K-12 Tax & Spending Climate: As its power declines, the U.S. pays the price

Chrystia Freeland:

Economic policy isn't just a domestic issue anymore. That is the conclusion we should draw from the market volatility this week, including the shift by Standard & Poor's to a negative outlook for U.S. government debt, and the meeting last weekend of the International Monetary Fund and World Bank.

This is a familiar fact for smaller countries. The emerging market nations have long understood that judgments made on Wall Street or at the IMF headquarters in Washington often had more power to shape their economic policy than the proposals of their own ministers of finance and central bankers. More recently, that is a lesson that fiscally weak Western countries like Greece, Ireland and Portugal have been learning, too.

Now, as the relative power of the United States in the global economy declines, it is a fact of life that Americans need to get used to, too. That is one of the important messages of the S&P decision at the beginning of this week to put the United States on a negative outlook - essentially a warning that the ratings agency is no longer certain the United States will maintain its AAA rating.

There are a lot of reasons the S&P call should be taken with a grain of salt. For one thing, the ratings agencies hardly covered themselves with glory in the run-up to the financial crisis, and surely no longer deserve oracular status - if they ever did.

Posted by Jim Zellmer at April 23, 2011 2:39 AM
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