Something important happened last week that ought to become an issue in next year’s midterm congressional races, but probably won’t.
The financial services company Moody’s downgraded the United States’ bond rating, becoming the last of the three major credit rating services to take away the nation’s once-perfect AAA rating. Instead, it assigned the U.S. a rating of AA1, still good but not the best.
The Trump administration responded the same way the Obama administration did when S&P became the first credit rating service to downgrade the United States’ rating back in 2011: It blamed the rating agency.
Between those two events, 14 years apart, and the similar reactions from two very different administrations, we get a glimpse of why all three ratings services — Moody’s, S&P and Fitch’s — don’t think much of U.S. finances.
The Moody’s downgrade came as the Republican-controlled U.S. House was advancing a spending plan that is projected to increase the national debt by $3.8 trillion over the next 10 years.
The statement Moody’s released was a pretty broad indictment of both political parties: “Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.”
Or, in the words of the 16th-century political analyst William Shakespeare: “A plague on both your houses.”
Moody’s went on (and on and on): It said that the “current fiscal productions under consideration” won’t really reduce either deficits or “mandatory spending” — meaning things such as Medicaid. “Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat,” Moody’s warned. “In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The US’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.”
Perhaps the biggest warning of all: Just three years ago, 9% of federal revenue went toward paying the interest on the federal debt. Now that’s up to 18% — and Moody’s warned it will rise even more, to 30% by 2035. “While we recognize the US’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics,” Moody’s said.
Here’s why all this mumbo-jumbo matters: The U.S. Treasury finances its debt by issuing bonds. The higher rated a bond is, the less interest the Treasury has to pay. The lower rated a bond is, the higher the interest has to be to account for the higher risk of default. In more plain terms, this bond downgrade amounts to either a hidden tax increase, or a hidden squeeze on government services, or perhaps both. If, come 2035, the federal government is paying nearly one-third of government revenue simply on interest, well, think of all the other ways that money could be used — be it on government services or tax cuts, take your pick. Soon after, many of the nation’s largest banks (Bank of America, JPMorgan Chase, Wells Fargo) were also downgraded on the theory that the federal government is less able to serve as a backstop in the event of a financial disaster. The general consensus among economists is that all this will lead to higher interest rates for borrowing money, which will lead to slower economic growth.
Now, here’s why none of this matters, at least politically: It hasn’t before.
S&P downgraded its bond rating for the U.S. government in 2011. Republicans were quick to blame Democrats, particularly then-President Barack Obama; Democrats countered that the Republican-controlled U.S. House was to blame — a “Tea Party downgrade,” then-Sen. John Kerry called it. Come the 2012 elections, nothing changed: Voters reelected Obama while keeping Republicans in charge of the House.
Fitch, the other big rating agency, downgraded the U.S. bond rating in 2023. If that was an issue in the 2024 elections, I sure don’t remember it — although arguably it was in the penumbra of the Republican charge that the federal government, under President Joe Biden, was spending too much money. The Republicans in Washington are currently trying to reduce spending — but not enough to match revenue, and they certainly don’t have any interest in raising taxes to produce more revenue. The result is that growing debt that Moody’s is warning about.
Back in 2010, Citizens Against Government Waste produced a television ad warning about the growing debt. Simply in stylistic terms, it’s one of the best ads I’ve ever seen.
It also obviously hasn’t had much impact. My personal sense is that Americans are simply numb to warnings about the debt. I’ve got some years on me, and all my life I’ve heard people warn about the dangers of a growing federal debt. It’s much like a warming climate; it’s a slow-moving problem that’s hard to see. It’s not as if international debt collectors are showing up to repossess the country. We just pay in other ways.
This seems very different from what happens at the state level, when bond ratings are downgraded as they sometimes are. Virginia, fortunately, has never been in that situation. The state has had a AAA bond rating — or, as it’s usually written, a “coveted” AAA bond rating — ever since such ratings were developed in the 1920s. Every now and then, there are rumblings that if Virginia doesn’t do such-and-such, its bond rating — er, coveted bond rating — will be imperiled. I consulted with the recently retired Richmond Times-Dispatch columnist Jeff Schapiro (whose commentary can still be heard on the Roanoke-based Radio IQ) because his memory of Virginia’s political institutions is longer than mine. He told me: “In 2004, when [then-Gov. Mark] Warner was battling the GOP legislature over the $1.4B tax increase he would ultimately win, the ratings services had been sending signals that Virginia’s triple-A rating MIGHT be imperiled” if the tax increase wasn’t approved. “But almost immediately following passage of the increase — late May I recall — the triple-A rating was affirmed,” he says.
It’s not that bond rating services like tax increases per se, but they do like to know that there are sufficient revenues to pay for debt. State (and local) governments are also in a very different position from the federal government: They can’t just print more money. They have to balance their budgets. If you want a particular service, you have to pay for it. At the federal level, both parties have found it convenient to spend and not to worry so much about the revenue side.
We think of Democrats as the party of fiscal laxity, but only five times since the 1950s has the U.S. had a budget surplus — and three of those came under Democratic presidents (and arguably perhaps all five because some fiscal years started under Democrats but then wrapped up under Republicans). Those years were 1969 (when Republican Richard Nixon succeeded Democrat Lyndon Johnson), 1998-2000 (under Democrat Bill Clinton) and 2001 (when Clinton left office and was succeeded by Republican George W. Bush). The deficit, of course, is not the same thing as the debt — the deficit is an annual accounting that adds to the debt. The last time the United States was debt-free was under Andrew Jackson from 1835-1837.
We’ve already seen, from two previous downgrades, that there is no political price to be made nationally for a credit rating going south. That’s not the case at the state level. Bond ratings (and the debt that has driven those downgrades) have long been a source of political controversy in Illinois, where the website Illinois Policy (which describes itself as pro-taxpayer) says the state’s bond rating has been downgraded 21 times since 2009. At one point in 2017, Moody’s and S&P put Illinois bonds just one level above the dreaded “junk bond” status. Moody’s blamed “a prolonged political impasse that has prevented progress on a growing pension deficit and an increasing backlog of unpaid bills.” The Multi-State Lottery Association dropped Illinois from the list of states eligible for Powerball and Mega Millions drawings because it wasn’t confident that the state could pay. They returned a few weeks later, after the legislature finally passed a budget. More recently, Illinois has seen its finances improve and its bond rating upgraded, from that low of Baa3 to an A rating. That’s well below Virginia’s AAA rating but is considered a big deal in Illinois.
“We are continuing to right the past fiscal wrongs in our state with disciplined fiscal leadership, and credit rating agencies and businesses alike are taking notice of Illinois’ remarkable progress,” Gov. J.B. Pritzker said in a statement in 2023. “Another credit rating upgrade means millions saved for Illinois taxpayers in interest — money back in the pockets of our state where it can better serve our residents.” Expect him to talk about that if he seeks the Democratic nomination for president in 2028, as some speculate he will.
Next door in Maryland, that state is going in the opposite direction. Two days before Moody’s downgraded the U.S. government’s bond rating, it also downgraded Maryland’s from AAA to AA1. That immediately set off a political firestorm in Maryland. Democrats blamed the Trump administration for laying off federal workers. “To put it bluntly, this is a Trump downgrade. Over the last one hundred days, the federal administration’s decisions have wreaked havoc on the entire region, including Maryland,” the state’s Democratic legislative leaders said in a statement. Republicans blamed Maryland’s Democratic-controlled government, saying the state’s financial problems predate Trump. “This is Moody’s saying that Maryland’s propensity to raise taxes is not enough any more,” one Republican leader told the website Maryland Matters. “People can move. They can work in other states. They [Moody’s] are looking at the potential for economic growth in the state and it’s not enough.”
Expect Maryland’s situation to become an issue in Virginia’s fall elections. Virginia Republicans are already fond of warning that Virginia Democrats are in danger of turning the state into Maryland (or California). Virginia Democrats are likely to point to Maryland as an indication of the havoc that Trump’s policies could wreak on the Old Dominion, as well.
Since Virginia has never had a bond downgrade, we don’t really know what the political fallout, if any, would be, but given how much politicians like to tout our AAA bond rating, I’m sure a downgrade would be a big deal. “I think it would be significant,” says former Lt. Gov. Bill Bolling, a Republican. “It might not mean a lot to the average citizen, but it would be a significant failure in the minds of the people who are knowledgeable of such things — business leaders, government leaders, politicos, etc. Certainly no political leader would want that to occur on their watch.”
At the local level, bond ratings are all too familiar topics in localities that have been deemed to be “economically distressed.” In 2017, Moody’s downgraded Bristol to Baa2 (that’s bad) with a “negative” outlook. Now, Bristol is back up to A2 from Moody’s and A-plus from S&P.
It should be noted that, even with the downgrade, the United States still has a pretty good bond rating. We’re just ranked with Austria, Finland and New Zealand instead of Australia, Canada, Denmark, Germany, Luxembourg, The Netherlands, Norway, Singapore, Sweden and Switzerland, all of which have the top ratings of AAA.
As for China, the country we’re most concerned about? It’s rated A-plus from S&P and A1 by Moody’s, putting it just slightly ahead of a rebounding Bristol. The difference? Moody’s outlook for China is negative, while Bristol’s is not.
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