S&P’s Credit Downgrade for the U.S: Its Significance to Nonprofits and Communities

The unprecedented downgrading of the credit rating of the United States is  a very important inflexion moment for the U.S. economy with potentially profound and long lasting effects for poor people and middle class communities. Nonprofits, however, which are largely concerned about the health and well-being of these communities are largely silent about the potential outcomes for the country and the communities they  work with. NPQ would like to begin a conversation with this salvo but we need your thoughts and opinions to seed it.

Like much of the rating industry after the financial meltdown, Standard & Poor’s doesn’t come to the current debt ceiling crisis with a stellar record (remember it claimed that securities backed by subprime mortgages were AAA ?) and didn’t help itself by making a $2 trillion error in its calculations and initially responding to Treasury officials who pointed it out with “stunned silence”. But its downgrading of the credit rating of the U.S. is, nevertheless, a powerful, serious and very conscious act, albeit mostly symbolic. 

But symbols are powerful and this is, in fact, the nation’s first-ever drop in its credit rating since S&P began doing sovereign debt rating in 1917. We figure that Nonprofit Quarterly readers probably have a lot to say about the potential effects of downgrading the credit rating of the world’s largest economy from AAA one notch down to AA-plus. What fundamental problems exist in our social economy that may be at the bottom of all this? How will—or should—the nonprofit sector respond? How will you respond? Weigh in with us…About its effects:

  • What do you anticipate as issues you may have to face in your community and your work/organization during this extraordinary period of churn and change?
  • Are you thinking about doing anything different at your organization as a result nation’s credit downgrade? 

About its causes:

  • What do you see as the causes of this historic situation?

What does the nonprofit sector need to do to insert itself into this dialogue with the power that befits its role in society? What do you want to see happen from this point on?

We want to hear what you have to say about this event.

As fodder, we thought we would look at the S&P report itself (PDF)  to highlight some of the more provocative lines to spur your and our thinking.  Without companion pieces from Moody’s and Fitch’s (though the latter might issue something as we speak), the S&P document  reads like a political rather than economic document, but that doesn’t make it uninteresting for nonprofits.  It very succinctly says things that some of us have been saying for a while and other things that should provoke policy discussion. 

Dysfunctional government:  “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.”  This is an indictment of both political parties, a perception of the President’s coming late to the party and the Republicans’ (particularly those in the Tea Party wing) being obstructionist.

No signs of governmental improvement:  “(T)he prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.” Our country’s long journey into dysfunction is seen as not ending soon.

Legislative punts:  “We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.”  The man and woman in the street could have told S&P that. 

The ideological divide:  “Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge.”  The failure of the White House and Congress wasn’t simply failure to reach a deal for the future, but a divide over worldviews that has not narrowed despite debates and talk, including the bipartisan Gang of Six efforts and Vice President Joe Biden’s talking to anyone with an ear and a pulse.   

Fix the entitlements:  “(T)he plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.”  Everyone knows this, but the nation is being held hostage to slogans and fear-mongering. 

The never-ending recession:  “(T)he revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms…(T)he revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions.”  My goodness, haven’t we and other observers been saying that the recession that ended two years ago never really ended?  S&P knows it too.

If you listen to the television pundits, they seem to be floundering about how important the credit downgrading is, how the markets will react, and whether the solution is raising more revenues, cutting deeper into spending, reworking entitlements, or all of the above and how much.  What should the nonprofit sector do, locally, regionally, and nationally, to make sure our voices are heard in the debates about the downgrading and what should be done—occurring at the tail end (or is it the tail?) of the worst economic climate since the Great Depression? 

We want to hear from you! Tell us what you think about the meaning of the nation’s new AA-plus credit rating and most of all we want to hear your ideas about how we should all be responding.  We need the nonprofit sector lens on the societal issues of our day, not just nonprofit-specific issues. Please comment below and share your responses with us.