AAA Ratings and Regime Types

by Joshua Tucker on August 12, 2011 · 17 comments

in Comparative Politics,Political Economy

About four weeks ago—in the midst of the negotiations over extending the US debt ceiling—I was talking with a British friend of mine, and he asked me what President Obama meant when said he was going to take the argument to the people. I explained that this meant he was going to give a speech, and make his arguments directly to the people. My friend listened to my answer, and then told me how when he heard this he wondered if Obama was going to call on early election.

I thought back to this conversation in view of the explanations given in the aftermath of the S&P downgrade of the US’s AAA debt rating. As the S&P noted in its report, the downgrade was as much political* as economic. Here’s an exerpt from the report:

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. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently (emphasis added).

In a nutshell, the S&P is concerned that even if either party has a plan to fix the US’s long term fiscal future, it is not going to get implemented because of conflict between the two parties. Why is the case? Because the executive (the Presidency) and the legislature (the Congress) are not controlled by the same party. This in turn got me thinking about the possible relationship between regime types—as one of the primary characteristics of parliamentary regimes is that the same party(ies) controls the executive and the legislature by definition—and AAA ratings. So here’s the breakdown of regime type for the 13 countries remaining in the world with AAA ratings from Moody’s (actually Aaa), Fitch, and S&P:

Now a couple caveats are in order. First, 11 of these countries are also West European democracies, so there clearly may be other important similarities besides parliamentary systems of government. Second, Singapore is included in this list as a parliamentary system, so take that as you may. That being said, the data are what they are, and the fact remains that not a single country with a presidential system of government currently has a AAA rating from all three ratings agencies. Of course there is one country with a semi-presidential system (France) left on the list, but, interestingly enough, France is also the country this week’s rumor mill suggested may be the next to lose its AAA rating. Coincidence?

********************

*I am curious to know—given the fact that the S&P downgrade decision was as much political as economic—exactly how many political scientists S&P had working on the ratings decision. Must have been substantial, right? I mean, the agency would want to have people who are trained in studying politics making ratings decisions about political systems, wouldn’t they? [h/t to others who have previously made this same point…]

{ 17 comments }

kevin August 12, 2011 at 3:51 pm

They must not have any political scientists on staff, and, really, they must not have anyone who knows about the US government. If you read on page four of the report, S&P argues that revenues won’t go up from the end of the Bush era tax cut:

“We have changed our assumption on this because the majority
of Republicans in Congress continue to resist any measure that would raise
revenues, a position we believe Congress reinforced by passing the act. ”

They have it exactly backwards, it would not be Republicans voting to raise taxes, Democrats will need to agree to keep them lower. That’s what happens when things expire, they need to be renewed, and I’m not sure you would get the Democrats to agree.

The more I think about the report, the more I think they might not have anyone on staff who has watched School House Rocks, let alone gotten a degree in political science.

idiot August 12, 2011 at 9:44 pm

In their defense, I believe the Democrats wants to raise taxes on only “the rich”, and not “everybody else”. If no law is reached to extend any of the tax cuts, then essentially the Democrats will consent to raising taxes on “everybody else”, which could be seen as very unpopular and against what the Democrats campaigned for. Far better then for the Democrats to agree to extend all tax cuts like they did before. And thus the financial straits of the US continue to collapse.

It’s “easy” per se to just not pass certain fixes and extensions of tax cuts (there is always an AMT fix passed to try and save the “middle class”)…but politicians feel politically compelled to do these fixes anyway, so they are not motivated by a simple desire to “raise revenues”.

roseonpolitics August 12, 2011 at 4:04 pm

That is a interesting find about the type of government and ratings. Although I don’t think the reasoning S&P gave was half economic half politics, it was all politics. Mostly for the reasons you already point out.

But to my understanding, these agencies are only supposed to give a downgrade if they fear countries are not able to pay back their debt. If they are not bringing in/or their people aren’t earning enough. They never said the U.S. couldn’t, but more afraid that it won’t.

That being said, I don’t think S&P have any political scientists on staff. Otherwise they would have seen the Republican leadership saying they don’t want interest rates spiraling out of control and pushing for the more extreme members of their party to take the deal.

Rob August 12, 2011 at 4:18 pm

I question the apparent assumption that it takes a political scientist to judge the consequences of Congressional and Presidential actions or to assess the likelihood that present policies will lead to serious reductions in the projected deficits. But if we’re going to go that route, should political scientists consult lawyers before commenting on existing or pending legislation?

Jon Baron August 12, 2011 at 4:21 pm

From a non-political-scientist (but not a non-political scientist), I’m missing something here. How many countries have presidential systems and do not have AAA ratings?

Joshua Tucker August 12, 2011 at 4:31 pm

Lots. Wikipedia has a list here (with a nice map) and here. While I’m not ready to call Wikipedia the definitive authority of presidential vs. parliamentary systems of government, these are easily accessible and I’m sure the overlap with academic datasets with variables of this sort is going to be very high, so at the very least it is a good first step.

OneEyedMan August 12, 2011 at 5:23 pm

I’d be interested in seeing the three counts as fractions of countries of each type. I can’e seem to find a definitive list
http://en.wikipedia.org/wiki/Parliamentary_system
and
http://www.cs.mcgill.ca/~rwest/wikispeedia/wpcd/wp/l/List_of_countries_by_system_of_government.htm
don’t agree

idiot August 12, 2011 at 10:00 pm

While many of you say “I don’t think S&P hired any political scientists so I’m not going to bother checking to see if they do because that’s too much work and whatever I think is always right 100% of the time anyway”, I tried to go onto the S&P website but it has been periodically down. And archive.org isn’t cooperating and hasn’t archived most of the pages. Also, S&P offices are closed right now so I can’t call them.

My goal is to try and contact these people and find out how many political science people they have over there and how many of them were on whatever board it is that make these ratings judgements. Let’s find that out, and it’d be better for all of us.

idiot August 15, 2011 at 12:42 pm

Well. Called S&P, and I was redirected to an answering machine. It seems that they are not actually allowed to say who is on their rating committee, but I may have misunderstood the person who was answering my call before redirecting me to an answering machine. I suppose that makes some sort of sense.

Joe Smith August 13, 2011 at 8:54 pm

I think that it is fairly well recognized that weak “coalition” style governments have a very poor record of controlling government deficits. With a split between the Senate and Congress the President has to build a cross party coalition.

MikeSoja August 14, 2011 at 12:06 am

–*I am curious to know [...] how many political scientists S&P had working on the ratings decision*–

You do know that political science isn’t really a science, don’t you?

Political science commentators are exact counterparts to football commentators, except that they armchair quarterback the political field instead of the gridiron, with the same level of expertise, intelligence, style, humor, and fanaticism as Al Michaels.

Mark B. August 14, 2011 at 8:06 pm

Yes, football commentators are typically careful about their methods, care about estimating relevant quantities as effectively and as accurately as possible, and test hypotheses rigorously. /sarcasm

If studying “squishy” concepts precludes something from being a science, then I move we strike quantum physics from science textbooks. /sarcasm (again)

Regardless the amount of sarcasm used here, I think that the practice of deciding what is and is not a science is probably a less precise practice than the practice of studying anything falling under the realm of social science.

MikeSoja August 17, 2011 at 4:41 pm

I believe the rule of thumb is: If it has the word “science” as part of its name, it’s not a science. See Physics, Biology, Chemistry, etc.

Doly August 14, 2011 at 6:13 am

Let’s do the statistics a bit further, using of course S&P ratings who are the only ones that downgraded the USA, including all the countries with a A-type rating, from AAA to A-:

Parliamentary: 28
Absolute monarchies: 4
Presidential: 3
Semi-presidential: 2
Parliamentary monarchies with a king that exercises power: 2
Single-party system: 1

I find this even more compelling, because this is a bigger set of countries, more geographically disperse with rather different histories, and the presidential system is actually the most common form of government.

MikeSoja August 14, 2011 at 9:04 am

There seems to be some confusion about the nature of the ratings that ratings agencies produce. S&P ratings are virtually no different than Amazon.com ratings on toasters. They are opinions. Different people will have different opinions, and while one hopes that the professionals will have somewhat more rigorous standards constraining their appraisals than Amazon amateurs, in all cases it still comes down to best guess.

Instapundit quotes The WSJ:

“In the wake of all the angst about Standard & Poor’s downgrading the credit of the U.S. government, we need to consider what rating agencies are. They are exactly what they themselves say they are: publishers of opinions. In other words, they are one group of scribblers among others, trying to forecast the future and its risks like hundreds of other people, naturally making many mistakes, like everybody else. It is a delicious irony that the opinions of these particular scribblers get special weight only because the federal government has given it to them. Government regulations require financial entities to use the ratings issued by government-designated rating agencies for investment decisions. Now S&P has turned on the source of its privileged position and profits. If the government does not like the force of this disloyal pontification, that’s its own fault.”

http://pajamasmedia.com/instapundit/126138/

Joshua Savitt August 15, 2011 at 2:57 am

It is often said that certain political systems are more suited to heterogenous versus homogenous societies. Parliaments, as well as centralized governments, lend themselves to more homogenous populations because of the consensus that is able to be achieved. The U.S. is a federal and presidential system because it is relatively heterogenous, and numerous sets of checks and balances have be set out to accommodate the larger gap between perspectives.
With this in mind, the political polarization that “justified” the U.S. downgrade may be due to this heterogeneity and not its regime type. Furthermore, it may be unfair to judge the United State’s political polarization against Europe’s, as our system of government has different mechanisms for achieving needed policy responses that are suited to our population. Accountability for individual legislators in higher in a presidential system, which is hindering tough decision making. Luckily, we have the fixes such as the unanimous consent procedure (already employed to tackle social security) that by definition do not make the same headlines that the recent partisan posturing has.

Tom Round August 18, 2011 at 4:15 am

> “one of the primary characteristics of parliamentary regimes is that the same party(ies) controls the executive and the legislature by definition”

I’d quibble that this should be amended by flipping it: that by definition, in a parliamentary system, the opposition party (opposed to the PM/ president) cannot control both/ all houses. Or all “budget-controlling” houses, anyway. It would be hard to argue that, eg, the Cabinet/ PM in Papua New Guinea “controls” the House of Assembly, but it remains axiomatically true that at least the opposition leader/ party doesn’t have a solid majority there – unlike the USA after 1994, when both Houses of Congress had a solid majority opposed to the then President (almost solid enough to impeach him!).

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