Why a U.S. Credit Rating Downgrade Could Hurt Obama in the 2012 Elections

Now with every passing day that the United States fails to raise its debt ceiling, the likelihood of an eventual downgrade of the U.S. Government’s sovereign credit rating from Triple-A status goes up.  Even if the ceiling is raised – still a seemingly likely outcome – the fact that country proved unable to resolve its differences in a timely fashion may have permanently shaken confidence in the U.S. Government’s ability to make key fiscal decisions important to creditors.

Political pundits tend to compare the current fiscal clashes to the 1995-96 debate that ultimately shut down the federal government for several weeks.  Cost-cutting Republicans were blamed for the mess, ultimately unraveling the support then-House Speaker Newt Gingrich had garnished with his “Contract with America.”  A recent WSJ/NBC News poll found 43% of Americans blamed Republicans for the ’96 shutdown versus 32% for Democrats.  The same poll found a 3-4 point swing in Republicans favor for this year’s debt-ceiling debate, with most – 39% – still blaming Republicans, versus 35% for Democrats. 1

But the poll may not capture the full picture of how voters may react in 2012.  Consider the following differences with 1995-96:

The Harm May be Permanent

While the ’95 shutdown was incredibly wasteful, it did not substantially affect the country’s standing with international stakeholders.  Were a U.S. credit downgrade to occur, the nation’s fiscal reputation – while still strong – would be weakened.  Interest rates for the U.S. to borrow would likely increase to some degree, further aggravating the country’s budget deficit.  Blows to international prestige tend to accrue to an incumbent President.

Inability to Avert a Downgrade May Be Seen as Reflecting Adversely on the President’s Leadership

In business, if a manager handles a rouge employee so that he doesn’t affect the unit’s performance, the manager will likely be viewed as doing their job.  But if the organization’s output suffers because of the loose cannon, the manager should be held accountable.  Superficially, the situations may not look the same – the manager has direct authority over the employee, while House Republicans have the aggregate independent authority of their elected members under the U.S. Constitution.

But in reality the situations may not be seen as that different.  A rouge employee may have strong alliances with the manager’s superiors or other stakeholders that make imposing discipline treacherous.  But a talented manager will find a way to finesse the situation so that the subordinate can be reeled in without threatening the manager’s own standing.

Using this everyday workplace comparison, if permanent harm results the President may be viewed as failing a leadership test.  Fair?  Maybe not.  Maybe this was a situation where no one allied with a political party could have herded their own alliance and the opposition into the same corral.  But fairness may not count.

A 2010 Opponent May Have Clean Hands

President Clinton’s eventual opponent in his 1996 re-election bid was then Senate Majority Leader Bob Dole (R-Kansas).  While Dole eventually pushed back against his own party’s right wing to end the shutdown in January ‘96, he had partnered with Gingrich all through the year on the platform that lead to the first partial shutdown in November ‘95.  Thus while Dole’s role may be viewed as constructive in the light of history, he was hardly perceived as lacking culpability when he ran in ‘96.

I’ve argued in an early analysis that Mitt Romney will most likely win the Republican nomination, and if this happens it is likely he will be viewed as having clean hands.  While Romney recently began to remark on the debt ceiling issue,2 the fact that he is currently in private life will help him.

Conclusion

Stay tuned.  While a lot of water is yet to pass under the bridge on the debt-ceiling controversy, comparisons with the ’95-’96 shutdowns to gauge the political fallout may be less than perfect.

  1. See Wall Street Journal, July 20, 2011, p. A6. []
  2. See “Mitt Romney Breaks Silence on Debt Ceiling,” July 14, 2011, abcnews.com, http://blogs.abcnews.com/thenote/2011/07/mitt-romney-breaks-silence-on-debt-ceiling-afghanistan-israel-iraq-troop-withdrawal-balanced-budget-amendment.html. []

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