The return of Political Economy II

The downgrade of US debt by S&P and the commentaries following it took the debate on credit rating agencies (CRAs) added-value to a next level. It is worth reading the S&P's statement and spotting the key paragraph ( if you missed the "political risk" in the title): 

[T]he downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011....

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. 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.

It comes as no surprise that nobody is arguing about the U.S. debt ratios. It is understood that S&P downgrade has to be viewed within the current political context of the U.S. Here's Dan Drezner's rounds up of the initial reax to the downgrade and why he thinks S&P took an unjustified step. Micheal Cohen holds a different view from across the pond.

These arguments show that once in the "political economy" field however, one has to ask whether S&P has the knowledge and expertise to issue statements and ratings that are political in nature, hence subjective. CRAs gained their legitimacy partly due to a process "hardening of information" whereby financial information is quantified. The process is efficient if risks can be expressed numerically in the form of a debt ratios, but become problematic when politics has to be embedded in a three letter code. We might have reached the limits of what "hard information" can tell us.