Standard & Poor’s has lowered New Jersey’s bond rating to AA-.  Such “junk bond” status will mean that New Jersey  will only be able to borrow at a higher interest rate in the future.  As a state’s deficit grows, the probability of a default increases. Risk averse investors demand a risk premium to compensate them for taking a gamble and the S&P rating provides valuable information for investors concerning how risky investing in New Jersey bonds really is. Will Standard & Poor’s “AA- for New Jersey” and the diffusion of this information trigger greater deficit cutting in New Jersey? Does such “market discipline” lead politicians to take actions they don’t want to take (such as reforming pensions)?   Economic theory would say “yes”. Market forces do constrain self interested politicians.  New Jersey voters now know that a consequence of political stalemate is higher future interest rates. Will they now lobby their politicians to enact a bundle of tax increases and spending cuts to earn their “AA” rating back?
13 thoughts on “State Bond Ratings and Pressure for Deficit Reduction”
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Why do you think voters care about bond ratings? NJ voters, in my experience, care a lot more about low taxes and high services. This combination is possible, with enough googoo (e.g., Montgomery County, MD.) But NJ voters don’t care much about googoo. Indeed, the mayor of my town is mistrusted locally because of a googoo image. You may have heard of him: a fellow named Cory Booker.
I think you are conflating voters with elites. Now it is true that elites have the power to buy voters, and a sufficiently active elite might buy the proper number of voters. But elites are not homogeneous, and many local worthies like things just fine as they are.
With the recent mob arrests, the pool of potential lenders to NJ has been reduced.
California’s lower than Jersey, and bond rates have hardly driven us to reform our budget practices.
Even if voters remembered that the state’s bond rating had changed, what are the odds that they would have any idea what the fiscal impact of that would be? I would be shocked if more that 10% of NJ voters knew what the state budget was to within $5 billion, or how much debt the state had outstanding to within $20 billion, or how much bond issuance there is per year within a couple of billion.
It is certainly possible (if unlikely) that people could raise this as an issue and make it salient to voters, but not because those voters would have any realistic notion of its impact.
Nope! The lesson from this is don’t spend anything, government cannot be trusted and so on.
Race to the bottom here we come!
Will they now lobby their politicians to enact a bundle of tax increases and spending cuts to earn their “AA†rating back?
chuckle…hahahahaha!
Good one! Thanks for the laugh.
the S&P rating provides valuable information for investors
As Noah said in the Bill Cosby skit, “Riiiight.”
What makes you so sure of this point? If we should have learned one thing from the whole mortgage fiasco, it’s that the ratings agencies, or at least those running them, were perfectly happy to exploit the reputational capital accumulated over many decades, if not more than a century, for a quick buck. Why would they not be doing the same thing again? I believe (though I am not certain) that when states are downgraded, they have to pay higher rates on current debt, much like individuals do on credit cards (i.e., when they miss a payment on one, rates on all rise.) So, other than this downgrading raising rather than reflects greater risk, or rather simultaneously raising the risk and publicizing it, I don’t know what information it actually contains.
I’m with marcel.
The ratings agency is simply playing an assigned role in the political fight over state taxes and spending.
“Does such “market discipline†lead politicians to take actions they don’t want to take (such as reforming pensions)? Economic theory would say ‘yes’.”
That’s not an “economic theory” — that’s a right-wing talking point.
Politics is a constant struggle over who gets what. The very rich don’t want to pay taxes; they’d prefer the state break contracts obligating the state to pay state employees, pensions. And, absent a political coalition to oppose them effectively, the plutocrats have the power to do so, just as they have the power to veto a tunnel to Manhatten and to demand subsidies for another casino.
The central problem of political economy in the twilight of empire is that the plutocrats, predatory and irresponsible, want an ever larger share of income, but no obligation or restraint. And, the power of the people to check them, is at a low ebb.
First of all AA- is investment grade and still several notches better than junk. The downgrade should increase New Jersey’s borrowing costs, but not all that much. Still it is an indicator of credit quality (to the extent S&P has any credibility) and adds credibility to the Governor’s agenda for reducing the budget. The big issue for NJ and other public authorities is whether they will have the ability and the determination to get a handle on their long term commitments (entitlements, pensions, other necessary costs), so that their credit quality can be stabilized. Mutual fund invesstors have been voting with their feet, pulling money out of municipals. Doesn’t mean that things can’t improve.
For the shock-doctrine types, the higher interest rates on bonds are a feature rather than a bug. More money to bondholders, less for services to ordinary citizens. But historically speaking one has to agree with marcel: historically spealing, the number of state and municipal defaults is infinitesimal compared to the volume of bonds issued; the risk premium ostensibly being asked would cover statistically expected losses many times over. (And in general rating agencies have been so far behind the times as to be laughable — all the things that supposedly justify downgrading for New Jersey, for example, have been visible for years.)
I wonder how much of a role the media play in voter ignorance. I’m not an expert but I’ve heard that NJ doesn’t really have its own media coverage, so that might explain some of the apathy.
Not that Cali is much better. But what we really need is to get rid of Prop. 13. That eccentric billionaire running around here should focus on that. Why should we be so afraid of democracy? Most voters inherently don’t want to raise taxes too high, because they know they will also have to pay. The sky wouldn’t fall. It is too hard to cut spending in a crisis, because for example prison reform really needs to be thought through. Something we humans aren’t so good at yet, collectively.
Jumping on here - Matthew, the rating agencies are a major market failure. ***Even stipulating that there was some sort of Evul Guvmint intervention***, the fact remains that they rated huge piles of gargage as good, for money. And the rest of the market looked at that, and didn’t come up with anything to deal with obviously corrupt rating agencies. As market signals, they’re pretty much trash.
@NCG-There’s only one network affiliate (NBC) based in NJ, WMGM in Wildwood in South Jersey, and it’s considered part of the Philadelphia market. The only full-power local broadcast stations we have are all PBS/NJN. North and Central Jersey get whatever crumbs of coverage the NYC stations decide to grant us, and Philly stations provide crumbs for South Jersey.
Some cultural background on New Jersey: https://thesamefacts.com/2010/10/politics-and-leadership/new-jersey/