July 13, 2005

Black is white. Night is day.

And the best way to improve your state's bond rating is to plunge it further into debt. Or so says South Carolina Governor Mark Sanford (R).

Earlier this week, South Carolina saw its bond rating downgraded from "AAA" (which is very, very good) to a slightly less good "AA+", by Standard and Poor's, one of the bond rating agencies that is in charge of such things.

S&P issued a news release explaining their action. (For the moment, it's available here, but probably won't be available to non-subscribers long.)

In brief, here's what they said:
1) the state's economy is growing pretty slowly, and its unemployment rate is worryingly high.
2) the good news is that the state has taken steps to clean up its act fiscally, including formal financial planning and not enacting a proposed income tax cut earlier in 2005 that would have cost more than $1 billion.
3) So the state's bond rating is going down, despite the fact that state lawmakers have done the right thing fiscally, because the good fiscal policy will make things better only in the long run and there remains a short-term economic downturn from which SC has not yet emerged.

Bond rating downgrades are nothing to laugh at: they make it more expensive, in the long run, for a government to borrow money, and they also send a powerful signal to businesses and individuals about how well the state is being managed. This is why the mere threat of a downgrade was enough to get anti-tax Virginia lawmakers to pass a big tax hike in 2004.

Within a day of the S&P announcement, Gov. Sanford had cooked up his response, which called for income tax cuts as the best long-term approach for impressing S&P.

In a way, this wasn't surprising. After all, it was Sanford who proposed a billion-dollar income tax cut back in January. But the S&P report states pretty clearly that cutting income taxes earlier this year, as Sanford recommended, would have made the state's fiscal health even worse. So why are income tax cuts any smarter now than they used to be?

According to Sanford spokesman Will Folks, it's because S&P isn't measuring things right:
“If you’re going to assume the price tag, you’ve got to assume the economic growth,” Folks said.

In other words, the administration is saying that a ratings agency that makes its living by evaluating the fiscal health of public and private entities just doesn't know how to do the math when it comes to tax cuts.

I wait with bated breath to see if investors worldwide will now shift their accounts from Standard and Poors to the governor of South Carolina. Hope he's got a license for that sort of thing.

Kudos, by the way, to South Carolina press for picking up on the incongruence between S&P's diagnosis and Sanford's cure:
An editorial in the Times and Democrat takes Sanford to task.
An article in the State is the reason the administration was even asked to defend its position on this.

Update: SC-based blogs are hitting this on all cylinders here and here.


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