MEDIA ADVISORY: ISU experts assess impact of U.S. credit rating downgrade

AMES, Iowa -- "How bad will it get?" That headline on Monday's USA Today cover story is the question all Americans are asking in the wake of the late Friday downgrade of the United States' AAA credit rating by Standard and Poor's.

While nobody can be certain what this unprecedented downgrade will mean to the U.S. economy, some Iowa State University experts can provide perspectives on the potential impact.

ON THE IOWA ECONOMY:

Dave Swenson, associate scientist in the Economics Department and staff member in ISU's Regional Economics and Community Analysis Program. CONTACT: 515-294-7458, dswenson@iastate.edu (Please note: Swenson is out of the office until Monday, Aug. 15).

"I believe that this is a temporary overreaction to sets of uncertainties that have accumulated over the past two weeks, and that the downgrade notwithstanding, there will only be a temporary rate-related impact on U.S. and consumer borrowing," Swenson said. "But if the downgrade indeed leads to a durable increase in borrowing costs, that affects all Iowa businesses and households. Of course, Iowa businesses and households are no different than all other national firms and households in their exposure to this issue; hence, our competitive position will not have changed initially.

"If there is a discernible slow-down in national growth or in global demand as a result of this, Iowa -- as it is more manufacturing dependent than the nation -- may be hit harder if that slowdown in demand for durable and nondurable manufactured goods is at all aligned with Iowa's production specializations," he said.

"On the other hand, the downgrade may further lower the value of the dollar, which can be beneficial to Iowa's ag and manufactured good exporters."

ON THE U.S. ECONOMY:

Sergio Lence, professor of economics and Marlin Cole Chair of International Agricultural Economics. He is an expert in financial markets and risk management. CONTACT: 515-294-8960, shlence@iastate.edu

"The downgrade per se is unlikely to be of major concern," Lence said. "However, the reasons for the downgrade -- political risks and rising debt burden -- are of concern.

"In my opinion, the debt burden was not the news, but the willingness of some key political figures to let the U.S. default was," he said. "Clearly, if a debtor has the capacity to repay its debt but is unwilling to do so, its creditworthiness will be impaired. The debt ceiling discussion showed that some policy makers are willing to let the U.S. default, which creates a risk for U.S. creditors.

"If recent history is any indication, it is unlikely that the downgrade will have a major impact," he continued. "The debts of Japan, Belgium, Italy, Spain, and Ireland have been downgraded from AAA to AA since 1998, and the average yield on their bonds increased by just 0.02 percent in the week after the downgrade. Japan's debt is rated AA, but it is borrowing at interest rates below 1 percent (e.g., yields on Japan's 10-year bonds are below to 1 percent right now).

"The entire debt ceiling process greatly damaged the confidence of investors, and is likely to end up having a negative effect in the real economy."

ON U.S. EMPLOYMENT:

• Peter Orazem, University Professor of economics. He is an expert in labor economics and human capital investment. CONTACT: 515-294-8656, pfo@iastate.edu

"Employment is a lagging indicator, meaning that it recovers more slowly than the economy as a whole," Orazem said. "Thus far, the U.S. economy has added 1.3 million jobs since the economic trough, meaning that it needs to add 6.8 million jobs to get back to the level in December 2007. At the current rate of increase of about one percent per year, it will be five more years before we get back to employment levels at the start of the recession.

"This is by far the slowest employment recovery of any post war recession, all of which would have recovered or added to pre-recession employment levels by this time," he said. "Other than the health and government sectors that added jobs in the Great Recession, job loss in every industry has been greater than in any recession in the past 60 years.

"The drop in stock prices reflects increasing concern that the recovery will be much slower than even the lethargic recovery would suggest to date," he continued. "While the debate over extending the government debt limit may have contributed to the decline in investor confidence, it is increasingly apparent that governments around the world cannot jump-start their economies using traditional fiscal policies, in part because excess borrowing that overheated their economies in good times now limits government ability to further stimulate their economies in recession."

ON U.S. SPENDING HABITS:

• Tahira Hira, a professor of personal finance and consumer economics in Iowa State's Department of Human Development and Family Studies, and chair of the NYSE Euronext Financial Literacy. CONTACT: 515-294-2042, tkhira@iastate.edu

"The credit rating downgrade has only formalized what we knew for fact and knew for a long time [about the nation's increasing debt]," Hira said. "It has given us the truth in a specific format and the rating agencies did their job. They told it like it is [about our debt addiction], rather than turn their face the other way.

"So is it bad? Not really," she continued. "Maybe that is what we need to get past the issue. Here is the fact: we have a serious debt problem. No more debates about that and let it get on with working on the solutions.

"While I'm not a macroeconomist, I do know to balance household budget and we recommend a three-pronged approach: find new sources of revenue; find places where you can cut expenses without compromising the integrity of the family; and remove, not just reduce, waste. To get effective results, we have to focus on all three of these - not just one - and our problem is bigger than one person, one party, one sector and/or one solution.

"Maybe this is the shock we needed and this anger, shame and embarrassment that we are expressing at the rating agency may also push our leaders to make corrections that we need to make," Hira said. "We can't keep going the way we are -- just talking (bickering), but not taking concrete steps to get on the path of healing."