Friday’s announcement by Standard & Poor’s that it had downgraded the U.S. sovereign credit rating from AAA to AA+ came with a sharply worded report about political dysfunction in Washington. A good deal of what’s in that report is difficult to argue with, but the decision to cut the rating is deservedly under fire.

First, two quotes from the report that sound right to me:

• “We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.” This is true. President Barak Obama himself referred to “dysfunctional government” after negotiations had ended. And the deal did little or nothing to justify the optimism some of us felt about Washington’s ability to strike the so-called grand bargain. Standard & Poor’s went on to say that the deal falls short on addressing the country’s debt, which it does. It cuts $2.4 trillion in spending over 10 years. The current agreement has identified $917 billion in savings. Another $1.5 trillion will be identified by the Congressional Joint Select Committee on Deficit Reduction, the super committee you’ve been reading about. This all falls short of the direction Standard & Poor’s gave Washington before Friday’s decision: find $4 trillion in cuts and revenue increases over the next decade or we’ll downgrade you.
•  “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy … It appears that for now, new revenues have dropped down on the menu of policy options.” That’s putting it politely. Even as the Republican leadership was prepared to deal with President Obama on a balance between cuts and revenue hikes, the Tea Party dug its heels in on no new taxes. Standard & Poor’s also correctly pointed out that: “the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.”

Here’s the problem though. After having made an accurate call on the state of U.S. political leadership, Standard & Poor’s has predicted that what’s wrong with Washington will trigger a scenario in which the world’s greatest economic power can’t meet its financial obligations. That’s a huge leap, no matter the state of the U.S. recovery.

“I don’t think there is any doubt about the ability of the U.S. to pay off its debt,” wrote Mark Thoma, professor of economics at the University of Oregon in an email to me on Friday night, following the announcement. “Bonds are nothing more than a promise to pay dollars and, if nothing else we can always print the money we need … [Standard & Poor’s] is worried that the U.S. political system does not have the necessary willingness. I think S&P is wrong about this. Its ability to evaluate politics is probably no better than its ability to rate toxic assets. I think we will do what is needed to pay our debt obligations.”

Thoma and I had spoken earlier in the day about the debt deal. He made three key points:

• The deal will have almost no impact on gross domestic product (GDP) growth in 2012. It cuts just $21 billion from the 2012 federal budget, which contains more than $3 trillion in expenditures. In terms of GDP impact, “it’s just about a wash,” said Thoma. “It’s a little bit of a negative.” GDP will take a bigger hit from the deal in subsequent years.
• A third round of quantitative easing by the U.S. Federal Reserve is possible. “That’s the Fed’s choice,” he said. “It would be another massive asset purchase program … The trigger is going to be deflation worries. I think they’ve made it pretty clear that it’s not so much output that’s going to trigger QE3, but if they start to see prices falling and start worrying about a deflationary spiral, that’s the Fed’s biggest fear.”
• A balance of spending cuts and tax increases is required to correct the U.S. debt problem. “We’re simply not going to deal with this problem from cuts alone,” said Thoma. “If we can’t ever get to the tax increase side of it, then investors are right to be pessimistic about the outlook.”

Thoma blogs at Economist’s View.