INCRAAN INTERNATIONAL NON-PROFIT

CREDIT RATING AGENCY

UNITED STATESOF AMERICARATING REPORT

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With this report, we want to make an additional contribution to one of the most pressing challenges of the global financial

world: how to conduct sovereign ratings. For almost two years now, the Bertelsmann Foundation has been committed to

improving major shortcomings of the sector from two angles. The first relates to the institutional and legal framework. The

second is aimed at increasing the transparency and overall quality of sovereign ratings.

In spring 2012 the Bertelsmann Foundation launched its first report that answered both of these key questions. In that

report, we developed an institutional framework and governance structure for the first International Non-profit Credit

Rating Agency, called INCRA. Additionally, we developed a comprehensive set of forward-looking, qualitative indicators to

be used to improve the quality of sovereign ratings. These indicators complement the traditional macroeconomic ones.

In the second phase, we put our indicators to the test by simulating a sovereign rating process for five countries: Brazil,

France, Germany, Italy and Japan.

Given the tremendous amount of interest expressed during the first two rounds, we have produced a third report. In

an effort to further demonstrate the viability of our INCRA model, we decided to rate the most powerful and one of the

most complex countries in the world: the US. We gathered a team of economists and political scientists from around the

world, albeit with US expertise, to join our rating committee to assess the US today and over the next three to five years.

The simulation of a US rating took place with one key question at its center: What is the ability and willingness of the US

government to repay its debt on a timely basis?

The overall engagement in our INCRA project demonstrates that we define ourselves not only as a think tank, but also as a

“do tank.” In today’s world, the Bertelsmann Foundation believes that an important part of our mandate, as a responsible

actor and representative of civil society, is not only to propose innovative social change, but also to support its realization.

With this in mind, the Bertelsmann Foundation will continue its efforts to broadly communicate and help implement the

INCRA model.

Aart de Geus Annette HeuserPresident and CEO Executive DirectorBertelsmann Stiftung Bertelsmann FoundationGütersloh, Germany Washington, DC, USA

April 2013

FOREWORD

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TABLE OF CONTENTS

Foreword 1

Introduction 5

US Rating Radar 8

US Rating Report by Vincent Truglia, International Economist

and Publisher of clearandcandid.com and former Head,

Sovereign Risk Unit, Moody’s Investors Service 9

US Macroeconomic Data 18

US Forward Looking Indicator Report by Michael Mandelbaum,

Christian A. Herter Professor and Director of American Foreign Policy

at The Johns Hopkins School of Advanced International Studies 21

Conclusion 47

INCRA Ratings Scale 49

Macroeconomic Indicators Codebook 50

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This US Rating Report is a follow-up to the country ratings

of Brazil, France, Germany, Italy and Japan which we

published last fall, based on the methodology in our report

“A Blueprint for INCRA: An International Non-Profit Credit

Rating Agency,” released in April 2012. INCRA presents

a new model, both in its institutional setup and its

methodology, for developing a credit rating agency (CRA)

to assess sovereign risk. The INCRA proposal emphasizes

a governance structure that would allow the institution

not only to be a non-profit, but also to avoid potential

conflicts of interest, as well as reflect the needs of the

international financial system. The new set of indicators

for assessing sovereign risk proposed by INCRA was put to

a test in our initial sample ratings report. In rating the US,

INCRA’s methodology has been applied as rigorously as

before to rate the world’s premier economy.

Why INCRA Makes a DifferenceThe 2008 financial crisis served as a catalyst to bring the

shortcomings of the financial sector to the attention of the

broader public. In particular, the operations and results of

credit rating agencies were put under the microscope. CRAs

specialize in the professional provision of credit ratings

to overcome information asymmetries between investors and

debt issuers.1 They are knowledgeable intermediaries that

facilitate the exchange of capital between supply-side

and demand-side actors. They inform investors about the

likelihood of receiving all principal and interest payments,

as scheduled, for a given security. In other words, they

answer the question: What is the probability of default?

From our point of view, the issue of sovereign risk

assessment needs to be addressed from two angles:

• The legal and organizational framework: Do we need

alternative institutions to the traditional for-profit

CRAs? Who is responsible for conducting research?

• The quality of the analysis provided: Is the current

set of indicators used by CRAs to evaluate a country’s

willingness and ability to repay debt sufficient? Do

we need a more comprehensive set of indicators that

will also increase the predictability of a government’s

financial performance?

Our proposed agency, INCRA, would be a non-profit,

international network of offices and utilize a new legal

framework based on an endowment solution to guarantee

a sustainable long-term existence. Financially supported

by a broad coalition of funders, from governments to

corporate players, non-governmental organizations

(NGOs) to foundations and private donors, it would

be an independent entity. INCRA would be based on a

robust governance model that would minimize and buffer

potential conflicts of interest. Specifically, a Stakeholder

Council would separate the funders from agency

operations. The agency would have offices in Europe, the

US, Latin America and Asia.

In order to evaluate a country’s ability and willingness to repay

its debts, a more comprehensive set of indicators is needed.

INCRA would conduct its sovereign risk assessments

based on a set of macroeconomic and forward-looking

indicators (FLI) that would provide the basis for high-

quality analysis. These FLI aim to capture a meaningful

picture of a country’s long-term socioeconomic and

political prospects, and therefore potential political

and/or social constraints on a government’s ability and

willingness to repay debt.

INCRA would pay tribute to the fact that the financial

world needs greater buy-in and participation from many

different actors in society, including governments and

NGOs. It would also reflect the realities of an increasingly

globalized financial world, where the quality of sovereign

ratings is crucial not only for Europe and the US but also

for emerging economies such as China and Brazil.

The Value-Added of a US RatingThe INCRA team welcomed the challenge of rating the US,

which has the world’s largest national economy. As one

of the most powerful countries in the world, the US has

successfully overcome the immediate aftermath of the 2008

financial crisis, but is now facing new political challenges

of increasing partisanship and political gridlock. As

Europe continues to grapple with the immediate issues

of its own debt crisis, the US is beginning to assess how

to move forward in a post-crisis economy. Therefore, now

is an ideal time to take a look at the state of the US. As

noted above, we have utilized the INCRA methodology

developed in our original blueprint, trying to maintain

a systematic approach that ensures comparability and

consistency with the five previous sample ratings.

Combined with the previous five sample ratings, with the

US rating we want to demonstrate that INCRA can:

• produce sovereign ratings that are based on a

comprehensive set of macroeconomic indicators,

INCRA USA Ratings Report

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INTRODUCTION

1 Coffee, John C. (2011). “Ratings Reform: The Good, the Bad, and the Ugly.” Harvard Business Law Review, Volume I and Katz, Jonathan; Salinas, Emanuel & Stephanou, Constantinos (2009). “Credit Rating Agencies. No Easy Solutions.” World Bank Group Crisis Response. Retrieved from http://rru.worldbank.org/documents/CrisisResponse/Note8.pdf.

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which are quantitative by nature, as well as FLI, which

are qualitative reflections of the socioeconomic

developments within a country.

• significantly increase the transparency and

understandability of a sovereign rating. Our team has

created a “rating radar” that presents a snapshot overview

of a country’s major strengths and weaknesses. We also

provide all the background material that has been used

in determining our sovereign ratings. Additionally, we

provide a clear overview of the methodology and process

that we followed in producing each sample rating.

We cannot stress enough the point that ratings are opinions

that can and should be challenged. Yet though they may

be subjective, that does not mean that they do not add

value. In spite of all the criticism that sovereign ratings

in particular have received in the past, they continue to

serve a major purpose: aggregating information regarding

the credit quality of borrowers, in our case sovereign

entities. Ratings are a subjective assessment of the ability

of countries to meet their debt obligations. The overall

information sovereign ratings provide may prove relevant

in helping to provide a foundation for other financial

actors to assess credit risks.

The Underlying Methodology and the ProcessIn our first INCRA report, we presented a detailed overview

of the comprehensive set of criteria that informs our

sovereign risk assessments. Definitions and applications

of these two sets of quantitative and qualitative indicators

have been further developed in two codebooks, included in

the previous sample ratings and at the end of this report.

The codebooks have served as a basis for each “country

committee” that we assembled for each country we

rated. On each committee, we had a balanced number of

economists, political scientists and other social scientists.

The US country committee followed the same procedures

as the previous ones, applying the same indicators in the

codebooks and discussing differing opinions as well as

the indicators that are most important in the medium and

long term. The steps each country committee took were

as follows:

1. A selected country expert produced a country report

based on the FLI codebook.

2. At the same time, the macroeconomic data for

the country was assembled from sources such as

the Organization for Economic Cooperation and

Development (OECD), the International Monetary Fund

(IMF), as well as national sources.

3. Each country committee call started with an extensive

discussion of the macroeconomic indicators and a

presentation of the expert’s report based on the FLI,

followed by a discussion among all members of the

committee. After they had reviewed all aspects of the

country and weighed all the arguments, each member

was asked to give his/her scores for macroeconomic

and FLI performance. The scores ranged on a scale

from 1 (very bad) to 10 (very good). If a score on one

indicator had a spread that was higher than four points,

the committee revisited it to discuss the discrepancy.

Where it was not possible to bridge the varying expert

opinions, the differences are made clear in the rating

report. Each committee had a minimum of five and

a maximum of nine voting members, each with an

equal vote.

4. The experts’ opinions are reflected in each rating report,

produced and finalized by a team of two designated

sovereign risk experts. Country experts also reviewed

each rating report.

5. Afterward, the scores were added up and weighted

according to a weight scheme that assigns different

weights depending on a country’s per capita income,

divided into high-income, middle-income and low-

income countries. For example, INCRA proposes

for high-income countries such as the US to weight

macroeconomic indicators 40%, while FLI would be

weighted 60%.

6. Finally, the overall scores were aggregated and the

averages calculated to produce a rating.

The presented sample ratings are global, not regional,

meaning they do not simply compare a country’s

performance with that of its regional peers, but rather

with global peers. This global approach allowed us to

produce consistent ratings to be used to compare the

probability of timely repayment of principal and interest

across countries. It was of particular importance for us

to guarantee the comparability of the US report with its

European counterparts, Germany, France and Italy, that we

had rated in the earlier phase.

The ResultsIn 2011, some European countries faced credit rating

downgrades for the first time in recent history2—as

well as the US for the first time ever. In light of these

downgrades and their critical timing, the acceptance,

transparency and legitimacy of sovereign ratings have

been called into question.3 Although there might be some

marginal impacts on funding costs, such costs are not

usually significant at the upper end of the rating scale.

However, many view sovereign downgrades, first and

foremost, as insults to a country’s national performance

and its overall status.

Rather than settling for defining sovereign ratings as

accessible to and understood only by a select few, we

prefer to redefine them as a public good. Sovereign ratings

that affect the future of countries and their citizens need

to be non-rivalrous and non-excludable,4 meaning everyone

has the same right and access to “consume” them. CRAs

are the main actors in the field of analyzing sovereign risk.

The future borrowing power and financial well-being of

entire countries often rely on the ratings they are given.

In this report and the reports preceding it, we have

addressed the questions of how to more transparently rate

a highly sensitive and critical asset class such as sovereign

bonds and how to produce the highest-quality ratings.

Increasing the quality is important, because if ratings

continue to fail to mirror financial realities, they will

become less relevant over time. We already have initial

indications of this in that following recent downgrades of

some European governments, investor reaction was much

more muted than expected. Some argue that this may be

explained as a result of investors having already taken into

account the risk of downgrades and therefore concluding

that some ratings were already too positive.

From a rating perspective, at the very upper rating levels,

there should be little chance of an actual default on a

security rated AAA, AA or A. A downgrade might reflect

heightened credit risk throughout the global economy.

Under those circumstances, even if a government is judged

to have a marginally higher credit risk than before, there

may be reasons for investors to want to buy even more of

those government securities.

If a government is suffering from a decline in revenue, to

remedy that, a government might increase taxes. If there

is excessive government spending, spending cutbacks

might occur. Both policy changes would usually be judged

a credit negative for other issuers in a country. In addition,

especially for large, wealthy countries, such as the US,

Japan, Germany and France, government bonds are usually

the most liquid security in financial markets. In a period

of uncertainty, liquidity has an extra value. Therefore,

there is no particular correlation between rating changes

for highly-rated sovereign debt and local interest rates on

that debt.

In the US report, as in the five previous rating reports,

we have tried to be as transparent as possible about our

process. INCRA gives the US a AA+, with a stable rating

outlook. The US is not an exception—quite the contrary,

our US rating result confirms a worldwide trend. Since

the financial crisis broke in 2008, the pool of government

bonds with triple-A status by the three major private-

sector CRAs has declined more than 60 percent. There

can be no doubt that the era of AAA sovereign ratings is

over for the time being. So instead of complaining about

downgrades, governments and citizens alike should

think of them as constructive blueprints for domestic

reform. We hope that our US report sets an example of

how a sovereign rating of a highly complex country, where

decision-making processes are either constantly in flux

or in gridlock, can still be provided in a comprehensive,

consistent and transparent way.

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2 Downgraded countries include: France, Austria, Slovenia, Slovakia, Spain, Malta, Italy and Cyprus. See: Tymkiw, C. and Rooney, B. (2012). “9 Eurozone nations downgraded by S&P.” CNNMoney. Retrieved from http://money.cnn.com/2012/01/13/markets/sandp_europe_downgrade/index.htm.

3 Tichy, Gunther. (2011). “Credit Rating Agencies: Part of the Solution or Part of the Problem?” Intereconomics, Volume 6, Number 5. Retrieved from: http://www.ceps.eu/content/intereconomics-vol-46-no-5-septemberoctober-2011-0. Article critical of the CRAs for reacting too late and not having transparent criteria for sovereign debt ratings.

4 Stiglitz, Joseph. (1999). “Knowledge as a Global Public Good.” Global Public Goods: International Cooperation in the 21st Century. Inge Kaul, Isabelle Grunberg, Marc A. Stern (eds.), United Nations Development Programme, New York: Oxford University Press. Retrieved from: http://cgt.columbia.edu/files/papers/1999_Knowledge_as_Global_Public_Good_stiglitz.pdf and Holcombe, Randall G. (1997). “A Theory of the Theory of Public Goods.” The Review of Austrian Economics Volume 10, Number 1. Retrieved from: https://mises.org/journals/rae/pdf/R101_1.PDF.

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UNITED STATES OF AMERICARATING: AA+, Stable Outlook

Economic Fundamentals

Public SectorFiscal Policy

Monetary Policy

Capital MarketsFinancial Risks

External Sector

Rule of Law

Transparency Accountability

Social Cohesion

Future Resources

Strategic Capacity

Implementation

Adaptability

Crisis Management

9.4

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6.86.7

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AA+7.8

MacroeconomicIndicators

Forward LookingIndicators

7.68.2

10 8 6 4 2 2 4 6 8 10

Pros:

• World’slargesteconomyforyearstocome

• Diversified,wealthyandhighlyproductiveecono-my,inparticularinthevitalservicessector

• World’slargestanddeepestfinancialmarkets

• Flexiblelabormarkets

• Rapidlyrisingdomesticenergyproduction

• Highlydevelopedcivilsociety

• Strongtraditionofruleoflaw

Cons:

• Debt/grossdomesticproduct(GDP)ratiofarhigherthanthehistoricalnorm

• Debt/revenueratiofarhigherthanitspeers

• Lossesinshareofworldmanufacturingtradegreaterthanthoseofitspeers

• Ongoingpoliticalgridlock

• Growingincomeinequality

• World’scostliesthealthcaresystem

INCRA USA Ratings Report 9

SummaryThe United States is still by far the largest economy in the

world. Despite losses in its share of world manufacturing

trade, it remains one of the most competitive, diversified,

wealthy and productive nations on earth. Its recovery

from the recent Great Recession has been slow, but

steady. Some academic economists argue that recovery

from a financial/banking-induced crisis is usually slower

than recovery from recessions caused by other factors.

However, when viewed against the depth and breadth of

the 2008 financial/banking crisis, the US demonstrated a

greater resiliency than most of its peers.

The National Bureau of Economic Research (NBER) dates

the Great Recession from December 2007 to June 2009.

During that time, US output dropped by an estimated

5.1 percent. As a result of the sudden collapse of the

real estate market, US and world financial markets faced

the risk of a complete meltdown, especially following the

sudden bankruptcy of Lehman Brothers in September

2008. However, the federal government proved capable of

rapidly dealing with the crisis, albeit with more political

melodrama than was probably necessary.

In late September 2008, Congress initially rejected a

financial market bailout proposal. This rejection caused a

sudden and dramatic drop in US stock markets. Congress

quickly reversed itself and in early October 2008 approved

$700 billion in funding for the Troubled Asset Relief Program

(TARP). This bailout, when coupled with the actions of an

unfettered and imaginative Federal Reserve, appears to

have averted what could have easily become an even more

severe economic downturn, if not an outright depression.

After a sharp rise in unemployment, a steep decline in

household wealth caused by the sudden drop in real

estate prices — a decline greater than witnessed during

the Great Depression — and dropping stock prices, the

federal government undertook significant stimulus

policies well beyond the initial TARP program. In 2009,

Congress passed a stimulus program estimated to have

cost about $790 billion by 2012. It was three-pronged,

with 1) tax cuts; 2) increased direct federal spending

on unemployment benefits and education; and 3) job

creation through federally funded projects and/or loans.

In December 2010, the federal government also temporarily

extended the so-called Bush tax cuts. This extension and

a few added features, including a temporary cut in the

payroll tax, added $860 billion more in stimulus.

As we will see, for most macroeconomic indicators the US

compares well with its peers, except those related to general

government debt. However, the US’s general government

debt ratios were not the primary drivers of its rating, since

overall the US still scored at an AAA level regarding purely

macroeconomic indicators. Rather, the committee found

the US scoring lower on a number of forward-looking

indicators (FLI), especially those related to political

gridlock and growing income and social inequality.

Because of this, and because sovereign ratings are meant

to be forward-looking as opposed to a snapshot of a

single point in time, the committee overwhelmingly voted

for scores consistent with a AA+ rating. It should also be

noted that some members of the committee produced

scores more consistent with AA.

Since the reasons for the rating outcome are more

closely related to long-term issues, the rating carries a

stable outlook. That outlook could change if the general

government debt ratios were to rise and/or political

gridlock becomes even worse. Since the committee found

the question of gridlock particularly relevant, it should

be noted that it expects it to eventually be overcome or

institutionalized in a way supporting a AA+ rating with

a stable outlook. However, if the gridlock worsens or

becomes more disruptive going forward, the outlook and/

or the rating would likely change.

The EconomyAs noted above, real GDP growth since the end of the

recession has remained lackluster. After real GDP growth

of three percent in 2010, the economy grew by a modest

1.7 percent in 2011, with a two percent rise in 2012. Most

forecasts for 2013 call for GDP to grow by between 2.3

and 3.3 percent. Growth is expected to be strong in the

first quarter because of the rebuilding efforts related to

Hurricane Sandy. It is expected to slow moderately in the

second quarter and continue at a more moderate level

for the second half of 2013. It appears that the short-term

boost to the construction sector from hurricane rebuilding

may be outweighing the headwinds coming from fiscal

policy. This seems to explain the somewhat unexpected

outperformance of the economy in the first quarter. Once

the effects of reconstruction drop off, more fundamental

factors will likely prevail in moving the economy forward.

For instance, in January, payroll or Social Security taxes

rose from 4.2 percent to 6.2 percent. This will bring in an

extra $100 billion in revenue. Sequestration, or binding

cuts in federal spending, will cost the economy about $42

billion in fiscal year (FY) 2013, which ends in September.

The remaining $42 billion of sequestration cuts will not

hit the economy until FY 2014 and beyond. According

to the Congressional Budget Office (CBO), without the

fiscal tightening already in place, growth would be about

1.5 percent higher in 2013. That implies that without

sequestration, real GDP in 2013 would be expanding

between 3.8 and 4.8 percent, thus achieving growth rates

not seen since the 1990s.

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Despite the fiscal headwinds and the drop-off in hurricane

reconstruction spending, some forecasters are more

optimistic about medium-term growth prospects going

forward because the US housing market seems to have

begun to rebound. House prices are no longer falling.

In most regions they are rising, albeit still remaining far

below their pre-crisis levels. Mortgage rates are still at

historically low rates, and the rate of foreclosures has

fallen significantly. Housing inventories are down.

A turnaround in housing is important for the direction of

the economic outlook because not only does it create a

positive wealth effect, but new home construction and/

or existing-home purchases have an important knock-on

effect on industries closely related to housing, such as

appliance manufacturers and household goods suppliers.

Growth in 2014 is expected to be similar to 2013 and

could remain in the range of 3 to 3.5 percent over the

next several years. To put this into context, during the

five-year period 1996–2000, real GDP grew on average by

4.2 percent a year. During the five years prior to the start

of the Great Recession, annual GDP growth averaged 2.5

percent. Therefore, overall growth over the next several

years is expected to outpace the pre-recession average,

but not be quite as good as witnessed in the latter 1990s.

Looking at the components of GDP growth, we find that

last year real private consumption grew by 1.9 percent.

Domestic investment grew by 9.8 percent, with residential

investment rising by a comfortable 12.1 percent, following

a string of years of decline. Export growth again outpaced

import growth, with exports rising by 3.4 percent and

imports by only 2.4 percent. The government sector

once again acted as a drag on GDP, as real federal

government spending declined by 2.2 percent. State and

local government spending also again declined, but at a

slower pace, 1.4 percent compared with a decline of 3.4

percent in 2011. The drag on GDP growth caused by the

governmental sector predates sequestration, which began

in March 2013.

InflationInflation has remained subdued during this recovery,

despite the enormous monetary stimulus the Federal

Reserve injected into the economy. So far, the stimulus

has not fueled inflation expectations. These expectations

are essential as they influence key drivers of inflation, such

as wage-price pressures and excessive investment in fixed

assets, The CPI, excluding volatile food and energy prices,

rose by only 0.8 percent in 2010, 2.2 percent in 2011 and 1.9

percent in 2012. Given that the US economy is performing

below capacity, excessive inflationary pressures are not

likely to emerge for several years.

What has concerned many observers about the medium-

term inflation outlook is the massive amount of monetary

stimulus that has been provided through unorthodox

measures, in particular quantitative easing (QE). QE is

basically a form of printing money. Historically, when

governments or their central banks resorted to the so-

called printing press, it almost inevitably ended badly,

resulting in high inflation and even, in some cases,

hyperinflation. There are countless examples of this in

Europe and Latin America. However, in all the historical

cases, QE occurred when an economy was prostrate after

military defeat, or was employed in an emerging-market

country where the government was unwilling or unable to

raise enough revenue to pursue its goals. As such, more

money was chasing the same amount of goods. The result

of such actions was inflation.

In the case of the US, QE has been used because the

usual financial market transmission mechanisms have not

functioned normally. Putting it another way, the velocity

of money has fallen. In most countries where QE was used

to excess, capacity constraints, not velocity, were the core

problem. In the case of the US, velocity is key. Will a day

arrive when velocity naturally picks up and inflationary

expectations accelerate? Yes, but there is no evidence

that it is imminent. Nonetheless, unwinding QE remains a

potential risk in the medium term.

Labor MarketsThe US has one of the most flexible labor markets in the

developed world. The Great Recession caused a steep

increase in joblessness, with the unemployment rate

peaking at 10 percent in October 2009. Although this was

below the previous post-World War II peak of 10.8 percent

reached in November–December 1982, the unemployment

rate has not dropped as quickly as in past recoveries. By

February 2013, the rate had fallen to 7.7 percent.

The number of long-term unemployed, those who have

been without work for 27 weeks or more, remained

unchanged at about 4.8 million, or 3.1 percent of the

labor force. This group accounted for 40.2 percent of total

unemployment. This is estimated to be about three times

higher than the rate recorded in the early part of the last

decade. There is a debate as to the causes of this major

change in employment, but it is too soon to know for sure

whether it will remain an ongoing problem or will slowly

ease as the overall unemployment rate drops further.

Another 2.6 million people were considered marginally

attached to the labor force: that is, they had looked for work

over the past 12 months, but not for the last four weeks. Of

that 2.6 million, only 885,000 were considered discouraged

workers, or those who had simply given up looking for jobs.

The rest of the 1.5 million had valid family or educational

reasons to be outside the labor force.

The CBO estimates that sequestration will result in 775,000

INCRA USA Ratings Report 1 1

fewer jobs than if sequestration had been avoided. That is

equal to about 0.5 percent of the labor force.

The real estate crisis negatively affected labor force

mobility in the US. Unlike that of many other countries, the

US labor pool is quite mobile. However, as house prices

fell, many workers lost their ability to sell their homes and

move to other regions to pursue new job opportunities.

Furthermore, some might argue that support from the

government to individuals to service mortgage debt

may have reduced the incentive to move. As the housing

market returns to health, labor mobility should once again

return to historic norms.

The Banking SectorAfter the near-meltdown of the financial system in 2008

following the bankruptcy of Lehman Brothers, the federal

government and the Federal Reserve proved that both

would make sure that the banking sector and related

financial services firms that were systemically important

would not collapse. The $700 billion TARP program

provided more than enough funds to support the banking

system, as well as the two major mortgage lenders, plus

AIG, Bear Stearns and the automakers. Although we do

not yet have the final figures, given what has happened to

date, the federal government will likely not have lost any

money as a result of the bank bailout program.

There is much discussion about resisting too-big-to-fail

moral hazard issues. We should keep in mind the difference

between a bank failure and a bank default. Depending on

how a bank is wound down or how regulators intervene

following its failure, a bank might still avoid defaulting

on deposits or other financial instruments. The reality

is that in recent decades the US banking industry has

become ever more concentrated into fewer and fewer

banks. In 2011, according to the Dallas Fed, the largest five

US banks had 52 percent of banking assets. The next 95

largest banks accounted for 32 percent of all bank assets.

Therefore, despite all the discussion about allowing banks

to fail, given the size of most US banks and their systemic

importance it is unlikely that the largest ones will ever

be allowed to default, at least not on deposits. As such,

despite the rhetoric, the US banking sector should be

viewed as a contingent liability of the federal government.

However, at the same time, it is difficult to imagine an

economic scenario in which the banking sector would be

under more stress than already experienced in 2008–2009.

As noted above, the long-term cost to the US government

of that bailout will prove to be minimal, if anything at all.

The External SectorExploring the US external sector presents a variety of

analytical problems. On the surface, the US regularly runs

large current account deficits. To finance these deficits,

the government has either borrowed money or sold assets

to foreigners. This results in a large net international

debt now estimated at over several trillion dollars. The

analytical problem is that ongoing current account deficits

and a significant net foreign debt should result in a net

income outflow in the current account. Yet despite years

of large deficits and the large net debt, the net income

flow is always positive. This means that despite a large

and growing net debt, US residents still earn more on

their foreign investments than foreigners do on their

US investments. Put differently, the net foreign equity

position of the US is still positive and will likely become

even more positive with the recovery of international stock

markets and other asset markets.

Therefore, if one simply looks at the debt stock and net

changes in it, the US would score low. However, when

looking at the cost of financing this debt, even over many

years, it appears to be cost-free. In fact, as noted above, the

US remains a net recipient of foreign investment income,

instead of the other way around. Looked at it from that

perspective, the US external position is quite healthy.

In 2011, net income as recorded in the current account

totaled $227 billion, and in 2012 it was $199 billion.

Analysts have been predicting that the net income flow

would eventually turn negative — but for decades, despite

those predictions, it has not.

The US Dollar as a Reserve CurrencyThere was a vibrant debate within the committee on the

impact of the special role the dollar plays in international

financial markets. The traditional terminology used, reserve

currency, has had a changing meaning over the years.

From the end of World War II until 1971, the international

foreign exchange regime was based indirectly on gold.

Indirectly is meant in the sense that the willingness of the

US to exchange dollars for gold, at a fixed price, was the

centerpiece of the system. In that era, the US was truly a

unique currency (unique in that few other large nations had

enough gold to fully support their currencies). In 1971,

the US formally broke the relationship between the dollar

and gold. From then on, the meaning of reserve currency

changed. Any currency that was widely accepted for use in

international transactions could appropriately be labeled

a reserve currency.

Since 1971, the dollar has remained the world’s preeminent

currency. Many argue that as such, the US continues

to have an advantage in that foreigners may have a

desire and/or need to hold dollars in excess of normal

requirements. This is seen as an important explanation

of why despite large current account deficits over many

years, the demand for the dollar remains strong, allowing

long-term US interest rates to remain lower than they

otherwise would be.

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For those who accept this argument — probably

representing the vast majority of analysts — the role of

the US dollar as the world’s major reserve currency is an

important strength for the US and its government’s ability

to fund itself, and therefore for the country’s credit rating.

By implication, if there is a threat to that reserve status, it

should have a negative impact on the rating.

There was a minority view on the committee that argued

because the dollar is a fiat currency, the Federal Reserve

has always had theoretical control over the entire yield

curve. However, until the adoption of unorthodox

monetary policies by the Federal Reserve beginning in

2008, yield curve flattening remained theoretical. Since

2008, however, flattening has occurred with a vengeance.

This appears to show that when necessary, the Federal

Reserve can and will intervene heavily even in long-

dated securities. The implication of this, it was argued,

is that even if foreign owners of US financial assets were

to sell those assets suddenly, Federal Reserve action

might completely mitigate or even reverse the effect on

US interest rates. The only impact such asset sales would

then have would be on the exchange rate of the country

attempting to dispose of its US assets. As such, a minority

on the committee felt that reserve currency status is

less important today to the US than Federal Reserve

willingness to undertake unorthodox monetary policies.

Public Sector and Fiscal IssuesDuring the rating process, we have tried to use data that is

comparable across countries. To date, this has not posed

an analytical problem. However, in the case of the US,

using general government debt data distorts the analysis.

OECD reports indicate that general debt statistics, while

statistically comparable across countries, analytically

exaggerate debt in some instances, particularly in the US.

To put it simply, since the US handles its pension programs

in a different way from most other wealthy countries, when

using general government debt, this tends to exaggerate

the US debt burden.

The main difference in approach is that US government

pension obligations are handled using an unusual

accounting practice—at least unusual for national

governments—by creating a liability for future pension

obligations. For instance, because payroll taxes to fund

the pension system are in excess of outgoing pension

payments, the excess tax revenue is used to purchase non-

marketable US Treasury debt. Basically, for public finance

purposes, this is an accounting fiction. Most other countries

use a variant of pay-as-you-go pension systems, so they still

have a similar implied liability to future pensioners but

avoid the creation of additional government debt. From a

long-term perspective, there is no difference between the

two approaches.

Besides pension-related debt, the US also has a number

of other similar trust funds created to sponsor other

government activities. The difference between marketable

federal government debt and total federal government

debt is significant (31.7 percent of US GDP in 2012).

Given the accounting fiction, it appeared reasonable to

the committee to exclude such trust fund obligations from

the US debt numbers when making comparisons across

countries.

The US also poses another interesting problem when trying

to make international comparisons. General government

debt includes the debt of state/provincial and local

governments. In most countries, this is not a controversial

idea, since to varying degrees national governments are

usually seen as wholly or partially responsible for lower

levels of government. For instance, in Germany, there are

strict and binding constitutional arrangements in place

to handle joint liability issues. In Spain in recent years,

though it was not constitutionally required to do so, the

Spanish government felt obliged to step in and provide

financial support for provinces in financial difficulty.

In the US, not only is there no such legal obligation for

the federal government to come to the rescue of state

and local governments, there is a long history of it not

stepping in when states or municipalities are in financial

distress. The one and only exception, federal aid to New

York City after it defaulted in 1975, arguably proves the

general rule. Given this laissez-faire tradition, some argue

that when examining US creditworthiness, state and local

government debt should be ignored.

The committee concluded differently for the following

reasons. Although the US federal government is not likely

to find itself in a situation where it will rescue problematic

state and local governments, the fact that these levels of

governments play an outsized role in the US implicitly

affects the ability of the federal government to adjust its

own fiscal policy.

In 2012, state and local government debt accounted for

19 percent of US GDP. These levels of government provide

a vast array of services that elsewhere are often provided

by national governments. US state and local governments

also have widely varying tax policies.

Most states, plus some cities, have local income taxes.

There are various state and local sales taxes. Local real

estate taxes are the rule. Because these are important

deductions for federal income tax purposes, and because

there are very different tax burdens on individuals

depending on their state or locale of residency, changing

these deductions may prove difficult in practice given

regional resistance. Since state and local government

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finances affect federal fiscal flexibility, the committee

deemed it appropriate for purposes of international

comparison to include their debts when calculating the

US equivalent of general government debt.

In the table above the figures for the US use federal

government held by the public plus state and local

government debt as the US equivalent of general

government debt. The IMF/OECD definition of government

debt is used for the four other countries. As can be seen,

while US “general government debt” for analytic purposes

was 58.3 percent of GDP in 2008, it had climbed to 93.2

percent in 2012. The US debt ratio was better than that

of its peers in 2008. By 2012, it was worse than Germany’s

and slightly worse than France’s.

The debate about the deficit centers around the federal

government, rather than state and local governments, many

of which have balanced-budget requirements. As such, we

will discuss the issue in terms of the federal deficit.

Using CBO projections, we find that the federal deficit

declines from 5.3 percent of GDP in FY 2013, to 3.7

percent in FY 2014, to 2.4 percent in FY 2015. It should

be emphasized that these are projections, not forecasts.

They assume that existing laws will remain in place

and the overall economic environment will follow an

expected pattern. Nonetheless, they are valuable in that

given the present political environment in Washington,

it doesn’t seem likely that there will be any major new

spending programs, and/or revenue measures that would

significantly change the already embedded pattern of

declining deficits. Therefore, the overall debt/GDP ratio

should stabilize and start declining as early as FY 2014 –

FY 2015.

According to the CBO, there is a risk that federal deficits, as

a percent of GDP, could once again start rising beginning

in FY 2018. The committee expects that increases in

deficits in later years will relate to increased entitlement

spending. It appeared reasonable to the committee to

assume that some entitlement reform is likely by 2018,

and that therefore the projected rise in deficits starting in

FY 2018 will not likely occur. If that proves to not be the

case, then clearly there would be downward pressure on

the rating.

Forward-Looking Indicators

Rule of lawThe US scored highly in the rule of law category. It was

recognized that the US legal system is both respected

and its laws generally obeyed. For instance, even in the

hotly contested legal dispute over the 2000 presidential

election, a verdict by the Supreme Court regarding who

won was accepted as binding by all sides. The US scored

even more highly regarding the independence of its

judiciary. At the federal level, the judiciary is viewed as

highly independent. There were some minor concerns

raised in the committee because in some states, local

judges are elected. Despite this, committee members

felt that because lower court rulings are easily appealed,

they could still view the judiciary as a highly independent

branch of government.

Separation of powers was viewed as extremely strong.

However, the committee noted that it was so strong at the

federal level that although normally a sign of a healthy

democracy, in the US case the separation of powers

appears to have unintended consequences, as witnessed

by today’s political gridlock.

Property rights were also scored highly, despite the fact

that there was some concern expressed about excessive

use of eminent domain.

Transparency and accountabilityThe US scored highly regarding government transparency

and accountability. In the section regarding prevention of

corruption, the committee noted that the US is generally

INCRA USA Ratings Report 1 3

General Government Debt

General Government Debt/GDP (%) 2008 2009 2010 2011 2012

US* 58.3 73.5 82.3 87.2 93.2

Italy 105.8 116.1 118.7 120.1 125.8

France 68.2 79.0 82.3 85.2 87.2

Germany 66.9 74.7 83.5 81.2 82.2

Japan 191.8 210.2 215.3 229.8 235.8

*ThisrowrepresentsUSgeneralgovernmentdebt/GDP(%),asourcommitteehasdefinedit.Thisexcludestrustfundobligations,butincludesstateandlocalgovernmentdebt

1 4

regarded as suffering from only minor instances of corrupt

behavior, usually at the local level. In general, the public

does not view corruption as a major issue. In fact, it

appears that official corruption in the US is possibly lower

than it has ever been in its history.

There was little doubt among committee members that the

US media was independent of government interference.

Although there is a small public broadcasting network, the

majority of the public views it as among the least biased

sources of analysis. The rest of the media are privately

owned. Also, as elsewhere, the growing use of the Internet

has democratized news outlets in an unprecedented way.

The US also scored high regarding civil society

participation. Nongovernmental organizations are active

throughout all aspects of society. Although some would

argue that some voluntary organizations are slightly less

active than in the past, there appeared little doubt that

nongovernmental groups continue to play an active role

in US society, affecting such things as tax policy, foreign

policy, environmental regulation and education. Some

on the committee even argued that as with the separation

of powers indicator, civil society participation in the US

may be so high that it slows down the decision-making

process, and therefore might represent a slight negative.

Nonetheless, overall it was still viewed as a key strength

for the US.

Social cohesionAs noted earlier, the US rating was constrained by its

overall scores for forward-looking indicators. We have just

examined some of the FLI indicators where the US scored

relatively high. Now we will explore several where the US

scored somewhat lower.

The US scored poorly regarding social inclusion. The

country has relatively high income and wealth inequality

compared to almost all other advanced industrial

countries. It has a less generous welfare system than its

peers, and a heterogeneous population with persistent

issues related to its historic racial divide. Although much

progress has been made, problems of racism still exist. In

addition, as mass immigration is continually changing the

country’s demographics, the US will soon face a challenge

as it becomes a country with a majority composed of

minorities. Although the country has found it easier to deal

with immigration than most of its peers, the very size and

rapidity of the demographic change presently underway

will nonetheless be difficult to deal with, all the more so

because of the country’s growing economic inequality.

Between 2002 and 2007, people in the top 1 percent of the

American income ladder captured two-thirds of the total

gains from economic growth, and the top one-tenth of 1

percent captured fully one-third of the gains.

The US also scored low on trust in its political institutions.

Although the committee recognized that the US political

system is viewed as among the most stable in the world,

public opinion surveys indicate Americans appear to

have little faith in Congress. Also, voter participation in

the US is significantly lower than in most other advanced

industrial countries. Some interpret this as a signal that

many people view their vote as having little direct impact

on policies that affect them.

The US scored by far the lowest in the area of conflict

management. Since the mid-1990s, the federal government

has often faced gridlock. The two major political parties

have become so polarized that decision-making has often

become almost impossible. In the past, most issues could

be settled in a bipartisan fashion. That no longer appears

to be the case. The debt ceiling controversy of 2011, the

fiscal cliff debate of 2012, the use of sequestration in

2013, and the difficulty in getting cabinet and judicial

level appointments approved by the Senate all indicate

dysfunction. Each side may argue that it is the other’s

fault, but from a governance perspective, polarization,

albeit a relatively new phenomenon, is nonetheless an

increasingly significant risk. The US scored lower in this

category not only compared with its European peers, but

also compared with Brazil.

The US also scored low regarding policy implementation.

The divisions within the federal government have

become so pronounced that getting through new policy

initiatives of any sort appears unlikely. As discussed in the

committee, in the past when a US president proposed an

agenda in the annual State of the Union address, he would

likely find many of the proposals passed during his term of

office. Few would expect that to happen today.

Resource efficiency was another area of weakness. Here

the discussion centered on the federal civil service. It was

noted that in the 1930s, civil servants were highly regarded

and generally well compensated. Since the 1980s, civil

servant compensation at the federal level has generally

fallen behind that of similarly skilled private-sector

workers. In addition, the size of the civil service has not

kept pace with the demands put upon it by an increasingly

technological society. In addition, as already noted above,

since it takes so long for the Senate to approve senior

federal nominees, many highly qualified people are just

not willing to go through the now painful appointment

process.

AdaptabilityIn the two sections related to adaptability, when

the committee discussed both policy learning and

institutional learning, the US scored low. Again, this

related to the increasingly divided nature of the federal

government. It was noted that in the past, bipartisan

policies could be adopted if viewed in the national interest.

INCRA USA Ratings Report 1 5

Today it appears difficult for the two major parties to agree

on defining what is in the national interest. For example,

in the past, bipartisan commissions were frequently

appointed to resolve complex issues surrounding Social

Security or Medicare or to resolve important tax matters.

Today, even when such commissions are formed, their

recommendations are usually ignored.

Recent Political DevelopmentsIn November 2012, President Barack Obama was reelected.

In addition, Democrats ended up with a 53-seat majority

in the 100-seat Senate, along with two independents who

caucus with them. Republicans now have 45 Senate seats.

There are 435 seats in the House of Representatives, and

Republicans retained control of the chamber by winning

234 of them, while Democrats won 201.

The election resulted in a divided Congress, in which either

party can block the other party’s bills. The US has often

had divided government at the federal level, and it has

usually worked relatively well. However, since 2010, when

Congress once again became divided, there has been little

bipartisan agreement, at least unless the government was

faced with an imminent crisis.

The debt ceilingUnlike other advanced industrial countries, the US has a

debt ceiling that acts as the upper limit on how much the

federal government can borrow. This is an anachronism

that dates to a time when the Congress had to pass a

bill permitting every US Treasury bond issuance. At the

beginning of the 20th century, the process was streamlined

by simply putting in place an overall limit. The debt ceiling

has been raised on countless occasions ever since. Until

1995–96, it had never been a controversial issue; after all,

the ceiling only allowed debt issuance related to programs

and spending already approved by Congress. In 1995–96

for the first time, Congress threatened to not raise the debt

ceiling unless President Bill Clinton agreed to a variety

of measures. However, instead of agreeing to Republican

requests, he slowly shut down the federal government.

As pressure grew on the Republican Congress, which the

public was blaming for the standoff, eventually the debt

ceiling was raised in early 1996. It did not become an

issue again until 2011. Republicans took control of the

House of Representatives following the 2010 election. A

large contingent of them are supporters of the so-called

Tea Party, which advocates reducing the size of the federal

government by all means possible, and as a result political

battle lines were drawn.

By late July 2010, the US government was rapidly running

out of borrowing authority. The Treasury had already

used many of its traditional quick fixes to get around the

ceiling. There were some in the Tea Party caucus who

actually argued for not raising the debt ceiling even if it

meant that the federal government would default on its

debts. Cooler heads prevailed, and at the very last minute

a deal was struck to raise the debt ceiling — but not in a

clear nor long-lasting way. The new law was signed on Aug.

3, 2010, the day the Treasury was scheduled to run out of

borrowing authority.

The crisis was averted by creating a so-called

“supercommittee” that was charged with recommending a

deficit reduction package of $1.5 trillion before November

2011. (The actual requirements to avoid sequestration were

incredibly complex.) If the committee could not agree on a

recommendation, automatic-spending cuts, better known

as sequestration, were to take effect in March 2013. The

rules surrounding sequestration are as equally obtuse as

the requirements surrounding the supercommittee. It was

thought in 2011, that such a foolish and arbitrary policy

that might end in sequestration would never be allowed

to happen. Yet lo and behold, sequestration is now the

law of the land. This has produced the odd result that

governmental dysfunction in this special case actually

improved the capacity of the federal government to meet

its financial obligations because it lowered spending. At

the same time, the fact that dysfunction prevailed raises

concerns that future outcomes might not be as beneficial.

Additional Signs of DysfunctionThe Bush tax cuts were set to expire on Dec. 31, 2012,

meaning that massive effective tax increases were

scheduled to kick in on Jan. 1, unless an agreement on a

new tax law was reached. Nothing was done until the early

hours of Jan. 1, and lawmakers thereby avoided a sharp tax

increase, but only by going to the brink once again.

For now, the federal government is operating on a continuing

resolution. That basically means there is no budget, except

what has already been approved. By July–August 2013,

the US will once again bump up against another debt

ceiling limit. The issues with the debt ceiling remain the

same as they were in 2011. The rating committee noted

that Congress will most likely pass a debt ceiling increase

in time, and that some sort of bipartisan agreement

may eventually be reached on the budget. However,

the committee also noted that this is not the type of

governance associated with an AAA rating.

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MACROECONOMIC INDICATORS 8.2

Economic Fundamentals 8.4

RealGDPGrowth% 8.3

GDPPerCapita 9.2

RealExports(%Change) 7.7

RealImports(%Change) 8.8

GrossDomesticInvestment/GDP(%) 8.0

GrossDomesticSavings/GDP(%) 7.3

Inflation-CPI(%) 8.6

PopulationGrowth(%Change) 9.1

Public Sector / Fiscal Policy 7.5

GeneralGovernmentDebt/GDP(%) 7.0

NominalGDPGrowth(LocalCurrency%) 8.0

GeneralGovtDebt/GeneralGovtRevenue(%) 6.9

GeneralGovtInterest/GeneralGovtRevenue(%) 7.6

GeneralGovtPrimaryBalance/GDP(%) 8.0

GeneralGovtFiscalBalance/GDP(%) 7.7

GeneralGovtRevenue/GDP(%) 7.4

GeneralGovtExpenditure/GDP(%) 7.6

Monetary Policy 9.3

AccommodativeMonetaryPolicy 9.3

Capital Markets and Financial Risks 8.2

DomesticCredit/GDP(%) 8.7

DomesticCredit(%Change) 7.9

OverallStrengthofBankingSector 7.9

External Sector 7.5

CurrentAccount 7.5

ExternalDebt 7.4

Country Committee Average Scores

FORWARD LOOKING INDICATORS 7.6

Political Economic and Social Stability 8.2

Rule of Law 9.4

LegalCertainty 9.0

IndependentJudiciary 9.8

SeparationofPowers 9.0

PropertyRights 9.8

Transparency / Accountability 8.9

CorruptionPrevention 8.2

IndependentMedia 8.9

CivilSocietyParticipation 9.6

Social Cohesion 7.4

SocialInclusion 7.1

TrustinInstitutions 6.9

SocietalMediation 7.1

ConflictManagement 6.3

Future Resources 7.5

Education 6.8

ResearchandInnovation 9.3

Employment 7.9

SocialSecurity 7.0

EnvironmentalSustainability 6.7

Steering Capability and Reform Capacities 7.1

Strategic Capacity 7.6

Prioritization 6.8

PolicyCoordination 6.9

StakeholderInvolvement 8.6

PoliticalCommunication 8.1

INCRA USA Ratings Report 1 7

Implementation 6.8

GovernmentEfficiency 6.4

ResourceEfficiency 7.1

Adaptability 6.7

PolicyLearning 6.4

InstitutionalLearning 7.0

Crisis Management 7.3

HistoricalEvidenceofCrisisManagement 8.4

CrisisRemediation 7.2

SignalingProcess 7.2

TimingandSequencing 6.8

PrecautionaryMeasures 6.9

AutomaticStabilizers 7.2

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UNITED STATES MACROECONOMIC INDICATORS

I. Economic Fundamentals 2008 2009 2010 2011 2012f

NominalGDPGrowth(LocalCurrency%) 1.9 -2.2 3.8 4.0 4.1

RealGDPGrowth(%) -0.3 -3.1 2.4 1.8 2.2

RealExports(%Change)* 6.3 -12.0 14.3 7.2 5.3

RealImports(%Change)* -3.8 -15.6 14.9 5.2 3.3

NominalGDP(bnUS$) 14,291.5 13,973.6 14,498.9 15,075.7 15,653.4

GDPpercapita(US$) 46,901 45,674 47,024 48,327 49,802

GDPpercapita(PPPbasis:US$) 46,901 45,674 47,024 48,327 49,802

Inflation-CPI(%) 3.8 -0.3 1.6 3.1 2.0

PopulationGrowth(%Change) 0.9 0.9 0.8 0.7 0.9

GrossDomesticInvestment/GDP(%) 18.1 14.7 15.8 15.9 16.4

GrossDomesticSavings/GDP(%) 12.8 10.5 11.6 11.6 12.8

*Exports/Importsincludegoodsonly

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II. Public Sector Policy 2008 2009 2010 2011 2012f

GeneralGovernment(GG)Debt/GDP(%) 76.1 89.6 98.6 102.9 107.2

GGRevenue/GDP(%) 32.5 30.9 31.7 31.4 32.0

GGExpenditure/GDP(%) 39.2 44.2 42.9 41.4 40.6

GGFinancialBalance/GDP(%) -6.6 -11.9 -11.4 -10.2 -8.5

PrimaryBalance/GDP -4.6 -7.9 -7.6 -6.4 -5.3

GGDebt/GGRevenue(%) 234.1 290.0 311.0 327.7 335.0

GGInterest/GGRevenue(%) 8.4 8.0 8.3 8.9

III. Monetary Policy

IV. Capital Markets & Financial Risk 2008 2009 2010 2011 2012f

DomesticCredit(%Change) 5.3 -1.3 -1.1 6.7 3.5

DomesticCredit/GDP(%) 224.4 234.4 233.3 234.9

IV. External Sector 2008 2009 2010 2011 2012f

CurrentAccountBalance/GDP(%) -4.7 -2.7 -3.0 -3.1 -3.1

Datasources:BanquedeFranceAnnualReports;IMF’sArticleIV2012;OECDAnnualReports.

f = forecast

2 0

2 0

Macroeconomic Data Sources:

Nominal GDP GrowthOECD Economic Outlook, Volume 2012 Issue 2, Statistical Annex, Table 2http://www.oecd.org/eco/economicoutlookanalysisandforecasts/economicoutlookannextables.htm Real GDP GrowthOECD Economic Outlook, Volume 2012 Issue 2, Statistical Annex, Table 1http://www.oecd.org/eco/economicoutlookanalysisandforecasts/economicoutlookannextables.htm

Real Exports (% Change) IMF World Economic Outlook Database, October 2012http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weorept.aspx?pr.x=58&pr.y=5&sy=2008&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&c=111&s=TMG_RPCH%2CTXG_RPCH&grp=0&a=

Real Imports (% Change) IMF World Economic Outlook Database, October 2012http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weorept.aspx?pr.x=58&pr.y=5&sy=2008&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&c=111&s=TMG_RPCH%2CTXG_RPCH&grp=0&a=

Nominal GDP (US$)IMF World Economic Outlook Database, October 2012http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weorept.aspx?pr.x=62&pr.y=5&sy=2008&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&c=111&s=NGDPD&grp=0&a=

GDP per capita (US$ and PPP)IMF World Economic Outlook Database, October 2012http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weorept.aspx?sy=2008&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=40&pr1.y=11&c=134%2C111&s=NGDPDPC&grp=0&a=

Inflation-CPI (%) IMF World Economic Outlook Database, October 2012http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weorept.aspx?sy=2008&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=55&pr1.y=6&c=111&s=PCPI%2CPCPIPCH%2CPCPIE%2CPCPIEPCH&grp=0&a

Population Growth (% Change)OECD Country Statistical Profiles: United States 2011-2012http://www.oecd-ilibrary.org/docserver/download/191100301e1t003.pdf?expires=1366146923&id=id&accname=freeContent&checksum=04D8694C429E3C8B184326A806555D8B

Gross Domestic Investment/GDP (%)IMF Article IV Reports 2010, 2011, 2012http://www.imf.org/external/pubs/ft/scr/2010/cr10249.pdfhttp://www.imf.org/external/pubs/ft/scr/2011/cr11201.pdfhttp://www.imf.org/external/pubs/ft/scr/2012/cr12213.pdf

Gross Domestic Savings/GDP (%)OECD Economic Outlook, Volume 2012 Issue 2, Statistical Annex, Table 24http://www.oecd.org/eco/economicoutlookanalysisandforecasts/economicoutlookannextables.htm

General Government (GG) Debt/GDP (%)General Government Revenue/GDP (%)General Government Expenditure/GDP (%)IMF World Economic Outlook Database, October 2012http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weorept.aspx?sy=2008&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=70&pr1.y=7&c=111&s=GGR_NGDP%2CGGX_NGDP%2CGGXWDG_NGDP%2CBCA_NGDPD&grp=0&a=

General Government Financial Balance/GDP (%)OECD Economic Outlook, Volume 2012 Issue 2, Statistical Annex, Table 27http://www.oecd.org/eco/economicoutlookanalysisandforecasts/economicoutlookannextables.htm

Primary Balance/GDP (%)OECD Economic Outlook, Volume 2012 Issue 2, Statistical Annex, Table 30http://www.oecd.org/eco/economicoutlookanalysisandforecasts/economicoutlookannextables.htm

GG Debt/GG Revenue (%)IMF World Economic Outlook Database, October 2012http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weorept.aspx?sy=2008&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=70&pr1.y=7&c=111&s=GGR_NGDP%2CGGX_NGDP%2CGGXWDG_NGDP%2CBCA_NGDPD&grp=0&a

GG Interest/GG Revenue (%)OECD.StatExtracts: Government deficit/surplus, revenue, expenditure and main aggregateshttp://stats.oecd.org/

Domestic Credit (% Change)Principal Global Indicators: Domestic Credithttp://www.principalglobalindicators.org/default.aspx

Domestic Credit/GDP (%)World Bank World Development Indicators 2012http://databank.worldbank.org/ddp/html-jsp/QuickViewReport.jsp?RowAxis=WDI_Ctry~&ColAxis=WDI_Time~&PageAxis=WDI_Series~&PageAxisCaption=Series~&RowAxisCaption=Country~&ColAxisCaption=Time~&NEW_REPORT_SCALE=1&NEW_REPORT_PRECISION=0&newReport=yes&IS_REPORT_IN_REFRESH_MODE=true&IS_CODE_REQUIRED=0&COMMA_SEP=true

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I. POLITICAL, ECONOMIC AND SOCIAL STABILITY – FACTORS FOR FUTURE GROWTH AND FINANCIAL RELIABILITY

Political and Institutional Stability

1. Rule of LawTo what extent do government and administration act on the basis of and in accordance with legal provisions or culturally accepted norms to provide legal or practical certainty?

Government and administration act

predictably, on the basis of and in

accordance with legal provisions. Legal

regulations are consistent and transparent,

ensuring legal certainty.

Government and administration rarely

make unpredictable decisions. Legal

regulations are consistent, but leave

a large scope of discretion to the

government or administration.

Government and administration

sometimes make unpredictable decisions

that go beyond given legal bases or do

not conform to existing legal regulations.

Some legal regulations are inconsistent

and contradictory.

Government and administration often

make unpredictable decisions that

lack a legal basis or ignore existing

legal regulations. Legal regulations

are inconsistent, full of loopholes and

contradict each other.

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COUNTRY REPORT FOR THE UNITED STATESby Michael Mandelbaum, Christian A. Herter Professor and Director of American Foreign Policy at The Johns Hopkins School of Advanced International Studies

The rule of law is firmly embedded in American society,

politics and economic life. The courts at all levels—

local, state, and national—function effectively, although

this effectiveness varies across jurisdictions, and their

verdicts are respected and obeyed. A vivid illustration of

the broad and deep acceptance of the rule of law and the

legitimacy of courts was the U.S. Supreme Court’s 2000

decision, in the case of Bush v. Gore, that decided the

presidential election of that year in favor of the Republican

candidate, George W. Bush. Although the court’s action

was unprecedented and the legal reasoning underlying it

the subject of widespread criticism, there was no hint of a

serious challenge to the decision by the losing side. While

judges in some states and localities are elected rather than

appointed, this has not thus far compromised the rule of

law in the United States by politicizing the judiciary, as it

has in other countries. The strength of the rule of law has

made an important contribution to American economic

growth since the 19th century, making it possible to do

business across a large continent among parties who do

not know each other. This feature of American life has

helped make the country, from the 19th century to

the present, an attractive destination for investment

from abroad.

INCRA USA Ratings Report

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To what extent do independent courts control whether government and administration act in conformity with the law?

Courts in the United States have the power to monitor

government actions and overturn them if they are found

to be in violation of basic—that is, constitutional—

doctrines. This power was affirmed early in the country’s

history by the Supreme Court’s 1803 decision in Marbury

v. Madison, which established what came to be known

as the power of judicial review. This power operates

at the state level as well. The legal sector of American

society is fully independent and well developed, with

an elaborate system of legal training centered on law

schools that students attend for three years after receiving

undergraduate degrees, and with provisions for continuing

legal education provided by local professional groups of

lawyers known as bar associations. While the prestige

of lawyers has fallen in recent decades, the standing of

judges and courts remains high.

Independent courts effectively review

executive action and ensure that the

government and administration act in

conformity with the law.

Independent courts usually manage to

control whether the government and

administration act in conformity with

the law.

Courts are independent, but often fail to

ensure legal compliance.

Courts are biased for or against

the incumbent government and lack

effective control.

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To what extent is there a working separation of powers (checks and balances)?

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The separation of powers is perhaps more fully

established, and has a longer history, in the United States

than in any other country. It is a fundamental principle of

the nation’s federal Constitution, which went into effect

in 1789 and stipulates a division of power among the

executive branch, headed by the president, the legislative

branch, which consists of the House of Representatives

and the Senate, and the judiciary. This pattern is generally

repeated in state and local governments.

It is not uncommon in the American system for power to

be divided between the two major political parties, the

Republicans and the Democrats, with one controlling

the executive branch and the other the legislative (for

example, for much of the 1970s and 1980s the Republicans

held the presidency while the Democrats controlled both

houses of the legislative branch) or with one controlling

one chamber of the legislative branch and the other the

other chamber (in 2013, the Democrats control the Senate

and the Republicans the House of Representatives). These

patterns are often found in state government as well. Such

divisions did not, in the past, paralyze the working of the

government. Indeed, some studies have suggested that

“divided government” of this kind can actually be more

productive in passing legislation than when power is

consolidated in the hands of a single party.

The actual balance of effective power between the

executive and legislative branches has shifted over time.

The executive became relatively more powerful from

the 19th century to the 20th with the expansion of the

functions of government, almost all of which the executive

branch supervises. In particular, at the national level the

executive branch tends to dominate the conduct of foreign

policy. Nonetheless, the legislative branch remains robust

at all levels of government, and the judiciary retains its

independence in its more limited sphere of enforcing and

interpreting rather than creating and administering the

law.

In recent years the separation of powers that is basic

to the American system of government has come under

criticism for providing, in effect, too much of a good thing:

fragmenting power in a way that makes it difficult for the

government to act decisively. It has come to be seen in

some quarters not so much as what its designers intended

it to be—a check against despotism—than as a formula

for gridlock in the conduct of the public’s business.

There is a clear separation of powers with

mutual checks and balances.

The separation of powers generally

is in place and functioning. Partial or

temporary restrictions of checks and

balances occur, but a restoration of

balance is sought.

One branch, generally the executive,

has an ongoing and either informally or

formally confirmed monopoly on power,

which may include the colonization

of other powers, even though they are

institutionally differentiated.

There is no separation of powers, neither

de jure nor de facto.

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To what extent do government authorities ensure well-defined property rights and regulate the acquisition, benefits, use, and sale of property?

Property rights and regulations on

acquisition, benefits, use, and sale are

well defined and enforced. Property rights

are limited, solely and rarely, by overriding

rights of constitutionally defined public

interest.

Property rights and regulations on

acquisition, benefits, use, and sale are

well defined, but occasionally there are

problems with implementation and

enforcement under the rule of law.

Property rights and regulations on

acquisition, benefits, use, and sale are

defined formally in law, but they are not

implemented and enforced consistently

nor safeguarded adequately by law against

arbitrary state intervention or illegal

infringements.

Property rights and regulations on

acquisition, benefits, use, and sale are

not defined in law. Private property is not

protected.

Following the British tradition that the United States

inherited, property rights have been well established

and effectively protected from the country’s beginnings.

Americans typically have more extensive personal

holdings of two important forms of property—equities and

real estate—than the citizens of other advanced industrial

democracies. There is nothing comparable in American

history to the expropriation and nationalization of private

firms, and indeed entire industries, that has occasionally

taken place in Europe.

A few recent episodes have caused concern about the

solidity of property rights. The Supreme Court’s decision in

Kelo v. New London, which upheld the right of a municipal

government to transfer land from one private owner to

another for the purpose of economic development, drew

opposition on the grounds that it excessively expanded

the government’s power over private property. The federal

government’s rescue of the automaker General Motors

during the financial crisis of 2008–2009 attracted

criticism for imposing losses on, and thus not adequately

protecting the interests and therefore the property rights

of, people holding the company’s bonds. In general,

however, and especially in contrast to its status in other

countries, the right to property in the United States

remains firmly established.

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2. Transparency / AccountabilityCorruption prevention: To what extent are public officials prevented from abusing their position for private interests?

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The United States probably has less overt corruption

today than at any time in its history. Major scandals

involving bribery at the federal level occurred in the

1870s and the 1920s, and as recently as 1973 a sitting

vice president, Spiro T. Agnew, was forced to resign from

the office because of illegal payments he had received

in his previous position as governor of Maryland. Most

corruption has taken place at the local level, often in

big cities, many of them in the northeastern part of the

country. While corruption has certainly not disappeared,

it is not a major feature of American political life. In 2011,

Transparency International ranked the United States the

25th least corrupt country out of 189.

Of greater concern is the legal use of money in politics

and governance, through lobbying for private economic

interests and donations to defray the expenses of political

campaigning. The sums involved in both have increased

substantially in recent decades. In 1974, for example,

the amount of money spent on all campaigns for the

House of Representatives and the Senate came to $75

million. In 2010, the figure was $879 million. In 1976,

the major-party presidential candidates spent, together,

about $300 million. In 2008, they spent $2.8 billion.

Campaigns have become increasingly expensive, among

other reasons, because of the soaring costs of purchasing

time on television for airing political commercials. Some

observers of American politics fear, and others firmly

believe, that monied interests are increasingly able to

influence—and distort—public policy through lobbying

and campaign contributions. Legislative efforts to limit

campaign contributions have been set back by Supreme

Court rulings, notably in the 2010 case Citizens United

v. Federal Elections Commission, that some types of limits

violate constitutionally protected rights.

Another potential source of improper influence, the

hiring of former government officials by private firms with

economic interests affected by agencies or departments

where the officials formerly worked, is regulated by statute.

However, the prohibitions are weak and the “revolving

door” between government departments and parts of the

private sector over which they have substantial power

certainly has not come to an end.

Legal, political, and public integrity

mechanisms effectively prevent public

officeholders from abusing their positions.

Most integrity mechanisms function

effectively and provide disincentives for

public officeholders willing to abuse their

positions.

Some integrity mechanisms function,

but do not effectively prevent public

officeholders from abusing their positions.

Public officeholders can exploit their

offices for private gain as they see fit

without fear of legal consequences or

adverse publicity.

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To what extent are the media independent from government?

Public and private media are independent

from government influence; their

independence is institutionally protected

and respected by the incumbent

government.

The incumbent government largely respects

the independence of media, but the

regulation of public and/or private media

does not provide sufficient protection

against potential government influence.

The incumbent government seeks to

ensure its political objectives indirectly

by influencing the personnel policies,

organizational framework, or financial

resources of public media, and/or the

licensing regime/market access for private

media.

Major media outlets are frequently

influenced by the incumbent government

promoting its partisan political objectives.

To ensure pro-government media reporting,

governmental actors exert direct political

pressure and violate existing rules of media

regulation.

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The very first amendment to the U.S. Constitution,

adopted at its ratification, guarantees stalwart protection

of freedom of the press. The press’s independence has

been reaffirmed by a number of important court cases,

notably the 1971 decision in the Pentagon Papers case,

which vindicated the right of two major newspapers, The

New York Times and The Washington Post, to publish

government documents involving national security that

they were not authorized to have.

The media in the United States are almost entirely

privately owned; the country has never had a government-

sponsored broadcasting outlet remotely as important

as, for example, Britain’s BBC. And the new technologies

of electronic communication have, mainly through the

Internet, multiplied the already numerous American media

outlets.

One possible adverse consequence of the digital

revolution in the American mass media is the weakening

of previously large, profitable, and powerful print outlets

such as The Times and The Post, to the point that they lack

the resources to conduct the kinds of investigations into

governmental malfeasance that have in the past served

as a check on corruption. Another adverse consequence,

already being felt in the view of some, is the aggravation

of the polarization of American politics as digital outlets

cater to and reinforce strongly partisan political views.

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To what extent does the government enable the participation of civil society in the political process?

Civil society—that is, nongovernmental groups of

all kinds—is as strong in the United States as in any

country in the world. The same first amendment to the

Constitution that assures a free press also guarantees

freedom of association, and thus enshrines the role of

civil society in the highest law of the land. The prominence

of nongovernmental groups was noted by the Frenchman

Alexis de Tocqueville in his influential 19th-century book

about American society, Democracy in America, first published

in two volumes in 1835 and 1840. Their importance

persists, although by some accounts—notably the 2000

book “Bowling Alone” by Robert Putnam—they have come

to play a less active role in American society recently

than they did in the past. In general, however, on virtually

every issue from tax and trade policy to environmental

regulations to the organization of the system of education

to foreign policy, elements of civil society pervade the

policymaking process. The government could not cut off

their influence if it tried; if it did try it would be violating the

Constitution; and it does not try. Indeed, it has sometimes

been suggested that the strength of civil society in the

United States, and the close involvement of its many

component parts in policymaking, are handicaps because

the groups are so numerous and so active politically that

they render the process of making and carrying out policy

less orderly and predictable than is optimal.

The political leadership actively enables

civil society participation. It assigns an

important role to civil society actors in

deliberating and determining policies.

The political leadership permits civil

society participation. It takes into account

and accommodates the interests of most

civil society actors.

The political leadership neglects civil

society participation. It frequently ignores

civil society actors and formulates its

policy autonomously.

The political leadership obstructs civil

society participation. It suppresses civil

society organizations and excludes their

representatives from the policy process.

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3. Social CohesionTo what extent is exclusion and decoupling from society effectively prevented?

Americans of African descent have had a special status:

Their ancestors were brought forcibly to the country as

slaves. Even after the slaves were emancipated at the end

of the Civil War, the southern U.S. states had an official

policy of racial segregation, depriving African-Americans

of full political rights and of the social and economic

opportunities available to other citizens. Since the late

1960s government and social institutions have made a

concerted effort to cope with the adverse consequences

of that inheritance, largely through measures intended

to broaden opportunity. The effort has had achieved

some notable successes. African-Americans are more

fully integrated into American society than was the case

before legal segregation was abolished and the official

efforts at inclusion began. A large and growing African-

American middle class now exists. On the other hand, on

many measures of well-being—income, total wealth, and

life expectancy, for example—African-Americans continue

to lag behind the rest of the country. Efforts at inclusion

since the 1960s have extended to other groups as well,

particularly people of Hispanic background, who also

tend to lag behind the majority on these indices, and to

women—who are, in fact, a slight majority rather than a

minority of the American population.

America’s Gini coefficient—a measure of inequality—is

41st out of 136 countries in the world, but it is higher than

that of any Western European country, and the trend is

toward even greater inequality. Between 2002 and 2007,

people in the top 1 percent of the American income ladder

captured two-thirds of the total gains from economic

growth, and the top one-tenth of 1 percent captured

fully one-third of the gains. The U.S. government has

taken steps designed to reduce inequality, most notably

a progressively structured federal income tax code and

the Earned Income Tax Credit, which benefits poorer

taxpayers, but these have not arrested or reversed the

ongoing trend.

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Policies very effectively enable societal

inclusion and ensure equal opportunities.

For the most part, policies enable societal

inclusion effectively and ensure equal

opportunities.

For the most part, policies fail to prevent

societal exclusion effectively and to ensure

equal opportunities.

Policies exacerbate unequal opportunities

and exclusion from society.

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Socioeconomic Criteria – Preconditions for Social Stability and Future Growth

With 15.1 percent of its population living below the

poverty line, the United States has a higher incidence of

poverty than most other similar countries. This relatively

high rate of poverty has several causes. They include

a somewhat less generous welfare state than in other

advanced industrial democracies, arising in part from the

belief that the availability of economic opportunity is more

important than economic equality, and a historically more

heterogeneous population than in comparable countries.

This heterogeneity stems from the fact that America has

been, since its inception, a nation of immigrants; and those

immigrants have come from different parts of the world:

first primarily from northern Europe, then, at the end of

the 19th century, from southern and eastern Europe, and

in the second half of the 20th century increasingly from

Latin America and Asia. Historically, the United States has

relied on the institutions of civil society, and particularly

on the private economy and the public school system,

rather than on the government, to absorb and assimilate

its immigrants.

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How strong is the citizens’ approval of political institutions and procedures?Please base your assessment on public opinion survey

data, addressing the following factors:

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Citizens’ assessment of politics and government in the

United States presents a mixed picture. On the one hand,

the overall political system commands wide and deep

support. The Constitution is the subject of respect, rising

in some cases almost to reverence, among Americans.

Democracy is widely regarded as without question the

most desirable form of government. The term “regime

change” is virtually never applied by Americans to their

own country.

On the other hand, the main political institutions,

especially the U.S. Congress, have shockingly low

approval ratings. In one recent survey, only 14 percent

of the respondents approved of the performance of

Congress. President Obama earned a higher score, just

over 50 percent, but presidential approval ratings have

occasionally fallen to the low thirties in recent decades.

Congress’s low approval ratings present a paradox. Since

the public elects its members, the low esteem in which

the institution is held would seem logically to produce a

rapid rate of turnover in its membership. Yet incumbents

are routinely reelected. Americans dislike the institution

of Congress but often approve of their own individual

representative to it.

Another sign of dissatisfaction with the political system

as it currently operates, as distinct from its basic design,

is the growing number of Americans who do not identify

with either of the two major political parties but instead

consider themselves political independents. According to

a survey taken at the end of 2012, fully 38 percent of the

electorate considered themselves independents, with 33

percent identifying as Democrats and only 23.9 percent

as Republicans.

Approval of political institutions and

procedures is very high.

Approval of political institutions and

procedures is fairly high.

Approval of political institutions and

procedures is fairly low.

Approval of political institutions and

procedures is very low.

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The 20th-century American humorist Will Rogers once

said that “the trouble with the House of Representatives

is that it is so damned representative.” Social interests

of every kind are well represented in the American system

at the national, state and local levels. Three concerns

about their role and their impact have arisen in recent

years. One is that on economic issues, business interests

have increased their ability to influence legislation at

the expense of consumers, who tend to be far less well

organized, and labor, whose union organizations represent

a steadily dwindling fraction of American workers. This

is perhaps one reason that corporate profits currently

constitute the highest proportion of U.S. GDP, and wages

the lowest, since the 1930s. (To complicate this issue, an

increasing proportion of organized workers are employed

by the government rather than the private sector, and their

gains in benefits, often imposing financial obligations

on the states and municipalities that employ them, can

lead to higher taxes or bigger deficits or both.) The second

concern is that societal interests can offset one another in

such a way as to paralyze the policymaking process, to the

detriment of the wider society. The third concern is that

cooperative associations are retarding economic growth.

The economist Mancur Olson identified the tendency,

which is particularly pronounced in democracies, to form

what he called “distributional coalitions”—interest groups

that use their political power to divert society’s resources

to themselves at the expense of the general well-being.

This process, in the view of some observers, is harming the

economic performance of the United States.

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To what extent is there a network of cooperative associations to mediate between society and the political system?

There is a broad range of interest groups

that reflect competing societal interests,

tend to balance one another, and are

cooperative.

There is an average range of interest

groups, which reflect most societal

interests. However, a few strong interests

dominate, producing a latent risk of

pooling conflicts.

There is a narrow range of interest

groups, in which important societal

interests are underrepresented. Only a few

players dominate, and there is a risk of

polarization.

Interest groups are present only in

isolated social segments, are on the whole

poorly balanced and cooperate little. A

large number of societal interests remain

unrepresented.

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To what extent is the government able to moderate domestic economic, political, and social conflicts?

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Historically the American government has done well

at moderating social conflict—with the monumental

exception of the country’s Civil War from 1861 to 1865. Since

then the two-party system, with its capacity for absorbing

and representing new forces and new ideas,; the habits of

democracy, which include cooperation and compromise,

and the country’s underlying consensus about basic

political values, have kept the conflicts inevitable in any

society, especially one as large, diverse and dynamic as

that of the United States, within reasonable bounds.

In recent years, however, the political system has become

more sharply polarized. The two major parties are now

farther apart ideologically, according to studies by

political scientists, than at any time in a hundred years

and perhaps since the 1850s—the contentious decade

that led to the Civil War. For this there are several reasons:

the increasing ideological homogeneity of the two parties,

with northern liberals having left the Republican ranks

while southern conservatives abandoned the Democrats;

the rise of social issues such as abortion and gay rights,

which, unlike economic issues, do not lend themselves

to compromise; and the computer-aided construction

of legislative districts, known as gerrymandering, to

guarantee the election of a candidate from one of the two

parties. In such districts, the primary election to choose

the parties’ candidates is the decisive contest—and one in

which, because only party activists tend to participate, the

candidate with the most extreme views stands the greatest

chance of winning. There is some evidence, notably in

the work of the political scientist Morris Fiorina, that the

electorate as a whole is not as sharply polarized as are

the two parties, which means that the political system

does not fully represent the country as a whole. But the

present state of the parties makes compromise on major

initiatives to address pressing problems, above all the

deficit and the reform of immigration laws, very difficult.

Another major conflict looms on the horizon: one between

generations. As the American population ages, the cost

of the major social support programs for retired people—

Social Security and Medicare—will increase sharply.

Meanwhile, the ratio of active workers, who will have to

pay more and more for these programs, to retirees, who

are the beneficiaries, will decline. In these circumstances,

with the economic interests of the two groups increasingly

at odds, the generations may well come into sharp

political conflict. The way to avoid or mitigate such a

conflict is to reform the programs to make them less costly,

but the polarization of the political system has thus far

prevented this.

The government depolarizes conflicts and

expands consensus across the dividing

lines.

The government prevents conflicts from

escalating.

The government does not prevent conflicts

from escalating.

The government exacerbates existing

conflicts for populist or separatist

purposes.

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4. Future ResourcesTo what extent does education policy deliver high-quality, efficient, and equitable education and training?

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The quality of the American system of education varies

dramatically. Post-secondary education is by most

accounts the best in the world, but at the primary and

secondary levels the United States delivers education that

is by global standards mediocre. Higher education is a

great American success story. Of the 20 best universities

in the world according to a survey by the Times of

London’s Higher Education Supplement, 15 are located in

the United States. (Four others are in Britain.) The best

students from all over the world aspire to do postgraduate

studies in these American institutions, especially in

the sciences, mathematics and engineering. Even here,

however, the picture is not entirely rosy. Many of the

best postgraduate students come from abroad, but U.S.

immigration laws make it increasingly difficult for them

to stay in the country and contribute to society and the

economy, as so many immigrants have done in the past.

And the nation’s political polarization has blocked reform

of the immigration laws to correct this. Moreover, rising

costs make access to higher education, which Americans

want to be universal, increasingly difficult. Students have

to take on increasingly heavy burdens of debt to attend

these institutions, which discourages attendance and

imposes hardship afterwards. And the percentage of the

population actually completing a post-secondary degree,

once the highest in the world, has fallen in recent years to

the point that America now ranks only 12th in the world on

this dimension of educational achievement.

U.S. primary and secondary schools fare less well in

international comparisons. In the 2008 Program for

International Student Assessment (PISA) tests of students

from many countries, American scores in science and

technology were at about the OECD average, and in

mathematics were below the average. In no discipline

did the United States excel. Since the 1970s, per-pupil

expenditure in the United States has more or less doubled

in real terms without producing better-educated students

as defined by scores on standardized tests. More than a

quarter of American students fail to complete high school.

The reform of primary and secondary education is widely

recognized as a major need, and a number of efforts are

under way: upgrading the performance of teachers for

one, and broadening the choices available to students

beyond publicly supported schools for another. Both are

controversial, however; neither is being implemented

on a national scale, and neither has thus far produced

dramatic improvement where it has been undertaken. The

need for such improvement is key because in the future,

even more than in the past, educational attainment will

be a predictor of income and lifetime earnings. Those

without academic credentials will lag behind the rest of

society. If the United States cannot upgrade its primary

and secondary education, the country’s degree of income

inequality will continue to increase.

Education policy effectively delivers high-

quality, efficient, and equitable education

and training.

Education policy largely delivers high-

quality, efficient, and equitable education

and training.

Education policy partly delivers high-

quality, efficient, and equitable education

and training.

Education policy largely fails to deliver

high-quality, efficient, and equitable

education and training.

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The United States does well—probably better than any

other country—at generating innovations and translating

them into new and commercially valuable products and

processes. This has been true from the founding of the

republic. From its earliest days, America was a nation

of tinkerers, innovators, and entrepreneurs. In the 20th

century, its universities and many private companies

became sources of ideas and technologies, with students

and others translating the fruits of university-based

research into commercially viable products and services.

Military-related research and the nation’s space program

also contributed in this way. A community of U.S. venture

capitalists provides money for new enterprises, and the

country’s bankruptcy laws and its comparatively greater

tolerance for business failures than in other countries

encourage people to take the risks involved in launching

new ventures. The outstanding product, and example, of

this “ecology of innovation” is Silicon Valley in northern

California. Even in this area of great strength for the

United States, however, there are worrying signs. Major

high-tech firms, for example, are moving research and

development facilities out of the United States. The

American share of total global patents is falling. Federal

funding for basic research, an integral part of the process

of innovation, is likely to decline in the years ahead. Still,

on balance, and in comparison with others, the country

scores very high here.

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products and services?

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Research and innovation policy effectively

supports innovations that foster the

creation of new products and services and

enhance productivity.

Research and innovation policy largely

supports innovations that foster the

creation of new products and services and

enhance productivity.

Research and innovation policy partly

supports innovations that foster the

creation of new products and services and

enhance productivity.

Research and innovation policy largely

fails to support innovations that foster the

creation of new products and services and

enhance productivity.

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INCRA USA Ratings Report

3 4

How successful is a government in reducing unemployment and in increasing employment?

3 4

Historically the United States has had a lower

unemployment rate than the countries of Western Europe,

the result of more flexible labor markets that were

themselves the products of fewer regulations and weaker

unions than in Europe. Americans’ greater geographic

mobility also played an important role here: Workers

moved frequently from one part of the country to another

to change jobs. Unemployment has remained higher than

normal in the wake of the recession of 2007–2009, in part

no doubt because of the severity of that downturn but also

very likely for reasons that go beyond it. Even with high

unemployment, by some estimates more than 3 million

jobs were going unfilled for lack of qualified applicants.

Improved training and retraining programs may turn out

to be necessary in the future, as they have not been in the

past, to return to the relatively high levels of employment

that have been historically normal in the United States.

Successful strategies ensure unemployment

is not a serious threat and levels of

employment are high.

Labor market and employment policies have

been more or less successful with regard

to the objective of reducing unemployment

and increasing employment.

Strategies to reducing unemployment and

increasing employment have shown little

effect.

Labor market and employment policies have

been unsuccessful and unemployment has

risen and employment has declined.

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To what extent are social security schemes based on principles of fiscal sustainability?

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America’s major programs in this area—Social Security

and Medicare—which are known as entitlements because

each is available by right to all Americans age 65 or older,

are not sustainable over the long term under current

conditions. The retirement of the country’s largest-ever

age cohort, the 78 million “baby boomers” born between

1946 and 1964, will vastly increase the amount of money

needed to fulfill the terms of these programs. This will

create economically ruinous and politically untenable

obligations. By one estimate, the entitlement programs’

share of consumption of U.S. GDP, which is now about

10 percent, will rise to more than 18 percent by 2050. By

another rough estimate, the difference between the total

cost of paying for the boomers’ retirement over several

decades under the current rules and the amount of money

the government can expect to collect for this purpose at

present rates is no less than $52 trillion. The most potent

driver of cost increases will be Medicare, and because

Medicare is such a large and rapidly growing program, the

problem of paying for U.S. entitlement programs is closely

related to another one: the high cost of medical care of

all kinds. The United States spends about 18 percent

of its GDP on health care, which is one-and-one half

times to twice as much as the other advanced industrial

democracies. France, for example, spends only 12 percent

of its GDP for this purpose, but the French population as a

whole is no less healthy than the American one.

The solvency of the nation’s entitlement programs, and in

some measure of the country as a whole, therefore requires

finding ways of controlling health care costs. There is no

national consensus on how this should, or even can, be

done. The Affordable Care Act of 2010, commonly known

as Obamacare, includes provisions for cost reduction,

but their effectiveness will not be tested until later this

decade, when the law has been in effect for several years.

As their costs rise, and even if the growth of health care

costs in general can be restrained, both Social Security

and Medicare will have to be reformed to keep them

economically and politically viable. While it is widely

accepted among those who study these programs that

changes will be needed in both benefits and costs to

bring them under control, little progress has been made

in devising and implementing such changes. The idea of

entitlement reform is a highly contentious and politically

divisive matter. The country has begun to debate it but

is not, as of this writing, close to an agreement on the

appropriate steps to be taken.

Social security schemes are fiscally

sustainable.

Social security systems meet most standards

of fiscal sustainability.

Social security schemes meet only some

standards of fiscal sustainability.

Social security schemes are fiscally

unsustainable.

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INCRA USA Ratings Report

3 6

To what extent are environmental concerns effectively taken into account in both macro- and microeconomic terms?

3 6

The United States has had an active and effective

environmental movement since the 1960s, which helped

to establish the Environmental Protection Agency (EPA)

in 1970. That agency has grown in power and reach;

likewise, state and even local governments have their own

environmental laws and agencies to enforce them. As a

result, over the four decades since the establishment of

the EPA, what might be called “local pollution” in the

United States—the smog in urban areas, for example, and

the pollution in rivers—has abated considerably.

To deal with the most important environmental problem

of global scope, however—global warming—the United

States has adopted few formal measures. A substantial

fraction of the American public, and part of the country’s

political establishment, simply does not believe that

the planet’s temperature is rising with unusual rapidity,

or that, if it is, this will cause severe environmental,

economic, social and political damage if unchecked.

The United States did not ratify the 1997 Kyoto Protocol,

the international treaty aimed at reducing emissions to

combat climate change. Complicated legislation called

the American Clean Energy and Security Act, designed

to reduce the country’s use of carbon-based fuels, was

approved by the House of Representatives in 2009 but

did not pass in the Senate. Once a leader in research and

development of renewable fuels, the United States now

trails behind other countries. It does have a number of

government initiatives designed to achieve that goal,

such as programs that encourage the use of ethanol or

subsidies for solar power and manufacturers of electric

automobiles. These programs have attracted criticism

and political opposition and have done little to reduce

American, let alone global, dependence on global-

warming-producing fossil fuels. Improvement in energy

efficiency in industrial and consumer activity over the

past several decades has reduced the amount of carbon-

based fuel usage per unit of economic output—but

because overall national output has grown, so have total

U.S. carbon emissions. Because of widespread skepticism

about the very existence of man-made climate change,

as well as because of the historically deeply rooted

resistance to taxation of all kinds (which is a sentiment far

stronger in the United States than in Europe) the United

States has not even seriously considered the measure that

would most efficiently increase innovation, production,

and consumption of non-fossil fuels: a tax on carbon.

Environmental concerns are effectively taken

into account and are carefully balanced with

growth efforts.Environmental regulation and

incentives are in place and enforced.

Environmental concerns are effectively

taken into account but are occasionally

subordinated to growth efforts.

Environmental regulation and incentives are

in place, but their enforcement at times is

deficient.

Environmental concerns receive

only sporadic consideration and are

often subordinated to growth efforts.

Environmental regulation is weak and hardly

enforced.

Environmental concerns receive no

consideration and are entirely subordinated

to growth efforts. There is no environmental

regulation.

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5. Strategic CapacityPrioritization: To what extent does the government set and maintain strategic priorities?

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The U.S. government has ready access to expertise of

all kinds: through government bodies organized for this

purpose, such as the President’s Council of Advisors on

Science and Technology, through expert testimony to

congressional committees, through informal consultation

by the bureaucracy at all levels, and by virtue of the fact that

it is far easier to enter the government laterally—to recruit

expertise from outside the permanent bureaucracy—

in the United States than in other countries. America

has on several occasions demonstrated its capacity for

setting and keeping to strategic priorities. Perhaps the

most notable example is its 45-year policy of containing

the Soviet Union, maintained through nine presidential

administrations, four Democratic and five Republican.

Still, consistency in the pursuit of major goals does face

several obstacles in the United States. One is the division

of power between the executive and legislative branches,

which can and do embrace different goals and check each

other in pursuit of them. Another is the fact that all of the

members of one chamber of the federal legislative branch,

the House of Representatives, must stand for election

every two years, a shorter term of office than is found in

any other advanced industrial society, which makes them

subject to short-term pressures and incentives. A third is

the unusually sharp polarization, in the second decade of

the 21st century, between the two major political parties,

making it difficult to find broad goals that both will

support. A fourth is the fact that, in contrast to Europe,

planning is not a highly regarded governmental activity

in the United States. While most Western European

governments have, or have had since 1945, official bodies

to engage in indicative planning (not to be confused with

the comprehensive and mandatory planning of communist

economic systems), the United States does not.

II. STEERING CAPABILITY AND REFORM CAPACITIES

The government sets strategic priorities

and maintains them over extended periods

of time. It has the capacity to prioritize and

organize its policy measures accordingly.

The government sets strategic priorities,

but sometimes postpones them in favor

of short-term political benefits. It shows

deficits in prioritizing and organizing its

policy measures accordingly.

The government claims to be setting

strategic priorities, but replaces them

regularly with short-term interests of

political bargaining and office seeking.

Policy measures are rarely prioritized and

organized.

The government does not set strategic

priorities. It relies on ad hoc measures,

lacks guiding concepts, and reaps the

maximum short- term political benefit.

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INCRA USA Ratings Report

Policy coordination: To what extent can the government coordinate conflicting objectives into a coherent policy?

3 8

The size of and division of power within the American

government presents a challenge to policy coordination.

Over the past half century, power within the executive

branch has gravitated away from the various departments

and agencies and to the White House, although the

business of government is so extensive and complex

that departments retain considerable independence,

especially on matters that are not highly political visible.

Within the White House, both formal bodies, such as

the National Security Council, and ad hoc arrangements

have been created for the purpose of coordination.

Still, the sheer scope of the government—as well as the

power of Congress, which the White House emphatically

does not control even when members of the president’s

party are in the majority in both houses and which has

important powers of its own (notably the power of the

purse)—limit the degree of coherence that the making and

implementation of policy can achieve in the United States.

The government coordinates conflicting

objectives effectively and acts in a

coherent manner.

The government tries to coordinate

conflicting objectives, but with limited

success. Friction, redundancies, and gaps

in task assignments are significant.

The government mostly fails to coordinate

between conflicting objectives. Different

parts of the government tend to compete

among each other, and some policies

have counterproductive effects on other

policies.

The government fails to coordinate

between conflicting objectives. Its policies

thwart and damage each other. The

executive is fragmented into rival fiefdoms

that counteract each other.

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Stakeholder Involvement: To what extent does the government consult with major economic and social interest groups to support its policy?

Both the executive and especially the legislative branches

consult extensively with major social and economic

groups. Because of the historical strength of civil society

in the United States and because economic, social and

political interests are well organized, the government very

seldom takes an initiative involving domestic matters

without extensive consultation. The 2010 health care

law is an example; the Obama administration conferred

with all organized parties with a stake in the legislation.

Of course, not all groups are equally well organized, and

the growing prominence of money in campaigning and

governing may give wealthy groups increasing influence,

tilting the political playing field in their favor. (It is also

possible, however, that technology will tend to equalize

political influence by providing groups lacking money

with new channels of influence.) The common criticism

of government is not that it fails to consult adequately

with those affected by the policies it enacts, but rather the

reverse: that consultations can become so elaborate and

prolonged that they prevent effective action.

The government successfully motivates

economic and social actors to support its

policy.

The government facilitates the acceptance

of its policy among economic and social

actors.

The government consults with economic

and social actors.

The government hardly consults with any

economic and social actors.

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INCRA USA Ratings Report

Political Communication: To what extent does the government actively and coherently communicate and justify the rationale for and goals of its policies to the public?

4 0

The United States is so large, and there are so many

channels of communication and so many different and

often conflicting views on public policy, that effective

communication is not always easy. It is the president,

at the national level, and to a lesser extent governors

and mayors at the state and local levels, who have the

strongest and most widely heeded voices. Since the early

20th century, the president has been the focus of media

attention in the nation’s capital, and is usually taken by

foreign audiences (and often by Americans as well) to

speak for the country as a whole. The president occupies

what has come to be known as the “bully pulpit,” from

which his words and ideas can reach all Americans and

others beyond the country’s borders. He has by tradition

at least one opportunity annually, in his State of the Union

address to Congress, to command the country’s undivided

attention and occasionally makes other special national

addresses, especially during emergencies. (Governors and

mayors have similar, although less potent, opportunities.)

It gives him the chance to set the national agenda,

although it by no means guarantees the enactment of that

agenda. As in other countries, it should be noted, officials

in the United States conduct their bureaucratic battles by

means of leaks to the press, so the executive branch, even

under the tightest presidentially imposed discipline, does

not always speak with a single voice.

The government effectively coordinates its

communication efforts and it coherently

communicates and justifies the goals of its

policies to the public.

The government seeks to coordinate its

communication efforts. Contradictory

statements are rare, but do occur

sometimes. In most cases, the government

is able to coherently communicate and

justify the goals of its policy to the public.

The government has problems in

effectively coordinating its communication

efforts. Statements occasionally contradict

each other. The government is only partly

able to coherently communicate and

justify the goals of its policies to the

public.

The government fails to coordinate its

communication efforts. Statements often

contradict each other. The government

is not able to coherently communicate

and justify the goals of its policies to the

public.

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6. Implementation and EfficiencyTo what extent can the government achieve its own policy objectives?

4 1

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Because power is divided in the American system, different

branches and levels of the government can and do have

different objectives. Indeed, this system was originally

designed to make it difficult to put into practice a

comprehensive program of any kind, or at least to prevent

such a thing from being done quickly. Moreover, the

current unusually sharp divisions between the two major

political parties further inhibit effective implementation

of any particular policy agenda. Each party opposes,

blocks and where relevant seeks to cancel or reverse what

the other is attempting to do.

It became customary in the 20th century for the president

to put together a legislative program and announce it in

his annual State of the Union message to Congress at

the beginning of each calendar year. On a few occasions,

most of that program has been enacted into law during the

president’s term of office. But in the political conditions

that prevail in 2013, such an achievement is most unlikely.

The government can largely implement its

own policy objectives.

The government is partly successful in

implementing its policy objectives or can

implement some of its policy objectives.

The government partly fails to implement

its objectives or fails to implement several

policy objectives.

The government largely fails to implement

its policy objectives.

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INCRA USA Ratings Report

4 2

To what extent does the government make efficient use of available human, financial, and organizational resources?

The quality of the government’s workforce, although

difficult to measure, has probably declined somewhat

in recent decades. Beginning in the 1930s, government

service came to be seen as important and constructive, and

in comparison with the private sector it was reasonably

well-compensated work. In recent decades, each of these

qualities has declined: One reason for the financial crisis

of 2008, for example, was the relatively weak government

oversight of the financial industry, the result not only

of the limits of existing regulations but also of the fact

that someone with an interest in finance could make

so much more money in the private than in the public

sector. Another difficulty, peculiar to the U.S. federal

government, inhibits maximally effective employment of

human resources. Departments and agencies often lack

leadership at the outset of a presidential term, when the

executive branch’s power to make and enact policy tends

to be greatest, because their leaders must be confirmed

in office by the Senate. This confirmation process has

become ever more complicated, protracted, intrusive

and, for the purpose of recruiting talented people to fill

the positions in question, discouraging. To confirm all the

senior appointed officials of the Kennedy administration

in 1961 took 10 weeks; of the Reagan Administration in

1981, 20 weeks; and of the Obama administration in 2009,

18 months.

The government makes efficient use

of all available human, financial, and

organizational resources.

The government makes efficient use of

most available human, financial, and

organizational resources.

The government makes efficient use

of only some of the available human,

financial, and organizational resources.

The government wastes all available

human, financial, and organizational

resources.

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7. AdaptabilityPolicy Learning: How innovative and flexible is the government?

The United States has experienced policy learning—or at

least significant change in policy—in recent decades. The

wars in Vietnam in the 1960s and 1970s and in Afghanistan

and Iraq in the first decade of the 21st century triggered

political backlashes that led to more cautious foreign

policies. (In Iraq the armed forces themselves engaged in

learning, leading to the change in tactics in 2007 known as

the “surge.”) The inflation of the late 1970s led to a tighter

monetary policy, and contributed to the deregulation and

increased reliance on market forces of the 1980s. A major

reform of the Social Security system was enacted in 1983,

and tax code reform in 1986.

In recent years, however, the government has become

more rigid. Changes of policy widely considered to be

necessary to secure the country’s future have nonetheless

not occurred. Every president since Richard Nixon, for

example, has preached the need, for reasons of national

security as well as economic well-being, to decrease

American reliance on imported oil. Yet the government

has never managed to pass the necessary measures—a

tax on carbon, or oil, or imported oil—that would achieve

The government demonstrates a

pronounced ability for complex learning.

It acts flexibly and replaces failed policies

with innovative ones.

The government demonstrates a general

ability for policy learning, but its

flexibility is limited. Learning processes

inconsistently affect the routines and the

knowledge foundation on which policies

are based.

The government demonstrates little

willingness or ability for policy learning.

Policies are rigidly enforced, and the

routines of policy-making do not enable

innovative approaches.

The government demonstrates no

willingness or ability for policy learning.

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this goal. (American reliance on oil imports has waxed and

waned, but for reasons largely independent of public policy.)

The same is true of the failure to reform Social Security and

Medicare, as discussed earlier. These situations are not due

to a lack of expertise or the failure to consult outside the

government. Nor can they be explained by the absence of

institutional mechanisms to foster adaptation. Indeed, all

three were on display in the 2010 report of the National

Commission on Fiscal Responsibility and Reform, popularly

known as the Simpson-Bowles Commission after its two

co-chairmen, Alan Simpson, a former Republican senator

and Erskine Bowles, a Democratic former White House

chief of staff. President Obama created the commission to

study and make recommendations on the nation’s fiscal

challenges; it had 18 members, including six Democratic

and six Republican members of Congress. Its mandate

included a provision for a vote on its recommendations in

both houses of Congress should a large enough majority

of the commission endorse them. The commission’s report

was widely praised as both an effective path to addressing

the nation’s fiscal problems and a program with the

potential to attract support from both political parties. It

won the support of a majority of commissioners, but not

a big enough majority to force a congressional vote. The

president did not endorse it, and it became a dead letter.

Here again, the chief obstacle to a needed adaptation in

public policy was the sharp polarization of the American

political system in the second decade of the 21st century,

to the extent that the two parties struggle to agree on any

significant measure.

Public opinion presents another obstacle to the reform

of energy policy and entitlements. Effective adaptation

would in both cases entail short-term economic sacrifice

on the part of the American public. While Democrats and

Republicans disagree on most important matters of public

policy, they have both been reluctant to propose measures

that require sacrifice of any kind, especially sacrifice on the

part of segments of society that they represent and that

support them. They calculate that this would have negative

electoral consequences for them because the American

public will not agree to short-term sacrifice, no matter how

compelling the case for it. The gap between what is needed

and what the public is willing to authorize obstructs policy

adaptation in the United States.

INCRA USA Ratings Report

4 4

Institutional Learning: To what extent does the government improve its strategic capacity by changing the institutional arrangements of governing?

The government improves considerably

its strategic capacity by changing its

institutional arrangements.

The government improves its strategic

capacity by changing its institutional

arrangements.

The government does not improve

its strategic capacity by changing its

institutional arrangements.

The government loses strategic capacity by

changing its institutional arrangements.

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Since the 1930s, reform of the functions of the U.S.

government has usually come in two varieties. One kind

of reform is an effort to coordinate better the disparate

agencies and departments of the federal government:

examples include the establishment of the National

Security Council in 1947 and the National Economic

Council in 1993, both with their headquarters in the White

House, and the appointment of various “policy czars” with

mandates spanning more than one agency or department.

President George H.W. Bush appointed two such czars,

President Clinton eight, President George W. Bush 33

and President Obama 37. Because the government

is so large, all presidential administrations develop

some mechanisms of coordination, even if they do not

acquire formal status or outlive the administration that

established them. The other kind of reform is the addition

of departments of agencies to reflect new challenges and

the political importance of new constituencies. As the

government has grown since the 1930s, departments and

agencies have multiplied. This assures official attention

to a wide array of social and economic issues. It speaks to

the ever-wider scope of governance in the United States,

in common with other advanced industrial countries.

Occasionally various agencies are consolidated, as with

the Department of Homeland Security, which was formed

in 2002. Whether that growth or those consolidations have

improved the strategic capacity of the government and, if

so, to what extent it has fostered such an improvement,

are matters of debate.

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4 5

Is there evidence from historical events that the country and society have already mastered economic and political shocks in the past?The United States has had the good fortune not to have

experienced a genuinely regime-threatening crisis since

the middle of the 19th century, when divisions in the

country led to a bloody civil war. During the Cold War,

the government had to navigate several political-military

crises, which derived their urgency from the possibility

that nuclear weapons would be used, conceivably on a

large scale, by the United States and its chief rival the

Soviet Union. The most serious of these arose over the

status of Berlin in 1961 (a previous Berlin crisis, without

the acute peril of nuclear war, had taken place in 1948) and

over the Soviet emplacement of nuclear-capable missiles

in Cuba in 1962. In both cases American policy, led by the

president, produced a resolution of the crisis on terms

favorable to the United States and without war.

In the 1930s the Great Depression administered a political

as well as an economic shock to the United States, as to

other Western countries, but the political system itself

was not in serious danger. The Keynesian economic

policies implemented by the administration of Franklin

D. Roosevelt, beginning in 1933, mitigated the economic

damage during the balance of that decade. World War II,

which began for the United States in late 1941, injected

stimulus on a large scale into the U.S. economy in the

form of military spending.

The United States also coped reasonably well with

the great financial crisis of 2008, which had global

consequences but centered on the American financial

system. The failure of the investment bank Lehman

Brothers on Sept. 15, 2008, triggered the crisis, freezing

the flow of credit and jeopardizing the existence of large

financial institutions, not all of them banks. The federal

government stepped in with emergency measures that

stabilized the financial system. It played, in effect, the

classic governmental role of lender of last resort. Close

cooperation on an ad hoc basis among three major

economic officials—Treasury Secretary Henry Paulson,

Federal Reserve Chairman Ben Bernanke, and the president

of the Fed’s most important regional branch in New York,

Timothy Geithner—was responsible for the generally

successful efforts to cope with the crisis. The process

was not an entirely smooth one. Congress rejected the

first proposal for a Troubled Asset Relief Program (TARP),

passing it only after the initial rejection had triggered a

sharp drop in the stock market. Nor did the U.S. economy

escape serious damage: the financial crisis contributed

substantially to the longest and deepest recession the

country had experienced since the 1930s. Without the

III. TRACK RECORD OF PAST CRISIS MANAGEMENT

effective work of the trio of economic officials, however,

the damage would surely have been worse.

Score: 9

Does the political system facilitate crisis remediation in a timely manner?While the American political system permitted crisis

remediation in the fall of 2008 and thereafter, it did not

facilitate what turned out to be an escape from the worst

possible outcome of the near-meltdown of the financial

system. Indeed, the crisis management process had a

troubling feature: The institutions with the greatest power

and therefore most extensive responsibilities under the

Constitution—the presidency and Congress—contributed

very little to the policies that mitigated the economic

shocks. While the presidency had been at the center of

the Cold War political-military crises, making the ultimate

decisions and rallying public support for them, in the 2008

financial crisis President George W. Bush appeared to have

delegated the authority of the executive branch to the

secretary of the Treasury. Congress came into the picture

when it was asked to provide an emergency injection of

funding to support the financial system in the form of

TARP. But the House of Representatives initially rejected

the program on Sept. 28, 2008, sending a shudder through

financial markets in the United States and elsewhere,

before it finally passed the necessary legislation on Oct.

3. In general, the bulk of the crisis remediation came from

the Federal Reserve, which is the least democratic, in the

sense of being the least publicly accountable, part of the

federal government. Its insulation from public pressure

enabled the Fed to operate swiftly, effectively and on a

large scale during the crisis, but also made the measures

it took less comprehensible to and less popular with the

public than would have been the case had the president

and Congress been identified with them. Moreover, post-

crisis legislation has curtailed some of the Fed’s powers,

and to be successful over the long term in a democracy

such as the United States, a program of any kind, including

a financial program, must have public support. Moreover,

the polarization of the political system makes any major

legislation, no matter how urgent, difficult to pass.

Polarization may even create crises, for example if Congress

follows through on the threat some of its members

have made to refuse to raise the nation’s debt ceiling

when necessary unless substantial reductions in federal

spending take place. Without an increase in the debt limit,

it is conceivable that the United States could, for the first

time in its history, actually default on its debt payments.

This is highly unlikely but unfortunately not impossible.

Score: 7

INCRA USA Ratings Report

4 6

Is the signaling process between decision makers (the government, central bank, employers and employee representatives) so well established that confusion about (and resistance to) the expected outcome of decisions by one decision-maker on the others can be avoided or at least minimized?There is adequate communication among the relevant

parties in the political and economic systems in the

United States. What is lacking is sustained cooperation,

due less to the constitutionally mandated separation of

powers than to the sharp ideological polarization of the

second decade of the 21st century.

Score: 8

Are there constitutionally anchored and politically accepted procedures for sequencing and timing countermeasures in a crisis?There are no such procedures. Usually the country looks

to the president to chart a response to a crisis and

orchestrate the policies necessary to follow it. In 2008,

although the country did cope more or less adequately

with the financial crisis once it erupted (as opposed to

preventing it in the first place), this pattern did not occur

in precisely the way that it had in the past.

Score: 6

What is the special international economic role of the United States?One particular feature of the U.S. role in the global

economy is germane to assessing its credit rating. The

United States supplies the currency most widely used

globally as a reserve. Other countries hold more than 60

percent of their reserves in dollar-denominated assets.

Because this produces wider tolerance among other

countries for economic policies that incur the rebuke of

markets when carried out by a country other than the

United States, it gives the U.S. government greater scope

for such policies. In other words, America’s credit receives

a boost in practice from the special status of the dollar,

which is bolstered by the fact that the other two plausible

candidates to serve as reserves—the euro and the Chinese

renminbi—are for different reasons unsuitable for the task

at present. Uncertainty surrounds the euro because of the

difficulties some of its members have had in financing their

deficits; as for the renminbi, the Chinese economy is too

tightly controlled by the ruling Communist Party to make

it attractive for others to hold its currency on a large scale.

The dollar’s dominance carries with it a danger, however,

especially in view of America’s clouded fiscal prospects: It

means that if other countries and global markets should

lose confidence in the dollar, the consequences for both

the American and world economies would be particularly

severe. A run on the dollar could do more damage than

the instability of the euro that began in 2011 or the crash

of Asian currencies in 1997 and 1998.

Score: 8

INCRA USA Ratings Report 4 7

CO

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LUS

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The Overall Objective of This ReportThis sample rating report is the logical next step for INCRA

to demonstrate that the current system of sovereign

ratings can be changed. All six of our INCRA sample

ratings, including the US rating, prove that:

• Transparency—providing all the data, background

information and average scores from committee voting—

can be a basic principle of sovereign risk assessment.

• A broader understandability of sovereign ratings can be

achieved by introducing new forms of presentation, such

as our “rating radar.”

• Both quantitative and qualitative indicators should be

included in every sovereign risk analysis.

In essence, we believe it is time to change the public

narrative about sovereign ratings. Instead of viewing them

as a “national insult” in the case of a downgrade or as an

unpredictable and not serious assessment of a country,

they should be seen as a starting point for an in-depth

debate about the reforms a country might need.

Overall, we still believe CRAs need major improvements.

Since sovereign ratings are public goods, it should be the

responsibility of all the major societal players to support

their improvement. As such,we still advocate that the G20,

representing the most important economic and financial

players in today’s world, is the best forum within which to

evaluate the political will for founding a new institution

that will be embedded not only in financial markets but

also in society in general. Additionally, corporate players,

NGOs and foundations should make commitments to help

improve the sovereign risk sector.

The first INCRA report and this report demonstrate that

there is an alternate way to address the highly important

and sensitive issue of how sovereign ratings are conducted.

The second INCRA report, with its sample ratings of

Brazil, France, Germany, Italy and Japan, along with this

US rating report, show that INCRA’s methodology works

for assessing sovereign risk and can provide investors

and the public with a clear, transparent assessment of a

country’s outlook. INCRA is an innovative solution that

merges the changing demands and interests of investors

assessing sovereign risk and the desire of governments

and the broader public for more transparency, legitimacy

and accountability.

As the sample ratings prove, in order to evaluate a country’s

willingness to repay its debts, a more comprehensive set

of indicators is needed. That is why INCRA, as shown in

this report, would conduct its sovereign risk assessments

using a set of macroeconomic and FLI that will provide

the basis for high-quality analysis. The FLI capture a more

meaningful picture of a country’s long-term socioeconomic

and political prospects and the potential political and

social constraints on its ability and willingness to pay

back its debt. In this regard, INCRA would be an incubator

for best practices in sovereign risk analysis.

The financial realities of the 21st century have already

outpaced the traditional trans-Atlantic partnership. INCRA

reflects the new realities of an increasingly globalized

financial world. The quality of sovereign ratings is crucial

not only for Europe and the US, but also for emerging

economies such as China, India, Brazil and Mexico, etc.

Therefore, INCRA would help guarantee the participation

of all the relevant international players—it would be the

first truly international CRA.

But in order to create a more coherent international

system for CRAs, whether they are for-profit or non-profit,

we need a broader dialogue on how to overcome the

irresponsible fragmentation of regulatory requirements

around the world. A broadly accepted and implemented

international regulatory framework must be developed to

oversee and govern this sector in the future.

Beyond that, there are further challenges ahead in order to

bring INCRA fully to life:

1. Investors may need to change their organizational

behavior. Though they are frustrated to some extent

with the current system, most investors continue to rely

on information from the big three CRAs, whose ratings

are often embedded in internal investment guidelines.

INCRA will be seen as the “new kid on the block” of the

CRA world. Its model needs to be robust enough to

convince investors that it will provide added value for

their investment decisions.

2. Governments must take a stand. They must turn from

simply criticizing how sovereign ratings are conducted

to reforming the system in a way that is convincing and

sustainable.

3. Representatives of the non-profit sector, whether they

are NGOs or foundations, need to be encouraged to

play a meaningful role in the financial world.

CONCLUSION

4 8

The members of the G20 have already made it clear that

CRAs need to be reformed. As we have explained, the G20

would be the best forum to evaluate the political will of

key players to give the new institution a chance.

Changing the current system requires bold and big

thinking. INCRA is a big idea based on a reasonable

operational concept. It would require an endowment of

$400 million. At first glance this is a lot of money, but it is

a small, manageable investment if divided among multiple

funders. In comparison to the hundreds of billions of

dollars already paid for public bailouts—partially the

result of flawed corporate and sovereign risk analysis—

such an investment is a modest and safe call.

INCRA has the potential to become a cornerstone of a

financial system capable of dealing with 21st century

problems. As the sample rating in this report will

demonstrate, not only do we need different institutions to

assess sovereign risk, but we also need a more coherent

and transparent methodology to analyze that risk. What is

required now is the political will and support of visionary

leaders around the world.

INC

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INCRA RATINGS SCALE

INCRA USA Ratings Report 4 9

8.00 - 10.00 AAA

7.70 - 7.99 AA+

7.30 - 7.69 AA

7.00 - 7.29 AA-

6.70 - 6.99 A+

6.30 - 6.69 A

6.00 - 6.29 A-

5.00 - 5.99 BBB+

4.00 - 4.99 BBB

3.00 - 3.99 BBB-

2.00 - 2.99 Below investment grade

1.00 - 1.99

MACROECONOMIC INDICATORS CODEBOOK

I. Economic Fundamentals

Real GDP Growth (%)Is real GDP growth adequate to raise real income over time and sufficient to satisfy domestic political needs?

1 2 3 4 5 6 7 8 9 10

Totallyinadequate

Substantiallyexceedsneeds

GDP per capita (current exchange rates in US$) and GDP per capita (PPP basis: US$)What is the level of wealth and development of a country? GDP per capita (PPP basis) is within which percentile, and what is expected to happen over time?

1 2 3 4 5 6 7 8 9 10

LowestLowerMiddle

IncomeCountries

UpperMiddleIncomeCountries

HighIncomeCountries

Highest

Real Exports (% Change)What is the importance of exports in this country’s performance?

1 2 3 4 5 6 7 8 9 10

Exportsectorperformingpoorly

Exportsectorperformingwellorexportsnotimportanttocountry’s

performance

Real Imports (% Change)To what extent is the country’s performance affected by its import needs?

1 2 3 4 5 6 7 8 9 10

Importneedsarehigh/importneedsare

affectingthecountry’s

performance

Importneedsarelow/importneedsare

notaffectingthecountry’sperformance

5 0

MA

CR

OE

CO

NO

MIC

IND

ICA

TO

RS

CO

DE

BO

OK

Gross Domestic Investment/GDP (%)Is a country’s investment ratio sufficient to address its development needs and support infrastructure at a level that will not hinder growth?

1 2 3 4 5 6 7 8 9 10

Investmentratioinsufficient

Investmentratiosufficient

How does a country’s investment ratio compare now and is expected to compare in the future to the median of its income peers?

1 2 3 4 5 6 7 8 9 10

Investmentratioissignificantlybelowpeer

median(currentorexpected)

Investmentratioisatpeermedian

(currentorexpected)

Gross Domestic Savings/GDP (%)To what extent is a country’s savings ratio sufficient to support necessary investment without causing balance of payments problems?

1 2 3 4 5 6 7 8 9 10

Savingsratioinsufficient

Savingsratiosufficient

How does a country’s savings ratio compare now and in the future to the median of its income peers?

1 2 3 4 5 6 7 8 9 10

Savingsratioissignificantlybelowpeer

median(currentorexpected)

Savingsratioisatpeermedian

(currentorexpected)

INCRA USA Ratings Report 5 1

Inflation/CPI (%)Are price changes distorting economic decision making, either through excessive inflation or deflation, and how will price changes affect future economic performance?

1 2 3 4 5 6 7 8 9 10

Pricechangesalreadyorarelikelytocausemajor

problemsfortheeconomy(e.g.hyperinflationorperniciousdeflation)

Pricechangesarenotcreating,

norlikelytocreateadistortion

Population Growth (% Change)Is a country’s demographic trajectory beneficial or burdensome to long-term economic performance and sustainability of the social security system?

1 2 3 4 5 6 7 8 9 10

Highlyburdensome

Highlybeneficial

1 2 3 4 5 6 7 8 9 10

Debt/GDPratiosignificantlyconstrainseconomicprogress

Debt/GDPratiodoes

notconstraineconomicprogress

How does a country’s debt/GDP ratio compare to its income peers today and in the future?

1 2 3 4 5 6 7 8 9 10

Debt/GDPratioissignificantlyhigherthanpeermedian(currentorexpected)

Debt/GDPratioisatorbelowpeermedian(currentorexpected)

II. Public Sector Policy

General Government Debt/GDP (%)To what extent does a country’s debt/GDP ratio constrain its economic progress?

5 2

MA

CR

OE

CO

NO

MIC

IND

ICA

TO

RS

CO

DE

BO

OK

Nominal GDP Growth (Local Currency %)Is expected nominal GDP growth adequate to meet government financing over time?

1 2 3 4 5 6 7 8 9 10

Totallyinadequate

Substantiallyexceedsneeds

General Government Debt/General Government Revenue (%)To what extent does a country’s debt/ revenue ratio put pressure on revenue generation and constrain the government’s spending flexibility?

1 2 3 4 5 6 7 8 9 10

Debt/revenueratiosignificantconstraint

Debt/revenuerationotaconstraint

How does a country’s debt/GDP ratio compare to its income peers today and in the future?

1 2 3 4 5 6 7 8 9 10

Debt/revenueratiois

significantlyhigherthanpeermedian(currentorexpected)

Debt/revenueratioisatorbelowpeer

median(currentorexpected)

General Government Interest/General Government Revenue (%)To what extent does a country’s debt service costs put pressure on revenue and spending flexibility?

1 2 3 4 5 6 7 8 9 10

GGinterest/revenueratioisasignificantconstraint

GGinterest/revenueratioisnotasignificant

constraint

How does a country’s GG interest/revenue ratio compare to its income peers today and in the future?

1 2 3 4 5 6 7 8 9 10

GGinterest/revenueratioissignificantlyhigherthanpeermedian(currentorexpected)

GGinterest/revenueratioisatorbelowpeermedian(currentorexpected)

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General Government Primary Balance/GDP (%)How large is the primary deficit or surplus, and what is expected in the future?

1 2 3 4 5 6 7 8 9 10

Countryhassignificant

primarydeficit(currentorexpected)

Countryhassignificant

primarysurplus(currentorexpected)

General Government Revenue/GDP (%)How broad-based is the tax system and what is the rates’ level? Can the latter be adjusted easily? How flexible is the revenue structure?

1 2 3 4 5 6 7 8 9 10

Narrow,inflexibletaxsystemandinflexiblerevenuestructure

Broad-based,flexibletaxsystemandrevenuestructure

General Government Expenditure/GDP (%)How effective are expenditure programs and infrastructure? To what extent does the pension system affect expenditure flexibility?

1 2 3 4 5 6 7 8 9 10

Ineffectiveexpenditureprograms;pension

systemreducesexpenditureflexibility

Effectiveexpenditureprogramsinplace;pensionsystemallowsexpenditureflexibility

5 4

MA

CR

OE

CO

NO

MIC

IND

ICA

TO

RS

CO

DE

BO

OK

1 2 3 4 5 6 7 8 9 10

Notaccommodative

Veryaccommodative

III. Monetary Policy

Is monetary policy accommodative?

1 2 3 4 5 6 7 8 9 10

Domesticcredit/GDPratiofarhigherorlowerthanpeers(currentorexpected)

Domesticcredit/GDPratio

similartopeers(current)

IV. Capital Markets and Financial Risk

Domestic Credit/GDP (%)Is the domestic credit/GDP ratio consistent with the country’s economic progress, and is it likely to be so in the future? (If possible, countries should be compared to peers: High-income countries automatically receive a 10. Middle or low-income countries need to be compared to their peers.)

1 2 3 4 5 6 7 8 9 10

CreditgrowthisfarinexcessofnominalGDP

growth

CreditgrowthisnearorbelownominalGDPgrowth

Domestic Credit (% Change)Is domestic credit growth a potential source of credit risk now or in the future? (If future trends are expected to be different, then adjustments need to be made in the final score.)

What is the overall strength of the banking sector?

1 2 3 4 5 6 7 8 9 10

Bankingsectorisweak;non-

performingloansaccountformorethan10%oftotalloansforthesystem

Bankingsectorisstrong;Non-performingloanscomprisenomorethan2%oftotalloansfor

thesystem

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1 2 3 4 5 6 7 8 9 10

Anydeficitinexcessof10%ofGDPtodayorexpectedinthe

future

Anycountry,whichhas

maintained,andappearslikelytocontinuetomaintainacurrentaccountsurplusinexcessof5%ofGDP

V. External Sector

How does an emerging market (EM) country’s current account position affect its development today and in the future?

How does an EM country’s current account position compare to its peers today and in the future?

1 2 3 4 5 6 7 8 9 10

Anydeficitinexcessof10%ofGDPtodayorexpectedinthe

future

Anycountry,whichhas

maintained,andappearslikelytocontinuetomaintainacurrentaccountsurplusinexcessof5%ofGDP

1 2 3 4 5 6 7 8 9 10

Debtservicecostsgreatlyconstrain

developmentalprogress

Debtservicecostsdonot

greatlyconstraindevelopmental

progress

External Debt (US$)*, External Debt/GDP (%)* and External Debt/Exports ratio (%)*How does an EM country’s external indebtedness constrain its developmental progress?

1 2 3 4 5 6 7 8 9 10

Debtserviceratiois

significantlyhigherthanpeermedian(currentorexpected)

Debtserviceratioratioisatorbelowpeermedian(currentorexpected)

How does an EM country’s debt service ratio compare to its income peers today and in the future?

5 6

MA

CR

OE

CO

NO

MIC

IND

ICA

TO

RS

CO

DE

BO

OK

1 2 3 4 5 6 7 8 9 10

Country’sdebt/reservesratioisinexcessof100%andisfarinexcessofitspeermedian(currentorexpected)

Country’sdebt/reservesratioisequalto100%(currentorexpected)

Coverage by Reserves

External Debt/International Reserves (%)* [Foreign Exchange Reserves (US$)* is the same thing as International Reserves]How significant is an EM country’s debt/reserves cover to avoid financial risk? (What does this imply about the possibility of a debt crisis?)

1 2 3 4 5 6 7 8 9 10

ExpectedM2/FXreservesratioinexcessof6

ExpectedM2/FXreservesratiois1

M2/Foreign Exchange Reserves*Does the ratio of M2/FX reserves pose a risk today or in the future of capital flight in an EM country?

1 2 3 4 5 6 7 8 9 10

Lessthan1monthtodayorinthefuture

Oneyear’scovertodayorinthe

future

Reserves to Imports (months)*How many months of imports of goods and services does an EM country’s international reserve cover today and in the future?

5 7INCRA USA Ratings Report

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1 2 3 4 5 6 7 8 9 10

Debtserviceratioatorabove100%(currentor

expected)

Debtserviceratiolessthan15%(currentorexpected)

Composition of Debt Servicing

Debt Service Ratio (%)*Is an EM country’s debt service ratio manageable today and in the future?

1 2 3 4 5 6 7 8 9 10

Short-term/externaldebtratioisnear

100%

Short-term/externaldebtratioislessthan20%(currentorexpected)

Short-Term External Debt/Total External Debt (%)*How pressing is an EM country’s short-term external debt on the ability of an EM country to have market access today and in the future?

1 2 3 4 5 6 7 8 9 10

RatiosignificantlyinexcessofEM

peers

Ratiooflessthan100%(currentorexpected)

External Short-Term Debt + Current Maturities Due on Medium-to-Long External Debt/FX Reserves (%)*How well positioned is an EM country to sustain a loss of market access?

1 2 3 4 5 6 7 8 9 10

Ratiofarinexcessof1.00

Ratioofclosetozero

Liquidity RatioTotal Liabilities Owed to Bank for International Settlements Banks/Total Assets Held in BIS Bank (%)*

5 8

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