Economy

The $2 Trillion Mistake

As has been widely reported, S&P briefly reconsidered their plans to downgrade the credit rating of the United States after the treasury pointed out to them that they miscalculated the nation's debt by over $2 trillion dollars.

It's hard to imagine how an organization that could make such a colossal miscalculation could still have the authority to preside over the credit rating of even a hotdog stand, but it's even more gobsmacking when you examine the details of the miscalculation.

Talking Points Memo has a brief rundown of how it happen.

CBO took into account our austere circumstances and concluded a more realistic growth measure over the next decade is inflation. Relative to that projected growth, which locks in discretionary spending cuts, and then institutes near-term caps, the debt deal saves $2.1 trillion. About $1 trillion of that comes from expected discretionary savings, and the rest will come from a Congressional deficit committee tasked with making up the difference, largely on the tax and entitlement side.

Enter S&P, which took CBO's conclusion -- $2.1 trillion -- and, according to Treasury, applied it, uncorrected, to the completely different, aforementioned baseline, assuming spending typically grows with GDP. Of course, if in absence of the debt limit deal, Congress would have increased discretionary spending at such a high rate, then the deal itself would actually cut vastly more than $2.1 trillion.

S&P didn't initially take that into account, didn't recalculate the expected savings, lopped $2.1 trillion off the wrong projection, and thus overestimated growth in future deficits by about $2 trillion, and debt as a percentage of GDP by about 8 percent.

bigMistake

S&P did not account for the savings agreed to in the Budget Control Act which, among other things, raised the national debt ceiling. Savings which account for over $2 trillion dollars, or, roughly the same amount S&P miscalculated.

It boggles the mind.

After the treasury confronted S&P for the mistake, S&P altered their rationale for the downgrade from "too much debt" to "political dysfunction." And while they may be correct about the dysfunction, it's exceedingly difficult to take them seriously.