Standard & Poor’s inconsistencies
By Ezra Klein,
Standard Poor’s downgrade of the U.S. economy is beginning to look like a kamikaze mission. The credit-rating agency delivered its payload, but at the cost of destroying its own credibility.
The problem isn’t the agency’s $2 trillion mistake. It’s possible for the agency to have made that mistake without harming its underlying point about the weakness and unpredictability of American political institutions. But S&P hasn’t confined their argument to our political institutions. The original draft of their report — which was leaked to Politico — included a section in the executive summary laying out the deficit math for the next decade. When that math proved wrong, S&P simply deleted the section. But that’s inconsistent with what they left in the report. Either the numbers matter or they don’t.
In both versions of the report, Standard Poor’s say they would upgrade our outlook from “negative” to “stable” if the Bush tax cuts for income over $250,000 expire. That would net the Treasury about $900 billion over 10 years. So according to S&P, $900 billion is a big deal. And it’s a big deal because of how much it would do to reduce the deficit.
In the original version, they say that $900 billion would mean net public debt drops from an estimated 93 percent of GDP in 2021 to 87 percent of GDP. But in the second version of the report — the one they wrote after they discovered their $2 trillion mistake — they revised their estimate for America’s baseline debt path down to “74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021.” In other words, S&P’s technical correction improved our deficit outlook by more than letting the high-end tax cuts expire, which S&P had said would raise enough money to stabilize our rating. If the numbers mattered, then by S&P’s own logic, that should have changed their opinion of our finances.
Similarly, they have previously explained that while a $4 trillion deal could have saved our credit rating, a $2.4 trillion deal — which is what we got — was insufficient to stabilize the debt. But since their original calculations misplaced $2 trillion, the deal and the correction should have added $2.4 trillion + $2 trillion to our bottom line. That, again, is more than $4 trillion.
Over the weekend, I spoke with Standard & Poor’s about these concerns. They didn’t have a particularly compelling response. “The point we were making on the numbers is that nobody we know is claiming this deal, however you do it, will halt the rise in the debt burden,” explained David Beers, one of the analysts responsible for sovereign debt. That’s true, but $4 trillion is $4 trillion is $4 trillion. The debt burden doesn’t care whether our fiscal picture improves due to a deal or the combination of a deal and a technical correction.
My hunch is that S&P was making a political argument and felt the need to cast it as deficit arithmetic. Then, when their arithmetic proved wrong, they were left looking foolish. As it stands, you actually can’t coherently merge the first and second versions of S&P’s explanation of the downgrade. That should tell you something about how rigorous their framework is, even if doesn’t obviate the still-legitimate points they made about our political system.