August 06, 2011
The S&P Downgrade and Tax Revenue Increases (or lack thereof)
Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a 'AAA' rating and with 'AAA' rated sovereign peers...
Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act....[Emphasis added -- mdc]
Update 1:37pm: Read Donald Marron's excellent dissection of S&P's $2 trillion error. Apparently, 8 ppts of GDP is irrelevant.
Posted by Menzie Chinn at August 6, 2011 12:20 PMdigg this | reddit
How much confidence do you have in their "scenarios"?
Posted by: Will at August 6, 2011 12:51 PM
Let us then have the full quote from S&P:
"We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade."
Posted by: Steven Kopits at August 6, 2011 01:02 PM
Steven Kopits: Yes, the point that prolonged controversy forced the revision in part was a no-brainer, and has been widely commented on (so widely it is now a cliche). It is the tax revenue component that I think has been less focused on, and why I highlighted it.
But you are right, people should read the entire report, which is why the hyperlink is provided. They should remember who nixed the $4 trillion grand bargain.
Posted by: Menzie Chinn at August 6, 2011 01:19 PM
Let's not forget that Obama and Boehner were apparently close to a much more ambitious deal that would have included cuts to entitlements and $800 bn in new revenues. And it was the absolute, total rejection of revenues by a faction of the GOP that killed it.
There's no doubt that plenty of Democrats will fight entitlement cuts tooth and nail, but a deal like this would have passed over their objections. They're not the principal roadblock.
Posted by: Dave L at August 6, 2011 01:52 PM
Steven Kopits During the negotiations the Administration (foolishly in my view) agreed to $4T in deficit reductions if some tax increases were included. I'm pretty sure the folks at S&P read the papers or watch the news...not Fox News, but the real news. So presumably they're smart enough to know that the problem wasn't on the Administration's side because Obama already offered a plan that S&P would have found acceptable. The Administration's big plan got the economy on the path that S&P thought was necessary. So S&P didn't have a problem with the Administration's plan; but S&P did have a problem with the refusal of the GOP to even consider any new taxes. Again, if the GOP had been willing to consider even a small tax increase, S&P would not have downgraded US debt. It is only because the GOP refused to consider tax hikes that S&P downgraded US debt.
S&P was blaming the political system in general, but they were specifically targeting the Tea Party crackpots...what's the new term? Oh yes, "Banana Republicans."
Posted by: 2slugbaits at August 6, 2011 02:03 PM
Maybe I am missing something.
Didn't President Obama sign an extension of the Bush tax cuts in December 2010?
Isn't the value of these Bush/Obama cuts over 10 years about $850 billion, which is less than 2% of projected spending over the next 10 years ($46 trillion)?
And didn't President Obama and the Congressional Democrats favor extending the cuts for all singles/marrieds making under $200/250K, which means that 80% of their value--or something like that--would be enacted under any circumstances?
I guess that my point is that the extension of the tax cuts is not news and the amount in political dispute is not much money at all compared to spending. So, I fail to see how the December extension of the tax cuts has much to do with the August downgrade.
It seems to me that S&P saw how clearly divided the political process is and how unlikely the recent "compromise" debt-ceiling solution is to put a real dent in the 800 lb gorilla, exploding govt spending on healthcare through Medicare, Medicaid and whatever is spent on Obamacare.
Do you disagree with that analysis?
Posted by: Chris at August 6, 2011 02:07 PM
All of the above is well and good but in the final analysis the facts are this:
1) the issuer of a non-convertible sovereign fiat currency can never be forced into default because they can always issue more currency. Any default by the US will be voluntary and political and of some interest to observe, since we certainly don't let companies and individuals declare bankruptcy just because they feel like it. The only real risk is inflation, hyper or otherwise and to the best of my knowledge (which is pretty good since I am the retired chief investment officer of a $100 billion plus asset management firm and was in the business for over 30 years) S&P has absolutely no insight or expertise relative to judging the inflation risk of the various combinatorics of fiscal and monetary policy by the US or any other country. (I won't go into the obvious issues associated with their apparent inability to do credit analysis correctly over the last decade either, but really, isn't that obvious.)
2) In the American political system there is no such thing as a long-term bargain, grand or otherwise, since no current Congress can bind a future Congress. Anyone who thinks this deal survives either the Republicans taking full control or the Democrats regaining full control is kidding themselves.
3) Relating to the above, since many people are clearly ignorant of basic American History, go study the greatest "Grand Bargain" in US history, the Missouri Compromise (1820) and its complete overturning 34 years later as we rushed headlong into the Civil War.
4) Given 2) and 3) any forecast about the deficit ten years out is silly. Or were lot of folks forecasting a budget surplus 10 years out during Ronald Reagan's last year in office. Personally, I don't recall that.
The S&P "downgrade" is a farce and I suspect the market will see it for what it is, but if it doesn't, I suggest you be ready to buy Treasuries in quantity, because the fact remains that this is a miserable economy and the current yield curve pretty much is an accurate reflection of that, which of course is the only thing a yield curve can tell you. As such a spike in rates based on perceived credit risk is a buying opportunity, and I know plenty of hedge fund managers lining up to make that trade.
BTW, I have heard through other sources that McGraw Hill's Terry McGraw (McGraw Hill of course owns S&P) is a Romney supporter. I am sure that is just a coincidence.
Posted by: Randy at August 6, 2011 02:13 PM
The budget deal passed was definitely a blue dog/Eisenhower Republican package.
Unless they do adapt something different from a Obama sellout.
1.Tax "increases" come from the end of the Bush Tax Cuts
2.Next round of spending cuts come heavily from DoD and return it closer to historical norms
3.Social spending growth slowed
All of these would begin in 2013 and end 10 years of what the BD's and ER have fought against. The Medicare stuff in the package is light weight. Couple that with RE credit stress reducing on individual homeowners in 2013, you have the BD/ER case for a major recovery shaping then without any major government spending or mobilization of resources.
That is their case. Obama doesn't even need to be reelected. Just do nothing.
Posted by: The Rage at August 6, 2011 02:24 PM
They also reference this:
"The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy."
This is obviously true. Whether it is worth a downgrade is debatable. As I read their entire report, they sound a lot like Paul Krugman: address the structural issues of entitlements and raise taxes. The irony is that Prof. Krugman dislikes the ratings agencies immensely and makes no bones about it.
In light of structural reform, the GOP of course intends to repeal healthcare reform after running for office with ads that repeatedly, repeatedly, repeatedly said healthcare reform resulted in, "$500B in cuts to Medicare". Instead, the GOP proposed - and voted for - ending Medicare, an act they will now run away from as fast as they can. Sensible reform is off the table. And you hear over and over that projected savings just won't materialize, which kind of means there's no way to cut anything because those cuts then won't materialize.
Of course, one can say the same thing about most everything. One of my favorites being the GOP's rejection of a payroll tax holiday, with leaders saying it wouldn't create jobs.
An odd exception of course is Judson Phillips, head of Tea Party Nation - which I don't confuse with the entire Tea Party - had an op-ed in the WaPo last week that said we shouldn't borrow any more money or raise taxes ... and then argued on the Tea Party Nation website that we should build more aircraft carriers, which cost $9B apiece, because that would create jobs. (Thanks to The Economist for that info.)
Posted by: jonathan at August 6, 2011 03:22 PM
Sorry Minzie, but with federal government having $65 trillion in unfunded liabilities, tax increases will not solve the debt crisis. Only real spending cuts will stabilize the federal government’s fiscal issues.
And while we are remembering things, let's not forget that Obama ignored the proposal from his own bipartisan debt commission to fix the debt; Obama did not submit even one piece of legislation to the Congress to solve the debt issue; he opposed the Ryan plan to cut $6 trillion over 10 years, which would have been sufficient to avoid a downgrade of US debt. And remember most of all that the Democrats wanted a clean debt limit bill, that is, one without any spending cuts or tax increases.
Posted by: Tom at August 6, 2011 03:42 PM
The Ryan plan didn't cut the deficit. It reduced taxes so much that the numbers at best come out even. That's accepting his nonsense that repealing healthcare reform would somehow save over $1T (when CBO projects healthcare reform reduces the deficit). He even included a sleigh of hand that he said was phony when Obama proposed it: counting over $1T in savings just because CBO projections show the cost of Iraq/Afghanistan going on forever. If those don't, we "save" that money. He said that wasn't a real savings and then put it in his own plan. (To be clear, this not $1T all once but over 10 years from reduced war spending.)
Ryan used made up numbers for huge interest savings that simply aren't real.
If you just take out those two, then his plan actually raises the deficit because he cuts taxes at the upper end by that much. He also raises taxes on the actual middle class and shifts the cost of ill health to old people and their families, but that's another issue.
That anyone believes that sack of lies is sad.
Posted by: jonathan at August 6, 2011 05:23 PM
In 2008, when the economy started going into the tank, Federal spending was just under $3.0 trillion. This year, with no real economic recovery, Federal spending is projected at $3.8 trillion.
So, is that a lack of taxing problem or a too much spending problem? And if it is a lack of taxing, what is the taxing increase by tax rate group that must occur?
Oh, those are just rhetorical questions.
Now, let's start with waste and fraud... while we cut the outrageous levels of spending back to pre-2008 levels.
Posted by: Bruce Hall at August 6, 2011 07:49 PM
Jonathan claims the following:
1) Claim: The Ryan plan didn't cut the deficit.
Fact: The Ryan plan reduces the deficit. The CBO analysis says, “The resulting budget deficits under the proposal would be around 2 percent of GDP in the 2020s and would decline during the 2030s. The budget would be in surplus by 2040 and show growing surpluses in the following decade. Federal debt would equal about 48 percent of GDP by 2040 and 10 percent by 2050.”
2) Claim: It reduced taxes so much that the numbers at best come out even.
Fact: Taxes revenues increase under the Ryan Plan. The CBO says, “The proposal also specifies a path for revenues relative to GDP—rising from 15 percent in 2010 to 18½ percent in 2022 and 19 percent in 2030 and beyond.”
It is clear the Jonathan’s main claims about the Ryan plan are false and he has not read or understood the Ryan plan.
Posted by: Tom at August 6, 2011 08:05 PM
The US is certain to default on its debt & unfunded liability via inflating it away in the fullness of time.
I'm surprised that S&P, as part of the heavily regulated oligopoly [with govt-mandated perverse payment system], had the fortitude to downgrade. To come a little nearer to telling the truth that thoughtful people already know.
Posted by: Bryce at August 6, 2011 08:10 PM
Tom Read the fine print in CBO's analysis of the Ryan plan. CBO was directed to just assume that a cut in the tax rate would not reduce revenues. Ryan's instructions were that tax receipts would just go up in some unspecified way. It was total fakery. And you have to read CBO's words...they were so diplomatic and tongue-in-cheek about it all. And Menzie thoroughly dissected the Ryan Roadmap, which was based on some Heritage Foundaton nonsense.
It's clear that your claims about the Ryan plan are false and you have not read or understood either the Ryan plan or CBO's analysis. You sound like a Fox News viewer.
Bryce Ratings agencies are not in the business of forecasting inflation, only the risk of default. But where is this inflation you keep talking about? Check out the 10 year bonds lately? Check out the TIPS rates? With the greater risk of a double-dip recession you really ought to be worrying about deflation, not inflation. In any event, it's a little hard to take S&P seriously after the hash the made of things. It was bad enough that they made a $2T error, but even after conceding the point and agreeing with Treasury's analysis the clowns at S&P refused to let the revised facts change their minds. Sound familiar?
BTW, as a government puke I found it amusing that all those high-priced private sector whiz kids over at S&P made a huge arithmetic error that was only caught by some underpaid bureaucrat over at Treasury working late on an RDO Friday.
Posted by: 2slugbaits at August 6, 2011 08:34 PM
Tom: Ditto on 2slugbaits. There was a big, magic asterisk in the Ryan plan, no surprise.
Where do you get your $65 trillion figure for unfunded liabilites from? The 2010 Financial Report of the United States Government indicates for the 75 year horizon a total liability of social insurance programs equal to $31 trillion (open group). Adding up other contingent liabilities listed in the report doesn't get me anywhere close to the $65 trillion figure. Please clarify your source.
Posted by: Menzie Chinn at August 6, 2011 08:41 PM
Minzie, you criticize the way the Ryan plan was scored. Please provide a link to the CBO scoring of your so called "$4 trillion grand bargain". But, I guess the CBO doesn't score Whitehouse press releases does it?
Your link only provides unfunded liabilities for the Social Insurance programs. Does your link assume that doctor reimbursements for Medicare will be cut starting Jan. 2012? Obama wants to repeal those savings, which of course would be an increase in unfunded liabilities. Is the Federal debt a funded liability? No. You can add that to your $31 trillion as well. You have excluded Military retirees/disability benefits and Federal employee retirement benefits unfunded liabilities. I was going by memory on the $65 trillion, but USA Today has a story on the unfunded liabilities at $61.5 trillion.
Posted by: Tom at August 6, 2011 09:46 PM
Tom: Well, if we'd been lucky enough to get to the compromise, then we would have had an actual scoring by CBO/JCT. Regarding the Ryan plan, let me quote from the CBO assessment of the Ryan plan so we can be clear about what was and was not done:
The path for revenues as a percentage of GDP was specified by Chairman Ryan’s staff.
The path rises steadily from about 15 percent of GDP in 2010 to 19 percent in 2028
and remains at that level thereafter. There were no specifications of particular revenue
provisions that would generate that path.
Representative Ryan then had the Heritage Foundation CDA undertake simulations to validate the plan's revenue projections. For the plausibility of those simulations, I refer you to the following posts:    .
I don't know where you get your definition of "unfunded liabilities", but for me, outstanding Treasury debt is not in that category. It isn't so defined in the referenced 2010 Financial Report of the United States. In addition, I note on page vi of that document "Federal employee postemployment and veteran benefits payable, which increased during FY 2010, from $5.3 trillion
to $5.7 trillion." Excuse me if I decide ascribe more credibility to a GAO document than a non-specified USA Today article of unspecified date/title/author that you recollect.
Posted by: Menzie Chinn at August 6, 2011 10:09 PM
In their initial, incorrect estimates, S&P projected that the debt as a share of GDP would rise rapidly through the middle of the decade, and they cited this as a primary reason for a downgrade.
What poppycock... Treasury is whining because S&P did not use a baseline that assumes a 5% GDP annual growth. Why would S&P use 5% when current annualized GDP, 2 years after the end of the recession, is under 2%?
If at first it doesn't fit, fit, fit again. - John McPhee
Posted by: Babinich at August 7, 2011 03:25 AM
@Menzie Chinn, or anyone else:
I have following problem with S&P's (and other rating agencies?) approach.
As I understand it S&P take some projected GDP scenario, e.g. CBO's alternative fiscal scenario, and then then it is calculated how much "savings" would be generated by government spending cuts, which are considered by S&P as something supporting a positive outlook, and tax changes over time and how the debt burden and deficit would be changed for the given GDP growth scenario due to the "savings".
However, any change in government spending or tax revenue will change GDP growth by feeding back into it. For instance, spending cuts will foreseeable contract demand and lower GDP growth relative to the assumed scenario, which, in turn, will change the debt burden and deficit compared to if there wasn't any feed back. I don't see that this feed back of spending cuts and taxes into GDP is taken into account in any way for the projections based on which the ratings are given.
Do I understand this wrong?
If I'm not wrong than I would say the debt and deficit projections done by the rating agencies, based on which the ratings are given, aren't worth the paper on which they are printed.
Posted by: rootless at August 7, 2011 06:24 AM
Babinich: Five percent pertains to nominal, not real, GDP growth. According to my calculations, nominal GDP (q/q SAAR) has grown by 4.1% over the 2009Q3-11Q2 period.
Posted by: Menzie Chinn at August 7, 2011 07:48 AM
Babinich Treasury is whining because S&P did not use a baseline that assumes a 5% GDP annual growth.
Ladies and gentlemen of the jury, I present to you exhibit "A" as to why Tea Party types should not be allowed to vote. Poster Babinich is unable to distinguish between nominal growth rates and real growth rates. The 5% growth rate mentioned in the Treasury document refers to nominal growth rate assuming a 2.5% inflation rate. But it gets worse. Poster Babinich completely missed the main thrust of Treasury's nonconcurrence with S&P's analysis, which was that S&P applied deficit reductions to the wrong baseline:
"S&P incorrectly added that same $2.1 trillion in deficit reduction to an entirely different “baseline” where discretionary funding levels grow with nominal GDP over the next 10 years.
Finally, poster Babinich is silent about S&P's admission that they screwed-up and Treasury was right.
Poster Babinich should recuse himself from the voting booth until he takes an econ class.
Posted by: 2slugbaits at August 7, 2011 08:00 AM
The House passed the Ryan budget and Cut Cap and Balance, and the Dem Senate voted the first one down and avoided a vote on the second. The Dems and the Obama regime brought this on themselves. The only solution is ejection in 2012. That's the one effective stimulus program.
Posted by: Rich Berger at August 7, 2011 09:02 AM
Rich Berger: Yes, I'll place that in with assessments like this: "I don't think the downturn will kill the idea that real-estate is a sure-fire investment." That is Rich Berger on October 22, 2007 10:36 AM.
Posted by: Menzie Chinn at August 7, 2011 09:25 AM
The amount of unfunded liabilities sums to $77.9 trillion in present value according to “The Citizen’s Guide to the Fiscal Year (FY) 2010 Financial Report of the U.S. Government” produced by the Department of the Treasury.
“From the budget or Governmentwide perspective, the values in line 1 plus the values in line 4 of Table 6
represent the value of resources needed to finance each of the programs into the infinite future. The sums are shown
in the last line of the table (also equivalent to adding the values in the second and fifth lines). The total resources
needed for all the programs sums to $77.9 trillion in present value terms. This need can be satisfied only through
increased borrowing, higher taxes, reduced program spending, or some combination.” P.171
Posted by: Tom at August 7, 2011 10:06 AM
Red herring. Easier than dealing with my contention today.
Posted by: Rich Berger at August 7, 2011 10:31 AM
Rich Berger: I think it's a red herring only if not true. In any case, the Ryan plan would have increased the deficit relative to CBO baseline (do you dispute that?), and that's with the magic asterisk. Cut, cap and balance -- yes, the House passed that bill. I think this article has it right about the sheer irrelevancy of that measure.
So, please return to your fantasy world where nothing is the fault of the Republicans, and house purchases are still an excellent investment.
Posted by: Menzie Chinn at August 7, 2011 10:43 AM
Tom: You're quoting from the same document I'm quoting from. Well, ever wonder why the infinite horizon PDV differs from the 75 year horizon that most people rely upon in these debates? It's because small differences in discount factors result in enormous differences in values when going out to...the infinite future.
So, I am happy to allow your PDV figures, if you're happy to concede we live in a world of infinite-lived representative agents.
Posted by: Menzie Chinn at August 7, 2011 10:46 AM
Rich Berger As best I can tell you approve of the hostage-taking style of compromise practiced by the Tea Party crazies. The nutjobs on the far right, with neither a clue nor formal training in economics, pulled together some Frank Luntz poll tested slogans, rolled them into a House bill and then wondered why no one with math skills took any of it seriously. And then when these idiots on the right got ignored, they threw a temper tantrum, threatened to hold their breath until they turned blue and then threatened to blow up the economy if they didn't get their way. And the coup de grace comes when the GOP leadership proclaims that ransoming the hostage works! The GOP had a chance for some serious negotiation, but when your model for negotiations is the Baader-Meinhof Gang it's a little hard to take you seriously.
Posted by: 2slugbaits at August 7, 2011 10:51 AM
I'm sort of surprised that no one addressed your comment.
"Maybe I am missing something.
Didn't President Obama sign an extension of the Bush tax cuts in December 2010?
Isn't the value of these Bush/Obama cuts over 10 years about $850 billion, which is less than 2% of projected spending over the next 10 years ($46 trillion)?"
That's a major misconception.
The bill that extended the Bush Tax Cuts contained the following:
1) Bush tax cuts: $544 billion.
2) Unemployment benefits: $57 billion.
3) Social Security tax break: $112 billion.
4) Individual tax credits: $8 billion.
5) Business tax breaks: $69 billion.
6) Estate tax: $68 billion.
The bill only extended EGTRRA and JGTRRA (the Bush Tax Cuts) for *two years*. Add in debt servicing costs and the cost of extending EGTRRA and JGTRRA for just two years comes to $745 billion. Extending EGTRRA and JGTRRA through FY 2020 would cost an additional $3.2 trillion. Counting debt servicing costs would raise the total to an additional $3.9 trillion.
Considering that the CBO's extended baseline scenario predicts deficits in FY 2013-2020 will total $4.9 trillion, this means failure to allow EGTRRA and JGTRRA to expire in FY 2013 would enlarge our fiscal gap by nearly 80% during those years. This is why it is such a big deal.
P.S. PPACA reduces total deficits by $143 billion through FY 2019. Efforts by the Republicans to tie the individual mandate to a "trigger" would probably meant the end to PPACA and those deficit savings. It would also have ended the only serious effort to hold back the explosive growth in healthcare costs that is the major driving force behind our entitlement crisis. This may also have spooked S&P.
Posted by: Mark A. Sadowski at August 7, 2011 11:33 AM
It's not communist party. It is One party government... no monkey business and cat-tail pulling here.
Citizen welfare is priority with China. Many programs are working and many new ones are on the drawing board. Redistribution of wealth? Not even a slight chance! "Sovereignty"? yes, meaning freedom from external control like the Federal Reserve System. China don't play that game.
When you're in a hole... stop digging! you know who you are.
Posted by: A Chanz at August 7, 2011 11:36 AM
Tom, you say a bunch of stuff and then when you're corrected - and you are so wrong, it isn't funny - you demand citations. Crawl out of your boxed up mind and try looking things up.
I check my facts and I'm not afraid to admit I'm wrong. I read every side of an issue and don't get my head stuffed with garbage out of some political playbook. Try thinking as a free man.
Posted by: jonathan at August 7, 2011 11:40 AM
"Counting debt servicing costs would raise the total to an additional $3.9 trillion."
"Counting debt servicing costs would raise the total to an additional $4.3 trillion."
Thus "nearly 80%" should read "nearly 90%".
Posted by: Mark A. Sadowski at August 7, 2011 12:33 PM
To paraphrase Andrew Jackson, "the S&P has made its decision, now let them enforce it".
Posted by: Mark Kuperberg at August 7, 2011 12:53 PM
Finally, poster Babinich is silent about S&P's admission that they screwed-up and Treasury was right.
I do understand the difference between nominal and real GDP. The point is Treasury, in its defense, is relying on the accuracy of the CBO calculations. The laughable aspect is that Treasury would bristle when CBO numbers are challenged.
S&P made clear that the "deficit cutting" plan is back loaded. Twenty billion in cuts over the next year. Then promises with absolutely no credit or merit.
As to the accuracy of CBO forecasts: http://www.cbo.gov/doc.cfm?index=3277
How accurate was that forecast?
If Treasury can defend itself by using CBO forecasts, why can't S&P go after the reliability of those numbers?
Posted by: Babinich at August 7, 2011 07:26 PM
Babinich: I still don't understand -- you cited the implausibility of the 5% growth rate, and then cited the 2% growth rate since the end of the recession, definitely giving the impression you had mistaken real for nominal growth rates. Can you please explain the logic in your first post. I would appreciate the illumination, as you state in your last post that you understand the distinction between real and nominal. Thanks.
Posted by: Menzie Chinn at August 7, 2011 07:31 PM
Thanks, that was useful information.
To summarize, the projected deficits without the Obama tax cuts from 2013 through 2020 are about $4.9 trillion or so? (It is without the Obama tax cuts? Right?)
If the Obama tax cuts are extended from 2013-2020, it will cost about $4.5 trillion more over that window. (I guess I should call 'em the Bush-Obama tax cuts, to be fair to W.)
Of that $4.5 trillion, Obama/Reid/Pelosi want 80% and the GOP wants 100%. So, any "news" in December involved about $1 tillion of a deficit that will be about $10 trillion.
(I won't quibble about static versus dynamic scoring. I'll just accept static for the sake of discussion.)
Considering this information, I think that my point remains. The December tax cut "news" is pretty modest news in the scope of things and doesn't have much to do with the August S&P downgrade.
I am also skeptical that the threats to Obamacare's individual mandate are spooking S&P because the program was designed to make it look misleadingly good over a 10 year window.
Thanks for your comment, Mark. It was unusually informative.
PS: Your command of DC initialisms is impressive, Mark. (That is not sarcasm.)
Posted by: Chris at August 7, 2011 08:07 PM
Yes, I mostly agree with your summary of my comment. (Evidently we don't see eye to eye on PPACA.) Personally I would like to see all of EGTRRA and JGTRRA expire. But obviously I don't speak for the Democratic leadership.
P.S. Thank you for the kind words.
Posted by: Mark A. Sadowski at August 7, 2011 08:30 PM
You are correct; I read the table poorly. I saw 5% and assumed annual. I am wrong.
Posted by: Babinich at August 8, 2011 03:11 AM
Babinich: Thanks, that clarifies the line of argument.
Posted by: Menzie Chinn at August 8, 2011 08:20 AM
Looking at the BEA figures on nominal and real GDP and comparing this recession to the 1981-1982 recession at the same point (3 1/2 years after the start), we find:
Nominal compounded growth:
81-82 recession - 8.6% /year
07-11 recession- 1.5% / year
81-82 recession - 5.4% / year
07-11 - nil
But wait, Obama wasn't president in 2007! But the Dems held Congress, didn't they? And recovery should be strong after a big dive, shouldn't it?
What is different now? Feckless, leftist leadership in 2007 to now.
Posted by: November2012stimulus at August 8, 2011 09:00 AM
As an investor the only thing I care about is the real return. I do not care weather inflation or default caused me to lose value, only that I lose value. In the case of a sovereign debt issuer the real value of its currency is the #1 issue in determining what the real return will be.
Whether the S&P is equipped to make detailed inflation forecasts is irrelevant. One can expect that if there is a shortfall between what the government is expected to spend and what it collects in taxes that will be filled by borrowing or printing.
Whether long term forecasts are relevant or not is also a red herring. People buying 30 year T-bonds want 30 year forecasts, the fact that they are difficult doesn't mean they are irrelevant.
If the S&P were competent and apolitical a downgrade would have come long ago. The fact that it has taken this long is a black eye much like the CDOs.
Posted by: tenthring at August 8, 2011 12:14 PM
tenthring You don't sound like much of an investor to me. Inflationary expections are normally included in the price of the bond, not the risk of default. Some people like to blur the distinction between default and inflating away the debt, but bond rating agencies are only supposed to be concerned with literal default. It's S&P's job to define the risk of outright default, not the risk of whether or not you will actually achieve your desired rate of return. The latter part of the investment decision is your responsibility, not S&P's.
Posted by: 2slugbaits at August 8, 2011 02:30 PM
The irony is that shares of S&P's parent company, McGraw-Hill, lost 8% of their value. Meanwhile yields on 10 year US Treasury's fell by 8%.
Posted by: 2slugbaits at August 8, 2011 02:42 PM
Read the letter on all of this sent by David Levey, former Managing Director, Sovereign Ratings, Moody’s Investors Service, to Scott Sumner.
Posted by: Jim Glass at August 8, 2011 02:43 PM
Yeah, good point Menzie, we have a long-term shortfall in our ability to pay promised entitlements that's NPV'd at $200 trillion (Kotlikoff), but the S&P is off by $2 trillion, so the US financial position must be rock solid.
Keep voting yourself those benefits!
Posted by: Silas Barta at August 8, 2011 03:45 PM
2slugbaits: "The irony is that shares of S&P's parent company, McGraw-Hill, lost 8% of their value. Meanwhile yields on 10 year US Treasury's fell by 8%."
Isn't that the truth. What happens when you downgrade the US debt. You start a panic where everyone "runs to quality" and buys US debt...
Posted by: Anonymous at August 8, 2011 08:55 PM
"Inflationary expections are normally included in the price of the bond, not the risk of default."
Ever heard of high-yield bonds?
Posted by: ObamaNotSmart? at August 9, 2011 09:35 AM
I just received an opinion letter from Dr. Laffer (not highly regarded by folks reading this blog) which says in essence that the downgrade is meaningless. The downgrade has made it so there are only two AAA rated sovereign issuers: Germany and France. Neither of which provide a large enough market for a flight to quality. Both of which will be negatively impacted by the problems of Europe. Additionally, he graphs the effects of downgrades of bond ratings for Japan, Canada, and others to show that the downgrades had no correlative effects on the bond yields. He also indicates that the downgrade would make sense if S&P was actually predicting a monetization of the debt. But, S&P did not do that.
Posted by: JLR at August 9, 2011 10:11 AM
I must be looking in the wrong places, but I can't for the life of me find a meaningful measure of the debt of the government. Obviously government debt over GDP is meaningless as GDP is not government income. Measuring debt with respect to income should be more relevant, and should make clear how much worse the US debt is compared to that of Italy, Spain or Ireland. Isn't there a standard definition of this number that someone tracks? It seems hard to believe.
Similarly, it seems incredible that there isn't some estimate of the actual size of the economy, which removes the expansion of total outstanding credit (private, corporate and public) from the GDP. The national income gets boosted by expansion of the outstanding debt, but surely there is a lot to be learned by removing this factor.
Posted by: endorendil at August 13, 2011 03:08 PM