S&P Was Right to Downgrade
The dispute between the Treasury Department and Standard and Poor’s over America’s sovereign bond rating is a tempest in a teapot. Worse, it overshadows the reality about America's debt: Congress cannot handle it politically and Americans will have difficultly handling it personally.
The facts about America’s fiscal status don’t allow for much debate.
Depending on whose baseline economic forecast you use, the United States will have sovereign debt at about 100% of GDP in a decade. We base those estimates on the slower-than-forecast growth of the past year and the probability that growth over the next two quarters will be slower than in the Congressional Budget Office baseline forecast.
Anyone predicting two years out, let alone 10 years, risks about a 90 per cent change of being very wrong. The dispute between Treasury and S&P’s baselines is a little like predicting how good the Washington Capitals are going to be in 2021. As the poet wrote, “So much/depends….”
So what are the unadorned numbers? So much depends on:
*will the Joint Select Committee on Deficit Reduction come up with a broad-based, fundamental change in America’s structural fiscal dilemma?
*what will Congress do at the end of this year with the Alternative Minimum Tax, the Medicare re-imbursement for doctors, Unemployment Insurance, and expiring tax cuts?
*what will happen to the Bush tax cuts in 2012—will all be extended, only lower income provisions, nor none at all?
*will troop withdrawal from Afghanistan and Iraq proceed on schedule?
*will America undertake military action in some other part of the world?
*will the very slow recovery continue, with unusually high joblessness for this period in a recovery?
*will an aging society spend less than historical levels on consumption and save more than the post-World War II average?
*is America in the fourth year of a “lost decade,” as some predict?
One could add lots of other unknowables: Pakistan deciding to attack India; further unrest in oil-producing nations; collapse of the EU; a large meteorite hitting earth.
What do we know?
Recent history gives us guidance.
In 2008, the Congressional Budget Office predicted that real GDP would grow by 1.7 per cent in 2008, by 2.8 per cent in 2009 and by 3.5 per cent in 2010. Sit down for the real numbers: -0.3 in 2008, -3.5 in 2009, 3.0 in 2010. The CBO then forecast 3.4 per cent for 2011 and the present growth path looks somewhere around less than 2 per cent.
It wasn’t just on growth that CBO (after consultation with many outside economists of note) erred. In 2008 it forecast unemployment of 5.1, 5.4, 5.1 for FY08-10. The real numbers were 5.3, 8.5, and 9.8.
Deficit projections were just as stark. FY08 was supposed to show a deficit of $218 billion. Real number? $455 billion. For FY 09, $198 billion predicted, -$1,414 billions (1.4 trillion) reality. For FY 10, -$241 billion and reality of $1.3 trillion.
And just for the sake of black humor, let’s note that CBO forecast a surplus of $87 billion for FY12. Current forecast, -$1.1 trillion.
This isn’t to pick on CBO at all. Indeed, CBO was slightly more pessimistic in its forecasts than the general consensus of economic analysts and more pessimistic than the Office of Management and Budget, the President’s fiscal forecasters.
But, the underlying theme is undeniable—while the nature of America’s economy was changing before their very eyes, most forecasters missed things entirely.
What about the future? At the risk of undermining the foregoing argument, let’s sneak a peek.
If history is any guide, growth will continue slower than forecast, unemployment will remain higher, and deficits will be whigher for at least a few more years. That’s what the Great Depression historians, of which Chairman Bernanke is an acknowledged expert, tell us happens when a nation recovers from a financial recession.
Summary: deficits continue to rise, debt accumulates more rapidly than forecast, demographics continue to make the present Medicare, Medicaid, and pensions systems of the United States unsustainable.
Of note: that word, “unsustainable,” was used by President Obama, Fed Chairman Ben Bernanke, the President’s fiscal commission, the Bipartisan Policy Center’s Debt Reduction Task Force, and by almost every other analyst on the globe.
Now, let’s ask that question again, “Was the S&P wrong to downgrade the future of United States debt?”
One of the saddest comments of all came from President Obama earlier today. Instead of ordering Congress back into session from its August vacation, instead of outlining a short, tough overall plan for growth and debt reduction, the President said, basically, 'well, gee, we have to do something.'
Maybe The Economist magazine is right—one weeps at the leadership of the Western nations.
