The White House and the Treasury are accusing Standard and Poor’s of making an elementary arithmetic mistake in the recent downgrade decision. Treasury’s John Bellows writes about what he calls a “$2 trillion mistake” saying that “After Treasury pointed out this error – a basic math error of significant consequence – S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit rating decision from an economic one to a political one.” White House adviser Gene Sperling adds that “The magnitude of their error combined with their willingness to simply change on the spot their lead rationale in their press release once the error was pointed out was breathtaking.”
But if you examine the details of the S&P–Treasury–White House dispute, rather than a “math error” you will find what is better described as a “difference of opinion” about a forecast for future government spending. In other words, the issue is about the appropriate “baseline” for government spending in the absence of more actions. Since when did different views or assumptions about the future become a math error?
In their original draft report, S&P evidently assumed that discretionary government spending would grow by about 5 percent per year over the next 10 years if no further action were taken (beyond the Budget Control Act of 2011). In the final draft, at the urging of the Treasury, they assumed that discretionary spending would grow at about 2.5 percent per year if no further actions were taken. The first assumption leads to a higher level of debt than the second. Over 10 years the difference is about $2 trillion.
So this is a matter of different assumptions rather than a math mistake. In fact, the alternative assumption of faster spending growth is not so unreasonable, and whether or not S&P put it in their final report it is something they or anyone else should worry about. In fact this assumption is used by CBO in their “alternative fiscal scenario,” which I and others have used to project debt into the future as in the exploding debt chart below. CBO devoted part of its January 2011 Budget Outlook to considering such alternatives. See in particular Table 1-7 of that CBO report where they show that increasing discretionary appropriations at the rate of nominal GDP growth (assumed to be about 5%) increased the debt by $1.8 trillion, or about $2 trillion over ten years, compared with the 2.5% assumption.
There are of course reasons to dispute the downgrade decision of S&P, but a math error is not one of them. It would be more productive for government officials to move on and to use their time to find ways to reform taxes or entitlements, fix the exploding debt problem, and thereby prevent the likelihood of the outcome in this chart, which shows CBO forecasts (during the past three years) under their alternative fiscal scenario explained in more detail here.