Different Assumptions on how Discretionary Spending Grows
The White House and Treasury criticized the S&P’s downgrade report by claiming it had a $2 Trillion math mistake- but it’s more like a difference in opinion on how to measure projected discretionary spending (DS), here’s my (rough) calculations:
*CBO long-term estimates; **Net Federal, State and Local Gov. Debt; Raw Data Source: CBO Budget and Economic Outlook
The “mistake” is actually simple. It’s just matter of how to project DS increases. The congress mandated technique used by the Congressional Budget Office (CBO) is to more or less assume that DS grows with inflation, but over the years the CBO has made an “alternative baseline scenario” that it feels is more realistic, which more or less assumes that DS grows at the nominal GDP rate. This is what S&P used- entirely disregarding the fierce austerity provided by the Budget Control Act of 2011, which I think will ultimately result in DS that is even BELOW the inflation rate (I’m not about to underestimate conservative tenacity). Supposedly after being confronted by it’s “mistake”, the S&P changed its downgrade rational from a macroeconomic to political one. Subsequently, I noticed John Chambers, the main who chairs sovereign ratings at S&P, repeatedly use the (para)phrase “3-6 year horizon” when defending the downgrade on CNN and Bloomberg (hence the last row on my table)- even though the rating was supposed to be domestic long-term- and who would call “3-6 years” long-term?
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