THE Reason for the Downgrade

Or, Barack Obama sucks at 11-dimensional chess.

On July 14, 2011, S&P was assuming that 2001 and 2003 tax fraud deferrals would expire at the end of 2012 [Update: link updated, via MG; PDF–see page 4].

It is no longer making that assumption, which is worth another $4T. Brad DeLong annotates/redlines the press release without comment on that part:

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.

English translation: even though extending the tax cuts would require an affirmative action of both houses of Congress and consent from President Obama (or veto override by vote of 2/3 of both houses), we don’t believe this will happen or we would have kept our innumerate mouths shut in the first place (or at least after Treasury called us on our McArdlesque calculations).

Our revised upside scenario–which, other things being equal, we view as consistent with the outlook on the ‘AA+’ long-term rating being revised to stable–retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and to 87% by 2021. to 77% in 2015 and to 78% by 2021. [redlining by BdL]

English translation: if we thought Barack Obama and his Administration both were serious and would be successful, we wouldn’t have left the U.S. on credit watch for possible downgrade. But we don’t, nyah, nyah, nyah.

As I noted earlier today, it’s not coincident that the twenty countries still rated AAA (with the possible exception of New Zealand) all either are tax havens, authoritarian “democracies” (Hong Kong and Singapore) or have Mandatory National Health Insurance.

If S&P on 14 July had said, “The U.S. needs to control its health care costs or we will downgrade it,” no one would have said a word of dissent. But the downgrade S&P presented is not based on the root issue; it is based on the belief that temporary blackmail does long-term damage.

It’s punditry, not analysis. Even Barack Obama deserves better.

At least until he fails 11-dimensional chess the way S&P believes he will.