S&P Was Wrong…But They Did Make a Good Point About Revenue

August 6th, 2011 at 7:47 pm

As I stressed here, I’m critical of S&P’s decision to downgrade US debt— it’s a misguided move that has potentially serious consequences.  Every “basis point”— one-hundredth of a percent— that interest rates go up on US Treasuries means another $1 billion of debt service expenses.

But the rating agency does raise some good points, both about recent political dysfunction and the need for revenues in any deal that can truly improve our fiscal outlook.

Here’s a picture that underscores these points.


The graph plots three scenarios of the debt as a share of GDP over the next decade.

–First, no new revenues from any tax increases, just the savings from the Budget Control Act (BCA–that’s the debt ceiling bill)–blue line;

–Second, no savings from the BCA, but new revenues from allowing the sun to finally set on the upper-end Bush tax cuts–red line;

–Third, both one and two: savings from the BCA and new revenues from the highend Bush sunset–green line.

Neither one nor two flattens the trend in the debt/GDP ratio, otherwise known as stabilizing the debt.  But together, the debt ratio stabilizes.

In other words, the combination of the sun setting on the highend Bush cuts along with savings from the new bill do, in fact, stabilize the debt, at least in the 10-year budget window.

Outside that window, however, the debt begins to rise again as a share of our economy.  If we want to lock in lasting stabilization, it would take a full sunset— not just the high end— of the Bush tax cuts along with the ultimate goal of long-term budget sustainability: slowing the growth of health care costs.

So while I still believe S&P screwed up big-time, I must also reluctantly thank them for underscoring a point my CBPP colleagues and I have been making for months.  A deficit reduction package without revenues will not work.  A package with revenues will.

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2 comments in reply to "S&P Was Wrong…But They Did Make a Good Point About Revenue"

  1. Tom Shire says:

    S&P may have screwed up the math somewhat, but their overarching concerns about debt ceiling brinksmanship and a lack of revenues in any deal are certainly legitimate. Those points, and the fact that we have the GOP to thank for this downgrade, are the most important takeaways from the S&P report.

  2. Altoid says:

    Good points here. But I want to express a continuing frustration about how the bush tax cut is discussed. Almost no one (aside from Jared) even bows to the fact that it was time-limited, and not even Jared *stresses* that fact enough.

    The law was written to have effect for, was it 9 years, and to expire in the tenth? IIRC, that was a fudge so it would meet budget limit rules that were in effect at the time. But it means these tax rates were always temporary. *Always*.

    Of course everybody knew the gop was going to dare everyone not to extend them. But that’s politics. The law that enacted them made them temporary. They were *always* temporary. IMHO that has to be the rhetorical starting point in any discussion of them by anyone who thinks they’re a bad idea.

    gop spokesentities will never volunteer the point, news reports almost never mention it (reporters seem to have amnesia on this point), and yet it’s a central feature of the law. Why they were temporary doesn’t matter for this discussion, but the fact *that* they were temporary is crucial. It really needs to be stressed by everybody who has the chance to talk about them.

    Why? This is a chance to play the gop’s own game by hammering on a key provision that nobody but wonks even knows about and yet is in the law, never mind why it’s there. (The fact that it’s a central provision of the law has the virtue of making this a true and valid point to hammer on. It means they knew it was going to reduce revenue and had to cover it up. And that’s a perfect follow-up if anyone wants to get into the weeds.)

    Does anyone think the goopers wouldn’t do that very thing, if we were talking about a temporary tax hike that was made temporary to fit inside technical budget rules but was ultimately intended to be permanent? Please, let’s try to play hardball here.