A $2 Trillion Math Error ?!!!

Following S&P’s decision to downgrade long-term U.S. Treasuries one notch from AAA to AA+, Treasury Secretary Timothy Geithner screamed to the media that S&P had made a “$2 trillion math error” and the media repeated this charge ad nauseum. Now, you and I think of  “2 + 2 = 5” as a math error, but not Secretary Geithner.

We now have learned that the “math error” was nothing of the kind; the $2 trillion was the difference in using “alternative assumptions” about the growth in discretionary spending by the U.S. Government over the next ten years: S&P had used a 5% growth rate, which is substantially lower than the 7.5% growth rate over recent years, while CBO had “done as it was told” by Congress, as it must by law, and used a growth rate of 2.5%. You make the call as to which is more believable.

Why are we using the CBO’s 10-year budget forecast as a policy tool in the first place?

If we go back ten years to 2001 and look at CBO’s forecast for 2011, we can get a good idea of just  how accurate is the CBO as a forecaster.

Nominal GDP: $17.1 Trillion. Actual (Projected): $15.2 Trillion. Error: $1.9 Trillion or 12%.

Unemployment: 5.2%. Actual: 9.1%. Error: 3.9 percentage points or 43%

10-Year Treasury Rate: 5.8%. Actual: 2.1%. Error: 3.7 percentage points or 176%

2011 Budget:

Receipts: $3.4 Trillion. Actual (Projected): $2.2 Trillion. Error: $1.2 Trillion or 54%

Expenditures: $2.6 Trillion. Actual (Projected): $3.7 Trillion. Error: $1.1 Trillion or 30%.

Surplus/Deficit: $0.8 Trillion Surplus. Actual (Projected): $1.5 Trillion Deficit. Error: $2.3 Trillion or 153%.

In fact, the CBO was projecting that the national debt would have been paid off and in a $2 trillion surplus, whereas today we find that our national debt has ballooned to $14.5 Trillion. In other words, the CBO was off by more than $16 trillion.

Why should we think this year’s ten-year forecast is any more accurate? We shouldn’t. Could the CBO foresee 9-11 and the 2008 market meltdown? No. But neither can it today foresee the big financial event that will occur during the next ten years and render this forecast as meaningless as the 2001 forecast for 2011.

What we really should be focusing on is the projected budget for NEXT year and the year after. Currently, the CBO forecasts that 2012 outlays will fall to $3.66 Trillion from $3.71 Trillion in 2011. This is laughable. From 2000 – 2009, outlays increased by an average of 7.5% per year, yet somehow CBO thinks that spending, two-thirds of which is autopilot increases for Social Security, Medicare and Medicaid, will decline by 1.3% as its “baseline” scenario. Far more likely is that spending will again increase by 7.5% to $3.99 Trillion, in which case the 2012 deficit will not be $1.1 Trillion, rather it will be $1.4 Trillion. Moreover, this higher 2012 spending will propagate throughout the next nine years to the point where the CBO’s estimate of the 2021 National Debt will be off by trillions, just as it was in 2001 for 2011.

One other little tidbit to cover here: When comparing the national debt to GDP, the CBO and others only count “debt held by the public,” which excludes the $4+ Trillion that the government has looted from the Social Security and other government Trust Funds. We know that the National Debt is around $14.5 Trillion, which is about 96% of GDP, yet the CBO reports the debt-to-GDP ratio as only 69%. Why? Because “debt held by the public” is only $9.8 Trillion. Just one more example of “smoke and mirrors” by the politicians to obscure from taxpayers just how bad our fiscal situation really is.

In closing, let me alert you to the fact that CBO will be updating its rosy economic forecast in coming months to reflect a much lower rate of economic growth. For 2011, the current CBO forecast has GDP growth at 2.7%. Thus far, Q1 growth rate was 0.4% and Q2 (Preliminary) was 0.9%, and likely to be revised downward to a negative number. CBO states that a 0.1% decline in annual growth rate would increase the 2021 national debt by $310 billion. In other words, a 1.0% difference, which looks almost certain, implies another $3.1 Trillion in 2021 debt.

Now who made the “math error?”


2 Responses to “A $2 Trillion Math Error ?!!!”

  1. Landon says:

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