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April 27, 2011

ERROR CORRECTION: We Made a “Credit Rating” Mistake Last Week

Quote of the Day: “On April 18th Standard & Poor’s put America’s AAA credit rating on negative watch.” — “The Economist” magazine, April 23, 2011, page 78, lower right column

We made a mistake last week. We claimed that S&P had lowered the U.S. credit rating. The word “rating” is a technical term. The “rating” was not lowered. Instead, the credit “outlook” was changed from stable to negative. The credit outlook is, essentially, a prediction about what may happen to the credit rating in the future, but not a change in the rating itself. We regret the error.

Several times per week, for most weeks of the year, we take complex issues and try to explain them in a few hundred words. We aim to do this in a way that non-experts can understand. Sometimes our efforts at simplification go too far. Fortunately, this happens rarely. We average about one of these correction messages per year.

If you could eavesdrop on our telephone conferences, and the back-and-forth emails devoted to creating a Dispatch, we think you would have increased confidence that we try to get things right, and even to be precise. We were NOT precise in this case, and we apologize for the imprecision. But we’d also like you to ponder a few questions about this issue . . .

How important was our imprecision?

Will the public view the credit worthiness of the U.S. Federal State as being stronger, or weaker, after this announcement by S&P?

Will investors take the lowered credit outlook into account, even though it is NOT a lowered credit rating?

If you think as I do, that market prices will reflect the lowered credit OUTLOOK, then the marginal difference between a rating and an outlook shrinks in importance.

I find this to be a reasonable claim — the U.S. Federal State’s credit isn’t as strong this month as it was last month. And why is that? Isn’t it because Congress has shown itself incapable of restraining its deficit spending? Of course it is.

And isn’t it also true that the credit outlook can only be improved by reducing the deficit? Of course it is.

We have suggested that the best way to do this is to leave the debt ceiling in place. This is in marked contrast to the Left-Statists like President Obama, who want to raise taxes on the rich.

This is why I sent the following letter to Congress this morning . . .

I want to point you to the following analysis by Professor Mark Perry, from the University of Michigan (Flint): http://mjperry.blogspot.com/2011/04/tax-rates-and-share-of-tax-revenues.html

The top 1% of U.S. taxpayers pay 40% of all U.S. federal income tax collections. This is a truly staggering number.

It is truly amazing how much this small group of people is asked to bear. On top of which they also provide a huge portion of the capital required to run the productive sector of the economy.

How often in history has so much been done for so many by so few? Of course . . .

If this group is benefiting from federal subsidies and bailouts, then I want those subsidies and bailouts to end instantly. But I do NOT want their taxes raised, for two reasons. 1). 40% of the tax burden is more than enough. 2) Their share of the burden has risen constantly, even while tax rates have fallen, as Professor Perry also demonstrates.

Most importantly, I do not believe you would use increased tax revenues to reduce the deficit. I think you would use them to maintain or increase your spending. This leaves us with one best way to balance the budget . . .

Do NOT raise the debt ceiling. Do NOT raise taxes on anyone. Instead, cut spending!

END LETTER

You can send your own letter to Congress using DownsizeDC.org’s Educate the Powerful System.

You can copy or borrow from my letter above if you desire.

Perry Willis
Vice President
DownsizeDC.org, Inc.

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