Treasury’s $2 Trillion Man
It was quick thinking by a little-known Treasury functionary that nearly saved the U.S. credit rating on Friday—but didn’t quite.
After Standard and Poor’s informed the government of its intention to downgrade the national rating from a pristine AAA to AA+, Treasury officials in Washington huddled to look over the ratings agency’s draft press release. It was reportedly John Bellows who noticed within minutes that S&P had made a glaring error that placed its calculations about the U.S. deficit off by about $2.1 trillion.
Treasury Secretary Tim Geithner quickly pushed back at S&P, pointing to the error. The agency acknowledged its mistake, then said it was charging ahead with the ratings change anyway. Later that evening, it officially downgraded American debt.
The tense Friday has cast the spotlight on Bellows, who is the acting assistant secretary for economic policy. After spotting the error, he took to the Treasury Department blog Saturday to blast S&P’s decision in dry but biting language. “After Treasury pointed out this error—a basic math error of significant consequence—S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit rating decision from an economic one to a political one,” he wrote.
The mistake itself is enough to make any non-budget expert’s head ache. The short version is that S&P miscalculated the share of GDP that public debt would reach by 2021 by using the wrong assumption, or “baseline” about budgetary matters. The correct projection, as calculated by the nonpartisan Congressional Budget Office, would produce a difference of $2.1 trillion less in debt. S&P responded that, in essence, it didn’t matter—the number was large enough to merit the downgrade, especially given the political paralysis that has gripped Washington.
Who is Bellows? Although the Treasury official was not available for comment on Sunday and has kept quiet outside of his Treasury blog post, The Wall Street Journal wrote that his “ambiguous title—acting assistant secretary for economic policy—underplayed his importance as a key Geithner adviser and budget expert.” But Bellows’ story is as much about the increasing inability of Congress to confirm key appointees as it is about the inherent inscrutability of bureaucratic titles.
Since October 2010, Bellows has headed the Office of Economic Policy, which tracks economic trends both at home and abroad, reports to the Treasury secretary, and helps produce the annual government budget. He got the title of acting assistant treasury secretary when Assistant Treasury Secretary Alan Krueger, a Princeton economist, stepped down to return to teaching after serving in the job since nearly the start of President Obama’s term. Obama didn’t nominate a successor until May 3 of this year, but the nominee—Northwestern University finance professor Janice Eberly—still hasn’t been confirmed, although she was given a hearing on July 28 (PDF).
Republicans in the Senate have pledged to block many of those nominated for government posts by President Obama, including dozens of top economic jobs. For many, the most absurd example is Peter Diamond, who despite holding a Nobel Prize in economics was forced to withdraw his nomination to the Federal Reserve Board of Governors due to Republican holds that prevented his confirmation. But while those fights get sporadic attention, the result is that officials like Bellows take over top jobs on interim bases that end up stretching on for months and months.
Prior to Bellows’ star turn this weekend, his name mostly appeared as the author of academic papers or on blog posts touting rather esoteric subjects such as reviving Build America Bonds or the stimulative effects of unemployment insurance. Treasury did not respond to requests for information about Bellows’ prior work and qualifications.
Still, Bellows’ refusal to pull any punches has ignited a firestorm—not surprising given his caustic language. “As anybody who has followed the fiscal discussions knows, a change of this magnitude is very significant,” Bellows said. “Nonetheless, S&P did not believe a mistake of this magnitude was significant enough to warrant reconsidering their judgment, or even significant enough to warrant another day to carefully re-evaluate their analysis.”
That, along with similar comments from Gene Sperling, the much-better-known chair of the president’s economic council, prompted a harsh pushback from S&P. Responding to attacks, the agency summoned reporters for an unusual weekend conference call with John Chambers, the chief of its sovereign ratings team. Chambers defended his company’s decision mostly on political grounds. “The debacle over the debt ceiling continued until almost the midnight hour,” he said. “For those who follow the fiscal situation of the United States, this shouldn’t be news to anyone.”
Bellows has also come under fire from outside. Stanford economist John Taylor, a leading conservative voice in the discipline, took issue with Bellows, saying S&P’s assumptions about the rate of growth of federal debt may have been different from the Treasury’s but were hardly outlandish. “Since when did different views or assumptions about the future become a math error?” Taylor wrote on his blog. “There are of course reasons to dispute the downgrade decision of S&P, but a math error is not one of them. It would be more productive for government officials to move on and to use their time to find ways to reform taxes or entitlements [and] fix the exploding debt problem.”
Meanwhile, S&P has warned that it could further downgrade American debt soon. If that happens, Treasury officials will likely be looking to John Bellows to check the agency’s math—and make clear his displeasure if they err.