Passing Judgment on Standard & Poor’s

by Pejman Yousefzadeh on August 7, 2011

The ratings agencies are an economic fact of life, and their power has to be contended with. They are not going away anytime soon. But I find it hard to disagree with people like Dan Drezner, who points out that Standard & Poor’s didn’t exactly cover itself in glory with its downgrade of the U.S.’s credit rating. To review the facts, S&P miscalculated the debt by incorrectly adding $2 trillion to the debt figure, and claimed–prior to having the mistake discovered–that the size of the debt was reason enough for the downgrade. When S&P’s arithmetic error was pointed out by Treasury officials, it hemmed and hawed for a while, and then decided that a downgrade was justified for political reasons.

All of this makes clear that S&P was determined to downgrade, come hell or high water, and that facts would not be allowed to get in the way. But just as S&P’s arithmetic was off, its political judgments were off as well, as Professor Drezner chronicles. Which goes to show that S&P is much like a really bad high school teacher, one whose lack of pedagogical talent and command of the subject being taught is rivaled only by an arbitrary and capricious temperament when it comes to grading students. Such a teacher should not be anywhere near the education system, but as long as he/she is, he/she can still keep deserving students from going to their colleges of choice by issuing bad–if entirely unjustified–grades when report cards come out.

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