Yes, fighting over the debt ceiling hurts the economy

Reuters

Steps used by members of Congress to enter the US House of Representatives are empty at the US Capitol in Washington October 7, 2013. As the US Government shut down enters its 7th day, US House of Representatives Speaker John Boehner said that there is "no way" Republican lawmakers will agree to a measure to raise the nation's debt ceiling unless it includes conditions to rein in deficit spending.

Article Highlights

  • Getting too close to the X date causes problems, even if the debt ceiling is eventually raised.

    Tweet This

  • The economy is very fragile, and the labor market is in quite bad shape. The last thing the economy needs is more headwinds created by politics.

    Tweet This

Senators Coburn and Paul took to the airwaves to argue that going past the so-called X date – the date beyond which the Treasury cannot honor all U.S. financial obligations, believed to be sometime in the second half of October – does not automatically mean that the U.S. will default on our debt. Other prominent conservatives have advanced this argument as well.

They are correct. The U.S. could in theory honor our debt obligations while not honoring other obligations, such as Social Security payments, federal-employee salaries, and payments to government contractors. The Treasury could still conduct auctions to roll over maturing securities past the X date, and the Treasury probably could ensure that it has enough cash to pay interest payments on the debt.

But this strategy is not as rosy as many conservatives believe, for a number of reasons.

1. I have read that the legality of prioritizing payments is unclear. I’m not a lawyer, and I don’t play one on TV, so that’s all I will say on the subject.

2. Treasury receipts are lumpy – revenues flow into the Treasury in very different quantities from day to day – and even the possibility that debt obligations may not be honored could seriously rattle markets.

3. IT problems and human error could come into play in a situation demanding such precision.  Indeed, when the Treasury missed a few payments in 1979, part of the reason was trouble with word-processing software.

And that’s not all. Getting too close to the X date causes problems, even if the debt ceiling is eventually raised. We don’t have to reach back into the mists of history to find evidence of this — the summer of 2011 will suffice. Consumer confidence plunged to levels similar to those at the time of the Lehman bankruptcy, and economic-policy uncertainty was as severe as any time since 9/11 – both of which have a nontrivial impact on the economy. In addition, the Bipartisan Policy Center estimates that taxpayers were on the hook for almost $20 billion in extra interest payments due to the perceived riskiness of Treasuries. And the nation’s credit rating was downgraded. Those are all bad outcomes.

Is anything like this starting to happen now? Yep. Here’s a chart produced by Goldman Sachs showing that investors are already showing their concern about the debt ceiling with their behavior on bills coming due soon:

And here's consumer confidence, courtesy of the good folks at Gallup:

The economy is very fragile, and the labor market is in quite bad shape. The last thing the economy needs is more headwinds created by politics. Getting too close to the X date is bad; we have 2011 to prove it. Going past the X date would be even worse, whether or not we successfully honor our debt obligations. And default would likely be a catastrophe.

Don’t believe everything you see on television.

Michael R. Strain is a resident scholar at the American Enterprise Institute.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Michael R.
Strain

What's new on AEI

In year four of Dodd-Frank, over-regulation is getting old
image Halbig v. Burwell: A stunning rebuke of a lawless and reckless administration
image Beware all the retirement 'crisis' reports
image Cut people or change how they're paid
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Event Registration is Closed
Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.