July 26 (Bloomberg) -- Alice Rivlin, a former Federal Reserve vice chairman, said investor confidence in the U.S. economy will help stave off the damaging effects of a potential downgrade by credit rating companies.
While a prolonged failure to pay debts would throw the economy into a “deep recession,” the U.S. may be able to weather a short default because global investors believe the country will solve the problem, Rivlin said today in an interview on Bloomberg Television’s “In the Loop” with Betty Liu.
“Investors around the world think that we will not default,” said Rivlin, a member of President Barack Obama’s deficit-reduction commission. “Even if we get a downgrade, they will go on thinking that because we are the strongest economy in the world.”
Both Moody’s Investors Service and Standard & Poor’s have warned the U.S. government risks losing its top credit rating if it fails to increase the debt limit, leading to a default. The Treasury Department has said the U.S. will exhaust measures to avoid breaching its $14.3 trillion debt threshold on Aug. 2.
Rivlin, who served as White House budget director under President Bill Clinton, said a default is unlikely because “cooler heads will prevail in the Congress” and “some sort of compromise will be worked out that will avoid default.”
“We all need to solve the problem, and it’s going to take some give on both sides,” Rivlin said. “Democrats have got to give on entitlement reform, and that means reductions in future benefits, and Republicans have to yield on tax reform, which can give us a better tax system but also more revenue.”
The plan has to be long-range and balanced, Rivlin said, citing Senate Majority Leader Harry Reid’s proposal as a “reasonable compromise” to get the U.S. past default and allow time for a rational solution. Reid, a Nevada Democrat, has said his plan would extend the debt ceiling through the end of 2012 and would not include tax increases.
“Where we are, there isn’t really time to legislate a long-range plan,” she said. House Speaker John Boehner’s proposal, which calls for a reduction in two stages, would create a debate in 2012 that “can only be worse.”
Rivlin, and former Senator Pete Domenici, a New Mexico Republican, are co-leaders of the Washington-based Bipartisan Policy Center’s Debt Reduction Task Force, which has been cautioning Republicans about the potential hazards of breaching the U.S. debt ceiling.
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