Default Doubters Repudiated by Republican Economists
Republican lawmakers have played down the significance of hitting the debt limit, saying the U.S. can avoid default by putting aside funds to pay bond holders. Economists affiliated with the party aren’t so sanguine.
Glenn Hubbard, Douglas Holtz-Eakin and Donald Marron, all of whom served in President George W. Bush’s administration, voiced concern that such a strategy could end up hurting the economy even if default were averted.
“I would still worry about it,” said Hubbard, who was chairman of Bush’s Council of Economic Advisers from 2001 to 2003. “It signals that we have an inability as a nation to get our budget process in order.” That could “do damage to U.S. growth potential and credibility,” he added.
The U.S. government is in the 11th day of a partial shutdown and less than a week away from Oct. 17, the day the U.S. will run out of room to borrow more unless Congress acts to raise the government’s $16.7 trillion debt ceiling, according to President Barack Obama’s Treasury Department.
U.S. stocks rose, extending yesterday’s gains and sending the Standard & Poor’s 500 Index (SPX) to the highest level since September, on speculation lawmakers were making progress toward an agreement. House Republicans offered a plan to raise the debt limit and end a partial government shutdown that would require Obama to accept policy conditions attached to a spending measure, said two congressional aides.
Some Republican lawmakers have argued that the U.S. can continue to meet interest payments on its debt, even if the government is unable to borrow more money from investors.
“The country will not default if we don’t raise the debt ceiling,” Representative Ted Yoho, a Florida Republican, said in an interview on Oct. 8. “We’ve got enough revenue coming in to pay our bills.”
“If you don’t raise your debt ceiling, all you’re saying is we’re going to balance our budget,” the Kentucky Republican told reporters in Washington Oct. 8. “I think if you propose it that way, the bulk of the American public would say, ’My goodness that sounds like a pretty reasonable idea.’”
It doesn’t sound that way to Holtz-Eakin, who worked with Hubbard at the CEA and is a former director of the Congressional Budget Office.
“Breaching the debt limit is a very bad idea,” said Holtz-Eakin, now president of American Action Forum, a self-described center-right policy institute in Washington. “While I don’t know exactly what would happen, I don’t want to find out.”
He said Obama needs to get together with Republicans and negotiate a deal to raise the debt limit. “If he doesn’t, he’s going to be responsible for the meltdown,” the economist said.
In the event the borrowing limit isn’t increased, it’s not clear that Treasury has the capability of ensuring that debt payments are made, Holtz-Eakin said. While the government does take in more money than it pays out in interest each year, that’s not true for each and every day.
He said it’s ironic that conservatives are arguing the Treasury can prioritize its payments. “These are the guys who don’t think the government can do anything right,” Holtz-Eakin said. “And they’re going to count on Treasury bureaucrats to manage this phenomenal sleight of hand. I don’t believe it.”
Even if the government were able to shuffle its payments so as to avoid default, it would still have to cut back on other outlays because it couldn’t borrow any additional funds. And that would hurt the economy, said Marron, a CEA member in 2008 and 2009.
“If the government has to suddenly move to a balanced budget for an extended period, the U.S. economy would likely plunge into recession,” said Marron, who is now director of economic policy initiatives at the Urban Institute in Washington.
The nonpartisan CBO has estimated that the deficit was $642 billion, or 3.9 percent of gross domestic product, for the year that ended Sept. 30. That’s down from 9.8 percent in 2009, the year Obama took office.
Almost two-thirds of Americans say a failure to raise the debt cap would be a real and serious problem, according to a NBC News/Wall Street Journal poll. The concern is shared across party lines: 72 percent of Democrats think that way while 57 percent of Republicans and independents say the same. The poll of 800 adults was conducted on Oct. 7-9 and has a margin of error for this reading of plus or minus 4.4 percentage points.
Greg Mankiw, who succeeded Hubbard as chairman of the Council of Economic Advisers in 2003 and stayed until 2005, agreed that prioritizing payments does entail some peril. “There is recession risk,” he said in an e-mail.
That danger, though, would be far less than that posed by a potential default. “If people really thought we were going to default on bondholders, that would be terrible,” said Mankiw, who is now chairman of the economics department at Harvard University in Cambridge, Massachusetts.
Treasury Secretary Jacob J. Lew told the Senate Finance Committee yesterday that a strategy of making debt payments while failing to meet other obligations would be “default by another name.”
Mankiw took issue with that type of argument. “It’s not a default on the debt,” he told Bloomberg Television on Oct. 9. “What the debt holders care about is how the United States treats its debt.”
Holtz-Eakin disagreed. “If you managed to prioritize, you would still send a signal to financial markets that you’re not worthy of additional loans, that you’re a risky borrower and your interest rates would go up,” he said. “That’s bad news for the economy.”
Such skepticism about prioritization doesn’t mean the conservative economists agree with Obama that Congress should just raise the debt ceiling. While Republicans were wrong to try to tie an increase to a delay of Obama’s health-care overhaul, they are justified in seeking changes in the budget in return, Hubbard said.
“I regret that both sides have taken positions that make it very difficult now to get to where we need to be,” said Hubbard, who is now dean of Columbia University’s Graduate School of Business in New York.
He said it was “irresponsible” for the president to refuse to negotiate over an increase in the borrowing cap.
Holtz-Eakin said much the same. “The idea that he’s not going to negotiate is ludicrous,” the American Action Forum president said. “He is going to negotiate and I would encourage him to start sooner rather than later.”
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