Pethokoukis, Economics, U.S. Economy

Debt ceiling crisis would be a catastrophic success for GOP

West Side of the U.S. Capitol Building

Photo Credit: Morriswa (Wikimedia Commons)

Republicans shouldn’t delude themselves. Failure to raise the US debt limit would almost certainly be a very, very bad thing. And that assumes Treasury Department computers are better programmed than Obamacare’s and can prioritize debt interest payments. A weekend research note from Goldman Sachs makes that very assumption and still arrives at this disastrous conclusion:

If the debt limit is not raised before the Treasury depletes its cash balance, it could force the Treasury to rapidly eliminate the budget deficit to stay under the debt ceiling. We estimate that the fiscal pullback would amount to as much as 4.2% of GDP (annualized). The effect on quarterly growth rates (rather than levels) could be even greater. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed very quickly.

But tell that to US Representative Ted Yoho. In an interview with The Washington Post, the tea party Republican from Florida said he doesn’t ever want to raise the debt limit. And he doubts there would be any sort of financial market reaction if America suddenly couldn’t pay its bills and had to slash spending. Just the opposite in fact. Yoho:

“I think we need to have that moment where we realize [we’re] going broke,” Yoho said. If the debt ceiling isn’t raised, that will sure as heck be a moment. “I think, personally, it would bring stability to the world markets,” since they would be assured that the United States had moved decisively to curb its debt.

How many other GOPers are Yohovians? Hopefully not too many. Because to believe in Yohonomics, you have to believe that no matter how deep and quickly and haphazardly government spending is cut, the private sector would seamlessly and instantaneously pick up the slack. And there would be a lot of slack. Goldman estimates the revenues Treasury will receive in the month following the October 17 deadline would equal only about 65% of spending going out, “implying a far greater fiscal pullback than will occur as a result of the ongoing shutdown.”

Would private investment immediately replace all that lost consumption? Economist Alberto Alesina comes about as close to endorsing the idea of “expansionary austerity” as you find with this cautious statement: “A deficit-reduction program of carefully designed spending cuts can reduce debt without killing growth.”

But what Yoho is talking about isn’t carefully designed at all. And slower growth, don’t forget, also means less tax revenue. It is possible to shrink government without really improving the debt situation. Indeed, the collapse in eurozone nominal GDP is what’s been driving that region’s debt crisis.

Maybe some comfort can be taken, perhaps, at how the US economy adjusted to severe spending reductions after the Cold War. Overall federal spending fell to 18% of GDP in 2000 from 22% in 1991. But that smaller reduction took place over the course of a decade and happened at the same time as a private-sector productivity boom. And would Yoho endorse looser monetary policy to make up for the severe fiscal retrenchment? Doubtful, given tea party disdain for the Fed. And again, it’s a pretty big stretch to think that global markets would view of all this without a wisp of apprehension

Maybe a debt ceiling disaster would give Republicans the balanced budget and smaller government they’ve been demanding — but only in the worst possible way.


18 thoughts on “Debt ceiling crisis would be a catastrophic success for GOP

  1. Goldman Sachs would hate if we quit printing fake money and charging “interest” on it to the Federal Reserve because that’s their Cash Cow. How about CAN the Federal Reserve and have the Treasury print the money? Better yet, tell the Federal Reserve that to manage our money, we’re going to stop payments (extortion) to the Federal Reserve BANKSTERS? That’d probably save enough to make us able to live within our budget.

  2. There is only one possible silver lining I can see in this ridiculous situation. A default by the U.S. and concurrent sell-off in world markets, plus the dramatic increase in interest rates, not to mention the failure of the government to pay military families, social security recipients, etc., would be so shocking to most Americans that it would marginalize the GOP for a generation. Most people would become finally convinced of the total inability of the GOP to govern. The electoral backlash might be enough to return some sanity to Congress.

  3. Well if GS says XYZ must be so … then gee it must be so! Not. GS = modern-day Banksters who simply trade all these markets with super-computers, long and short algorithms. Good writer JP but if the best you can do is reference GS to reinforce your point, then you have lost your point.

  4. This article didn’t need to be written.

    I guess Mr. P. is having trouble getting his phone calls returned, so he’s rolling more Democrat these days.

    The Republicans are not going to allow the country to default. But they have made a point to voters that the deficit continues to grow, thus the need to raise the debt limit. That serves a political purpose.

    In the meantime, they have focused attention on ObamaCare.

    My guess is that they will gain some small advantage from this brinksmanship. Given the headline on the front page of the WSJ today, I can imagine that the Democrats decide that the path of least resistance is to institute a delay.

    Per the debt limit again, the assumption is that the Republicans would be blamed. Politically, that may be true in the near term. But in the history books, it won’t look like that.

    In the history books, it will look like the country defaulted, when Barack Obama was president. Who remembers, who the Speaker of the House was during the Civil War, or WWI or 100 days?

    I am sure that President Obama realizes that.

  5. I agree with Sgt. Friday, it was not the Democrats who got the blame for the housing collapse, Bear Stearns and Lehman bankruptcies in 2008 even though they were the majority party in Congress. The president takes the credit or the blame for the economy and if Obama won’t head off a default by serious negotiations with the GOP he will be responsible in November 2014 not John Boehner.

    • So the 70 plus percent of americans who don’t approve of a govt shutdown meant to derail Obamacare are going to forget Ted Cruz in a year? Remember the “unskewed” polls of 2012? Well, you are delusional again, and digging yourself a deep, deep hole.

  6. The debt limit law cannot be faithfully executed, except by refusing to faithfully execute the law in general. For example, in 2011 an AEI scholar, Benjamin Zycher, writing in National Review Online’s blog The Corner, recommended complacency about breaching the debt ceiling:

    “Of course not all bills would be paid; but how many people will die in the streets if the Departments of Agriculture, Commerce, Education, Energy, HUD, Interior, Labor, Transportation, and the EPA are shut down for, say, a month?”

    If the Congress passed a bill to shut down these agencies, and the President signed it (or the Congress overrode his veto), then that would be fine. But in the absence of such legislation, an executive branch decision to shut down these agencies would be illegal and unconsitutional.
    If a law cannot be obeyed except by disregarding the Constitution, then that law is incompatible with the Constitution, or unconstitutional. Therefore, the debt limit statute is unconstitutional, Congress has a duty to repeal it, and barring such action the President has a duty to disregard it.

  7. The Banana States of America…defaulting on payments, ferocious security and uniforms everywhere, palatial estates and million-dollar weddings…where is Spiro Agnew when you need him?

  8. So we raise the debt ceiling again, the drunken sailors continue their binge, and we’re in the same spot again next year. Sorry. I don’t buy it. Cold turkey is the only way to stop our spendthrift federal government when practically all members of Congress are in the pocket of one or another big business that wants more handouts, or are bent on using government largesse to buy continued votes–or both.

  9. Well our parents were known as the Greatest Generation, and we will be remembered as the Greediest one. The ones who continue to bankrupt the country we will leave to our children and grandchildren. The one that will leave them a mountain of debt, an overwhelming regulatory load, and for the first time in the history of this country our children and grandchildren will have to endure a lifestyle that is worse than our own. All because we allow our politicians to sell us on irresponsible fiscal policy that leads us to hand them the bills for our credit card expenditures…

    The GOP is standing for spending cuts and the same deal for individuals that the President and Democrats gave big business. In addition, they are correct in that the President’s 72% subsidy for the richest among us, the ones who wrote and passed the ACA law should be happy to be the first to enroll in it. If they aren’t, then it should be repealed.

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