Pethokoukis, Economics, U.S. Economy

Turns out the left has its own Default Caucus


Some Republicans and conservatives have been getting grief, rightfully so, for minimizing the economic impact of a US debt default. Take Rep. Ted Yoho, a Florida Republican: “I think, personally, it would bring stability to the world markets.” Apparently no one informed Wall Street of this because stocks are jumping on news that Republicans might agree to a short-term increase in the debt limit.

But fair’s fair, and more attention should be given to those left-of-center folks playing down the disastrous consequences of a default, technical or otherwise. For instance, left-wing economist Dean Baker of the Center for Economic and Policy Research, author of The End of Loser Liberalism: Making Markets Progressive, writes in a Huffington Post piece titled “Debt Default: The Only Way to Get to Full Employment?” that a default “is not the sort of thing that an economy still struggling to recover from the recession needs right now.”

Very reasonable. But turns out that Baker is actually pretty geeked about one possible impact of the US stiffing its lenders:

We have been repeatedly warned that the dollar could lose its status as the world’s reserve currency in the event of default. While this is a dubious claim (will countries rush to the euro?), it would actually be good news if it were true. … If the dollar is no longer the pre-eminent reserve currency, then countries will dump much of their dollar holdings, pushing down its value in currency markets. A lower-valued dollar will cause exports to soar and imports to plummet, creating millions of new manufacturing jobs. Millions more jobs would be created in other sectors due to the multiplier effect. This could well bring us back to full employment — a goal we may not otherwise achieve until the next decade.

That’s a handy bit of ceteris paribus reasoning. But all else wouldn’t be equal. Not at all. UC-Berkeley Economist Barry Eichengreen, former senior policy adviser at the International Monetary Fund, thinks the loss of the dollar’s status as the premier global currency would cost the US, ballpark, about a full year’s worth of economic growth, or about $500 billion, as federal borrowing costs rose. But that’s just for starters. As the dollar fell, the euro would rise, perhaps pushing that region back into recession and reigniting its currency crisis. But wait there’s more:

Likewise, small economies’ currencies – for example, the Canadian dollar and the Norwegian krone – would shoot through the roof. Even emerging-market countries like South Korea and Mexico would experience similar effects, jeopardizing their export sectors. They would have no choice but to apply strict capital controls to limit foreign purchases of their securities. It is not inconceivable that advanced countries would do the same, which would mean the end of financial globalization. Indeed, it could spell the end of all economic globalization.

Eichengreen writes about the “end of globalization” like it’s a bad thing. Which it would be. But that might be OK for progressives who see globalization as an unwelcome occurrence that has hurt American unions and pushed down worker wages (even as it lifted hundreds of millions of Asians out of poverty).

Anyway, let’s hope Washington doesn’t buy either the “default equals stability” or the “default would create millions of jobs”  arguments and ends this debt limit crisis ASAP.

9 thoughts on “Turns out the left has its own Default Caucus

  1. Calling it a “caucus” on the left is misleading and a case of false-equivalence. Pethokoukis is comparing two Economists to GOP members of Congress. Do Baker and Eichengreen meet the definition of “caucus” below?

    cau·cus (kôks)
    n. pl. cau·cus·es or cau·cus·ses
    a. A meeting of the local members of a political party especially to select delegates to a convention or register preferences for candidates running for office.
    b. A closed meeting of party members within a legislative body to decide on questions of policy or leadership.
    c. A group within a legislative or decision-making body seeking to represent a specific interest or influence a particular area of policy

  2. There is zero chance of default.

    Monthly, tax revenue works out to be about $250 billion of tax revenue per month and monthly net interest payments are about $20 billion. Yes, these payment and receipts are “lumpy,” so to let the coffers run completely dry is a potential problem.

    All entitlement spending is another $125 billion per month. That’s $145 billion of absolutely essential spending per month versus $250 billion monthly revenue. So all Medicare and Social Security checks can go out.

    All interest payments can be made—easily.

    See my blog entry: Fear Mongering By Democrats is Irresponsible:

    • You write “to let the coffers run completely dry is a potential problem.” But the reason it’s a potential problem is that it would lead to default. It follows that there is not “zero chance of default.”

      • true, running the government past the debt ceiling to the tune of $50 billion using accounting tricks is a problem it’s true. You’re right, there would be some risk if no one did anything. But monies would be approved to cover interest payments to cover any lumpiness. The US will never, ever default. I don’t care how irresponsible members of Congress are in other areas. The Republicans ironically are the party of financial responsibility–why else would they make such a fuss as we pass $17 Trillion in debt? It’s not popular. It’s the Dems that are the party of fiscal and personal irresponsibility. My understanding is that there are no significant interest payments until Nov 1.

        • You’re kidding, right? A Republican prez and Republican congress gave us Medicare Part D. The basic premise of supply side economics — cutting taxes now in expectation of higher revenues later — is called gambling where I grew up. Nothing the House Rs have done in the last two weeks could be called responsible in any analysis. Sayonara Teabaggers. Thanks for overreaching.

          • supply side economics created 20 million jobs during Reagan’s tenure alone despite one of the steepest recessions in 1981 to 1982. Because of that tax revenues rose from $600 billion to $1 Trillion in 1990 or 70% in constant dollars. Those supply side job gains continued under Clinton as well. Bush’s performance was not good, you’re right. Obama by not negotiating is complete bullshit—a complete abdication of his job. It’s about what I’d expect for an leftist amateur who continues to harm the country with EVERYTHING he does.

  3. The rest of you can discuss this. I have decided on complere denial. I do not believe there is a Congressman named “Yoho” who says defaulting on USA debt will bring stability to global financial markets.
    The Banana States of America, here we come…

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