The Costs of Debt Limit Brinksmanship

By :: September 18th, 2013

Today I had the chance to testify before the Joint Economic Committee about a perennial challenge, the looming debt limit. Here are my opening remarks. You can find my full testimony here.

I’d like to make six points about the debt limit today.

First, Congress must increase the debt limit.

Failure to do so will result in severe economic harm. Treasury would have to delay billions, then tens of billions, then hundreds of billions of dollars of payments. Through no fault of their own, federal employees, contractors, program beneficiaries, and state and local governments would find themselves suddenly short of expected cash, creating a ripple effect through the economy. A prolonged delay would be a powerful “anti-stimulus” that could easily push our economy back into recession.

In addition, there’s a risk that we might default on the federal debt. I expect that Treasury will do everything it can to make debt-service payments on time, but there is a risk that it won’t succeed. Indeed, we have precedent for this. In 1979, Treasury accidentally defaulted on a small sliver of debt in the wake of a debt limit showdown. That default was narrow in scope, but financial markets reacted badly, and interest rates spiked. If a debt limit impasse forced Treasury to default today, the results would be more severe. Interest rates would spike, credit would tighten, financial institutions would scramble for cash, and savers might desert money market funds. Anyone who remembers the financial crisis should shudder at the prospect of reliving such disruptions.

Second, Treasury doesn’t have any “super-extraordinary” measures if the debt limit isn’t raised in time.

Pundits have suggested that Treasury might sidestep the debt limit by invoking the 14th Amendment, minting extremely large platinum coins, or selling gold and other federal assets. But Administration officials have said that none of those strategies would actually work.

Third, debt limit brinksmanship is costly, even if Congress raises the limit at the last minute.

As we saw in 2011, brinksmanship increases interest rates and federal borrowing costs. The Bipartisan Policy Center—building on work by the Government Accountability Office—estimates that crisis will cost taxpayers almost $19 billion in extra interest costs.

Brinksmanship also increases uncertainty, reduces confidence, and thus undermines the economy. In 2011, for example, consumer confidence and the stock market both plummeted, while measures of financial risk skyrocketed.

Finally, brinksmanship weakens America’s global image. The United States is the only major nation whose leaders talk openly about self-inflicted default. At the risk of sounding like Vladimir Putin, such exceptionalism is not healthy.

Fourth, as this Committee knows well, our economy remains fragile.

Now is not the time to hit it with unnecessary shocks.

Fifth, as the CBO confirmed yesterday, the long-run budget outlook remains challenging.

Deficits have fallen sharply in the past few years. But current budget policies would still create an unsustainable trajectory of debt in coming decades. Congress should address that problem. But the near-term fiscal priorities are funding the government and increasing the debt limit.

Finally, Congress should rethink the debt limit and the entire budget process.

Borrowing decisions cannot be made in a vacuum, separate from other fiscal choices. America borrows today because this and previous Congresses chose to spend more than we take in, sometimes with good reason, sometimes not. If Congress is concerned about debt, it needs to act when it makes those spending and revenue decisions, not months or years later when financial obligations are already in place. When the dust settles on our immediate challenges, Congress should re-examine the entire budget process, seeking ways to make it more effective and less susceptible to dangerous, after-the-fact brinksmanship.



  1. Michael Bindner  ::  8:38 pm on September 18th, 2013:

    Three things. First, I don’t think the leadership will let default or a shut down happen. Hopefully the CR will also increase the debt limit.

    Second, Obama erred in not allowing taxes to go up for a few more of the brackets where the Bush tax cuts were made permanent. Families making over $150,000 should have also had their taxes go up automatically. Of course, when Obama made this promise he expected cap and trade or a carbon tax to be enacted – which would have closed the gap and tax everyone – not just the wealthy.

    Third, we have become the world’s reserve currency to a much greater extent then in 1979 (which had an interest rate spike that probably killed the Carter presidency). If we were to default now, we would become Greece – not because of our long term debt problem.

  2. Tax Roundup, 9/19/2013: « Roth & Company, P.C  ::  9:41 am on September 19th, 2013:

    […] Marron,  The Costs of Debt Limit Brinksmanship  […]

  3. AMTbuff  ::  11:16 am on September 19th, 2013:

    Holding the debt limit hostage is a desperate act, appropriate only for a desperate situation. Is our failure to take any reasonable steps to control our debt and deficit a sufficiently desperate situation? Reasonable people can disagree on that.

    Our political system is structurally biased toward more spending, running up unpayable government debt, and eventual default or hyperinflation. If one is serious about stopping this, and neither party is right now, what other tactics are available? If a massive default is inevitable, is it really all that horrible to provoke a smaller default now?

    I don’t personally favor playing games with the debt limit, but I understand why some people do. There aren’t many ways to focus attention on fiscal danger. This crude tool is something of a last resort.

    If we were serious about eliminating the use of the debt limit as a political tool, we’d create a more useful and less dangerous tool for bringing attention to the need for fiscal discipline. Any ideas what that tool might be? And don’t say a balanced budget amendment. California supposedly balances its budget, but its true fiscal deficits could hardly have been higher. The only effective fiscal constraint is a current political penalty, not any formal rule.

    Someone once proposed paying politicians and government employees in zero-coupon 30-year government bonds. That might open eyes to the risk of default or hyperinflation.

  4. Nick  ::  11:10 am on September 25th, 2013:

    Is there any evidence that increasing the debt limit raises the interest rate the US must pay on what it borrows later. Lenders to the US may view the debt ceiling as a commitment mechanism, and if we build a reputation of always just raising it, then there is less of a commitment to repay in place, and lenders may want that decreased risk mitigation mechanism replaced with higher interest rate. My initial reaction is that the effect is small or negligible at best given how many times we’ve already raised the ceiling, but interested in others’ thoughts.

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