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A public policy blog from AEI
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.
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