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The public policy blog of the American Enterprise Institute
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.
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