Raising the Debt Ceiling Is Paying Our Bills

October 21, 2013Danny Vinik 1 Comment

President Barack Obama says we need to pay our bills. I agree. But raising our debt limit without reform is not paying our bills. It is asking China, bond holders and other creditors to pay our bills.

The president says we need to avert a default. I agree. But raising our debt limit without any reform is not averting default. It is merely postponing default. Instead of simply opening up a new credit card in our childrens’ name because we’ve maxed out all of our own, we must take responsibility and stop business as usual in Washington. We owe it to our children and grandchildren to end the spending spree and start making the tough choices that will finally force the government to live within its means.

Here’s how U.S. fiscal policy works: The federal government takes in a certain amount of money and spends a certain amount of money each year. Congress passed laws that dictate what people have to pay to the government and how much the government will spend. In the U.S., the federal government almost always spends more than it takes in. It makes up the difference by taking on debt, but the debt ceiling prevents us from taking on more debt. It doesn’t change how much we’re spending or taking in. When Congress refuses to pay the debt ceiling, it stops us from making up that gap. The amount we owe doesn’t change. We just aren’t paying our bills.

The part about China is particularly bad. Rep. Barr really thinks that raising the debt limit is us asking China to pay our bills? China’s decision to purchase Treasuries has nothing to do with helping the U.S. out. China makes its own fiscal policy decisions that it thinks is best for itself, not the United States.

Finally, raising the debt ceiling without reforms does nothing to our odds of a future default. In fact, the only reason there is a chance the U.S. breaches the debt limit in the future (and I don’t think there is one) is the Tea Party’s willingness to do so. In a sane world, Congress would abolish the debt ceiling and there would be zero chance of a U.S. default, but sadly we don’t live in a sane world. Raising the debt ceiling now only increases the odds of a future default in that it makes Tea Party Republicans even more anxious to commit economic suicide.

Were Mainstream Conservatives To Blame for the Shutdown?

October 18, 2013Danny Vinik 2 Comments

The post-mortem of the McConnell-Reid deal to open the government and avoid a default has focused a lot on who is to blame on the Republican side. Many have laid the blame at Speaker Boehner’s feet – something I have pushed back against a number of times. House Republicans blame Senate Republicans. Senate Republicans blame Ted Cruz and Co. The Tea Party blames the establishment. The Washington Post’s Jonathan Bernstein has narrowed it down more, specifically focusing on mainstream House Republicans:

There’s plenty of blame to go around for the shutdown and debt-limit fiasco, but any account which focuses mainly on Boehner is probably letting both the moderates and the mainstream conservatives — in other words, most House Republicans — off far too easy.

Bernstein has named this group the ‘Fraidy Cat Conference:

These 175, too, are mostly paranoid about renomination, even if they want reporters to know that they’re not actually nuts. They’re the ones who drive what Boehner does. They’re the ones who have to bear the brunt of the responsibility for this shutdown. They’re the ones who are the ‘fraidy cat conference — so paranoid about renomination, and more broadly about allowing any distance to appear between themselves and the “conservatives” who they probably honestly have contempt for, that they’re willing to run their party right into a ditch.

The problem with this argument is that the ‘fraidy cat conference is right to be afraid. They have seen the power of the Tea Party and how tough primaries can be. They’re right to be paranoid about renomination.

This gets to a larger problem with diagnosing who is to blame for the shutdown. It’s important to look at the incentive structure for all of the actors involved.

Mainstream conservatives – the ‘fraidy cats – have an incentive to put as little distance as possible between themselves and the right wingers. Many are part of the “hope yes/vote no” conference that is glad the shutdown is over with and a clean CR passed, but couldn’t vote for the legislation themselves for fear of conservative blowback. I imagine that for many, this was an easy decision. Stick with the Tea Party through and through.

Like Boehner, these members had the power to end the shutdown anytime they wanted. Like Boehner, they had both individual and group incentives to keep the shutdown going until the 11th hour. Supporting the shutdown reduced the chances that these mainstream conservatives would face a primary challenge while also keeping the party unified. This point cannot be repeated enough: the GOP cannot allow a civil war to break out between the establishment and the Tea Party. It must do everything in its power to avoid that.

The reason that Boehner and the mainstream conservatives are incentivized towards making extreme demands and shutting down the government is because the Tea Party sets those incentives. The far-right members are the ones willing to jump ship from the Republican Party and commit political suicide. In doing so, they would take the Republican Party down with them. That gives them the power to set the framework of the House Republican strategy. If the Tea Party wants to fight, then Boehner and mainstream conservatives must listen. They have every incentive to do so. These are rational decisions.

The Tea Party is being irrational. They chose a strategy guaranteed to fail, forced their fellow Republicans to use those futile tactics, and caused needless suffering and economic harm. Their incentives are shaped not by outside forces, but by themselves. Yet, they decided on this radical plan to shut down the government if the president did not make drastic alterations to his greatest legislative achievement. It was bound to fail and blow up in their face. Yet, the Tea Party irrationally chose to take this route anyways.

Ultimately, they are the ones to blame.

No, The Government Shutdown Didn’t Cost The Economy $24 Billion

October 18, 2013October 18, 2013Danny Vinik 3 Comments

Now that the government shutdown and debt ceiling brinksmanship are over, the media has turned to playing the blame-game and diagnosing how badly the fiscal fights hurt the economy. On Wednesday, right before the McConnell-Reid deal passed both houses, S&P estimated that “the shutdown has shaved at least 0.6% off of annualized fourth-quarter 2013 GDP growth, or taken $24 billion out of the economy.”

This number, $24 billion, has been repeated around the internet as representing the cost of the shutdown, but that’s wrong for two reasons.

First, S&P is calculating how much the shutdown hurt the economy in the 4th quarter, but does not add in any bounce-back effects that will happen in the first quarter of next year. Many of the federal workers who were furloughed had to reduce their spending and it will continue to have an effect into November and December. But they will receive pay for their missed time; eventually that money will circulate into the economy. That doesn’t mean there were no negative economic effects to furloughing federal workers. Many workers in other sectors depend on those workers to purchase goods and services and those workers will not receive back pay. But that $24 billion is overstated as it does not included the bounce back effect. At the beginning of the crisis, Macroeconomic Advisors estimated that a the furloughs caused by a two-week shutdown would reduce real GDP by 0.3% in the 4th quarter. However, it noted that most of that should be made up in the first half of next year, as happened in the 1995-1996 government shutdown.

Second, the Federal Reserve may have delayed tapering to offset some of the negative impact of the shutdown. The September FOMC meeting outlined those fears:

However, a number of others (FOMC members) pointed to heightened uncertainty about the course of federal fiscal policy over coming months, including the potential for a government shutdown or strains related to the debt ceiling debate, which posed downside risks to the economic outlook.

In his press conference, Ben Bernanke repeatedly emphasized that the fiscal fights in Washington would be a drag on the economy. It’s unclear whether the Fed would have begun tapering in September if there was not a potential government shutdown and debt ceiling fight lurking in the near-future. It might have delayed reducing its bond purchases anyways as the economy slowed. However, investors are already predicting that the Fed will likely continue delaying tapering until at least the spring of next year since the federal government may go through these fights again in January. If that’s the case, then the Fed almost certainly kept its policy more accommodative due to the shutdown, which offsets some of that $24 billion in negative economic costs.

None of this is to say that the shutdown wasn’t costly. It was. It caused needless suffering for many Americans and certainly hurt the economy. But it’s unlikely to have cost the economy $24 billion. Keep that in mind.