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.

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.

It’s A Great Day For American Political Institutions

October 16, 2013Danny Vinik 1 Comment

Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell have officially unveiled their agreement to reopen the government and prevent us from breaching the debt ceiling. Speaker John Boehner has finally surrendered and will allow a vote on the bill; it is all but certain to pass with mostly Democratic support. Hurrah! We have avoided committing financial suicide, even if it took us until the 11th hour to strike a deal.

As the House bill fell apart yesterday afternoon, many people began wondering if a default was a real possibility. Fitch put the country on “Credit Watch Negative,” citing the debt-ceiling brinksmanship that has cast doubt on the ability of the federal government to uphold the full faith and credit of the United States.

Ezra Klein has argued recently that confidence in our political institutions may be a bubble ready to burst. In today’s Wonkbook, he cited the Fitch analysis and maintained that our political system is fundamentally broken:

Here’s why it does matter: Fitch is right. Does anyone really want to argue with this statement? “Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default.”

…

Fitch and S&P aren’t saying anything that the rest of the country doesn’t believe. They’re not even saying anything that Wall Street doesn’t believe. Everyone knows that American politics has become a game of Calvinball played with live ammunition. The question facing traders is when to finally bet that this is the day when someone doesn’t make it out alive.

What you see with the Fitch and S&P calls is that the market price on the U.S. political system doesn’t reflect what market participants are coming to believe about it: that a once capable and reliable system is now dysfunctional and unpredictable.

Derek Thompson says this repeated debt ceiling brinksmanship is “like Groundhog Day, but 720x longer and completely horrible.” Neil Irwin and Matt Yglesias argue that we’ll be doing this all over again in a few months.

They’re all wrong.

Today is the best day for America’s political institutions in a long time. We have permanently disarmed the financial nuclear bomb known as the debt ceiling.

Why do I say permanently? Because the McConnell-Reid deal confirms that Boehner and GOP House leadership were bluffing the entire time. President Obama has called for a clean CR and clean debt ceiling hike for weeks. The final deal is a clean CR, a clean debt ceiling hike and enforcement of existing law in Obamacare (income verification). If Boehner and Co. were willing to cause an international financial crisis, they surely wouldn’t accept this deal. The fact that they’re surrendering reveals that they will never let us default.

Whenever we hit the debt ceiling next, Boehner will have no credibility to threaten a U.S. default if Republicans do not get what they want. President Obama can refuse to negotiate again with the full knowledge that the speaker will cave at the last minute. The world now knows that Boehner will not let us breach the debt ceiling

This is what Democrats have been fighting for this entire time. They have created a new governing norm that eliminates any possibility that the United States won’t pay its bills. Our government may have a number of problems, but for the first time in Obama’s presidency, we can confidently say that the debt ceiling cannot be used as an extortion device. That’s a massive victory for our political institutions.