Note: This article has been updated to include a reply from economist Jeffrey Miron.
Apocalyptic talk flies around about the consequences of breaching the debt ceiling—that is, letting the federal government run out its borrowing authority and failing to let it run up the credit cards any further. Establishment figures warn that, with the goverment spending far more than it takes in in the form of tax revenues, the leviathan on the Potomac will not only be unable to pay its bills if the debt ceiling isn't raised, but that it could default on payments on its existing debt and cause an international financial crisis. Not incidentally, that would raise the price of future borrowing to the U.S. as the federal government became a higher-risk customer. President Obama claims "every economist out there is saying" that "millions of Americans—not just federal workers—everybody faces real economic hardship" if the debt ceiling isn't raised.
But, is it true? Does every economist out there see doom if the debt ceiling isn't raised?
To find out, Reason approached several prominent economists and asked them a simple question: Reason Magazine is doing a piece on the debt ceiling, and we were wondering what your take is on the consequences of breaching it? Will it be a catastrophe or not? We've already mentioned Nobel Prize-winner Vernon Smith's answer, but he wasn't the only one to chime in, nor was he the only one to see a potential upside to keeping the debt ceiling where it is.
Twitter feed to fiscal hawks as "wankers." About the debt ceiling he told Reason, "I have no idea. I think we are entering uncharted waters and only a fool would do such a thing."Bruce Bartlett is a one-time Ron Paul staffer who went on to become Vice chairman of the Joint Economic Committee of Congress under President Reagan and a senior policy analyst for President Bush the first. He's since become something of a Keynesian and refers on his
Short and pithy and unenthusiastic about leaving the debt ceiling unhiked—but not really a prognostication of doom.
chairman of the Department of Economics at Harvard University, agrees about the degree of uncertainty inherent in breaching the debt ceiling.Greg Mankiw, Chairman of the Council of Economics under President Bush, the second, and now
"It is hard to say for sure, as it is largely uncharted territory. My sense is that if the Treasury prioritizes debt service over other spending, then the bond market should not fear default on government bonds. However, the administration has asserted that such prioritization is impossible, which strikes me as implausible.
The one clear risk is that the sudden reduction in government spending could contract aggregate demand and push the economy into recession."
professor of economics at Chapman University's Argyros School of Business, and 2002 co-winner of the Nobel Prize in Economics, takes the prospect of a frozen debt ceiling, and even a debt default, in stride.By contrast, Vernon Smith,
"No, it will not be a catastrophe. The U.S. is one of the few countries in the world and in history that has NOT defaulted on its debt; consequently we suffer the consequences of the curse of a reserve currency. The great housing-mortgage market bubble, 1997-2006, was fueled by a massive inflow of foreign investment funds. This is the other side of our deficit on trade account which looks like a sweet deal in which foreigners send us more goods and services value than we send them. But it has negative consequences and cannot be sustained indefinitely."
By Smith's take, making the United States less attractive as a destination for foreign investment might spare us future bubbles, and so have an upside.
professor of economics at George Mason University, and a member of the Mercatus Center Financial Markets Working Group. Like Mankiw, he points out that the federal government can still service debt even without a hike in the debt ceiling. He also suggests that a freeze of further borrowing might be what it takes to force the federal government to reduce spending.Also seeing a silver lining in the debt-ceiling cloud is Lawrence H. White, a former visiting scholar at the Federal Reserve Bank of Atlanta,
"Reaching the debt ceiling does not imply default on 'full faith and credit' Treasury debt, because the Treasury has more than enough income to make the interest payments due on the debt. But it does imply that other spending will have to be cut in order to pay the interest due on existing debt without borrowing more. I'm in favor of reducing that other spending, so that result doesn't strike me as a catastrophe."