Sep 24, 2013 at 1:33 pm
*And, like my CBPP colleagues, I consider “prioritization” the same as default.
Annie Lowrey provides a clear anatomy of the two different types of fiscal dysfunction Congress is toying around with right now: gov’t shutdown vs. default on the public debt. It’s the fiscal version of a medical journal article on the symptoms of various types of self-inflicted wounds.
I just want to amplify one point. Since we’ve never defaulted, we don’t know how much it will cost, with “cost” here meaning spending that would be avoided if we didn’t screw around with the debt ceiling. But a few sources Lowrey cites suggest that even flirting with default back in 2011 cost between $1-2 billion due to higher interest rates. You start futzing around with not paying your creditors and surprise!–they insist on adding a risk premium to the interest rate.
We have some limited info on the cost of the last big shutdown–21 days in late 1995, early 96–and those costs were also in the same range: $1-2 bn.
So, just thinking about breaching the debt ceiling costs as much as actually shutting down the government.
If we really default, here’s a rough rule of thumb for you: the debt held by the public right now is $12 trillion. So, a percent higher risk premium adds about $120 billion to annual payments, about 100 times worse than a shutdown.
Now, I don’t know that a default would raise interest rates by a full point (and, of course, I’m just talking about the increased cost of servicing the public debt…many private rates are tied to T-bills, so the cost to the broad economy is much higher). You wanna divide that by half, be my guest. Or double it.
Who knows? All I can tell you is it’s absolutely crazy to go there.
Now, I fear some readers may conclude the shutting down the government is the low-cost option here. Not my point…not at all. Yes, banging your head against the wall is less bad for you than chopping off your hand. But I’d advise neither.
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