The Relative Costs of a Shutdown Versus a Default*

September 24th, 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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6 comments in reply to "The Relative Costs of a Shutdown Versus a Default*"

  1. Tom in MN says:

    If many people don’t know Medicare is a government program, then how many know that defaulting on the debt means not paying off that Treasury bond they bought for their grandchild? I think most people have some idea of what a shutdown means and the jokes you see on TV are all along the lines of good riddance, but do they have any idea what a default means — perhaps stiffing the Chinese?


  2. D. C. Sessions says:

    You do realize that to the “smaller is always better where government is concerned” crowd, increasing interest rates on the debt is all around a Good Thing, because it makes the national debt scarier?

    That, and who gets to collect the presumptive risk premium? It certainly won’t be anyone on food stamps.


  3. urban legend says:

    We don’t need no stinking platinum coin, and we don’t even need a 14th amendment clause that Alexander Hamilton would have criticized as redundant to implicit powers — or at best a bit of in terrorem language to warn off troublemaking politicians from the South. It’s time for the administration to stop playing for iffy political advantage from threats of a shutdown by ending this charade once and forever: by asserting it is within the executive power set forth in Article II to pay all bills on goods and services already obtained and to keep the government going in accordance with laws in place. Paying the bills is clearly an executive function, and for that matter, so is determining how they will be paid and the extent to which they can be paid from flowing revenue and borrowing. To the extent the debt ceiling is interpreted to interfere with these executive powers, the law is unconstitutional.

    The markets will thank him, the people will thank him, future Presidents will thank him, for showing everyone this emperor has no clothes. Republicans and the Washington Post will be left spluttering about how the President has done wrong by doing the right thing for the country.


    • urban legend says:

      Further thoughts: how can a backdoor repeal by default — failure or refusal to pass legislation — of all the laws passed ordering the President to execute — all the other laws, every one of them — be Constitutional? How can a backdoor default on obligations already incurred possibly be Constitutional?

      In common law terms, even without a written constitution, such an interpretation of a state statute or local ordinance, having the effect of denying payment for goods or services already received, would, without an eyelash being batted, be invalidated as “against public policy.” The same would probably be said about a legislative non-action causing breach of contract for goods or services not yet delivered, and for that matter, breach of reasonable expectations of citizens who may have re-ordered their lives on the basis of legislation.

      In Constitutional terms, created by men imbued with the common law, the debt ceiling law so interpreted violates the separation of powers. It cannot be justified as a legitimate check on the executive branch, either, since it is not aimed at abuse but rather at the executive performing duties already created by Congress.

      Did the founders who developed a Constitution for the ages believe a Congress politically opposed to the President should have the formalized ability, simply by doing nothing, to hold the country hostage by preventing the President from doing his job — i.e., other than by repealing the laws he or she is under a duty to execute? How can a law that has been routinely passed for 100 years virtually automatically because that is the only result that can ever make sense for the continuation of the country — and serving no discernible purpose whatsoever other than as a foil for grandstanding by Representatives and Senators of the opposite party from the President’s — be respected as a serious piece of legislation?

      The automatic nature of past debt ceiling increases to meet actual needs has made confronting its unconstitutionality unnecessary. Perhaps the tea party people have unintentionally done the country a favor. It’s time for consciousness to be raised.


      • Jared Bernstein says:

        I too have wondered why POTUS couldn’t say: to allow default would violate my oath to protect and enforce the constitution (or however you say it) so go forth and borrow, Treas. Of course, I’d still expect a big fight and a big risk premium on rates so economic damage would be done. But I don’t think the WH lawyers see it this way anyway.


  4. purple says:

    Well, the last flirtation with all this produced the sequester cuts, and ‘the world hasn’t ended’ and the hardline Right sees it as a huge win.

    They will never stop.


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