October 12, 2013

Republican economists repudiate default doubters

Some Republican lawmakers have argued that the U.S. can continue to meet interest payments on its debt, even if the government is unable to borrow more money from investors.

By Rich Miller
The Associated Press

(Continued from page 1)

“If the government has to suddenly move to a balanced budget for an extended period, the U.S. economy would likely plunge into recession,” said Marron, who is now director of economic policy initiatives at the Urban Institute in Washington.

The nonpartisan CBO has estimated that the deficit was $642 billion, or 3.9 percent of gross domestic product, for the year that ended Sept. 30. That’s down from 9.8 percent in 2009, the year Obama took office.

Almost two-thirds of Americans say a failure to raise the debt cap would be a real and serious problem, according to a NBC News/Wall Street Journal poll. The concern is shared across party lines: 72 percent of Democrats think that way while 57 percent of Republicans and independents say the same. The poll of 800 adults was conducted on Oct. 7-9 and has a margin of error for this reading of plus or minus 4.4 percentage points.

Greg Mankiw, who succeeded Hubbard as chairman of the Council of Economic Advisers in 2003 and stayed until 2005, agreed that prioritizing payments does entail some peril. “There is recession risk,” he said in an email.

That danger, though, would be far less than that posed by a potential default. “If people really thought we were going to default on bondholders, that would be terrible,” said Mankiw, who is now chairman of the economics department at Harvard University in Cambridge, Mass.

Treasury Secretary Jack Lew told the Senate Finance Committee on Thursday that a strategy of making debt payments while failing to meet other obligations would be “default by another name.” Mankiw took issue with that type of argument. “It’s not a default on the debt,” he told Bloomberg Television on Oct. 9. “What the debt holders care about is how the United States treats its debt.”

Holtz-Eakin disagreed. “If you managed to prioritize, you would still send a signal to financial markets that you’re not worthy of additional loans, that you’re a risky borrower and your interest rates would go up,” he said. “That’s bad news for the economy.”

Such skepticism about prioritization doesn’t mean the conservative economists agree with Obama that Congress should just raise the debt ceiling. While Republicans were wrong to try to tie an increase to a delay of Obama’s health-care overhaul, they are justified in seeking changes in the budget in return, Hubbard said.

“I regret that both sides have taken positions that make it very difficult now to get to where we need to be,” said Hubbard, who is now dean of Columbia University’s Graduate School of Business in New York.

He said it was “irresponsible” for the president to refuse to negotiate over an increase in the borrowing cap.

Holtz-Eakin said much the same. “The idea that he’s not going to negotiate is ludicrous,” the American Action Forum president said. “He is going to negotiate and I would encourage him to start sooner rather than later.”

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