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

WASHINGTON — Republican lawmakers have played down the significance of hitting the debt limit, saying the U.S. can avoid default by putting aside funds to pay bond holders. Economists affiliated with the party aren’t so sanguine.

Glenn Hubbard, Douglas Holtz-Eakin and Donald Marron, all of whom served in President George W. Bush’s administration, voiced concern that such a strategy could end up hurting the economy even if default were averted.

“I would still worry about it,” said Hubbard, who was chairman of Bush’s Council of Economic Advisers from 2001 to 2003. “It signals that we have an inability as a nation to get our budget process in order.” That could “do damage to U.S. growth potential and credibility,” he added.

The U.S. government is in the 11th day of a partial shutdown and less than a week away from Oct. 17, the day the U.S. will run out of room to borrow more unless Congress acts to raise the government’s debt ceiling, according to President Barack Obama’s Treasury Department.

Republican leaders in the House of Representatives were in talks with Obama Thursday over their proposal for a short-term increase in the $16.7 trillion debt ceiling.

U.S. stocks jumped the most since January and Treasury bill rates tumbled Thursday on the signs of progress toward an agreement. The Standard & Poor’s 500 Index soared 2.2 percent, the biggest advance since Jan. 2. Rates on Treasury bills scheduled to mature on Oct. 17 dropped for the first time in six days.

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.

“The country will not default if we don’t raise the debt ceiling,” Rep. Ted Yoho, a Florida Republican, said in an interview on Tuesday. “We’ve got enough revenue coming in to pay our bills.”

The U.S. takes in about $250 billion a month in tax revenue while paying out $20 billion in interest, said Sen. Rand Paul.

“If you don’t raise your debt ceiling, all you’re saying is we’re going to balance our budget,” the Kentucky Republican told reporters in Washington Tuesday. “I think if you propose it that way, the bulk of the American public would say, ‘My goodness that sounds like a pretty reasonable idea.’”

It doesn’t sound that way to Holtz-Eakin, who worked with Hubbard at the CEA and is a former director of the Congressional Budget Office.

“Breaching the debt limit is a very bad idea,” said Holtz-Eakin, now president of American Action Forum, a self- described center-right policy institute in Washington. “While I don’t know exactly what would happen, I don’t want to find out.”

He said Obama needs to get together with Republicans and negotiate a deal to raise the debt limit. “If he doesn’t, he’s going to be responsible for the meltdown,” the economist said.

In the event the borrowing limit isn’t increased, it’s not clear that Treasury has the capability of ensuring that debt payments are made, Holtz-Eakin said. While the government does take in more money than it pays out in interest each year, that’s not true for each and every day.

He said it’s ironic that conservatives are arguing the Treasury can prioritize its payments. “These are the guys who don’t think the government can do anything right,” Holtz-Eakin said. “And they’re going to count on Treasury bureaucrats to manage this phenomenal sleight of hand. I don’t believe it.”

Even if the government were able to shuffle its payments so as to avoid default, it would still have to cut back on other outlays because it couldn’t borrow any additional funds. And that would hurt the economy, said Marron, a CEA member in 2008 and 2009.

(Continued on page 2)

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