Transcript: Donald Marron’s testimony on the economic impact of debt ceiling brinksmanship before the Joint Economic Committee – Sept. 18, 2013

Donald Marron, Institute Fellow & Director of Economic Policy Initiatives, The Urban Institute, on the economic impact of debt ceiling brinksmanship before the Joint Economic Committee on Sept. 18, 2013. SOURCE: Joint Economic Committee

Partial transcript of testimony of Donald Marron, Institute Fellow & Director of Economic Policy Initiatives, The Urban Institute, on the economic impact of debt ceiling brinksmanship before the Joint Economic Committee on Sept. 18, 2013:

…I’d like to make six basic points today.

First, Congress has to increase the debt limit. Failure to do so will result in severe economic harm.

Treasury would have to delay billions then tens of billions then hundreds of billions of dollars of payments. Through no fault of their own, federal employees, contractors, program beneficiaries, and state and local governments would find themselves suddenly short of expected cash, creating a ripple effect through the economy.

A prolonged delay will be a powerful anti-stimulus that could easily push our economy back into recession as Mark said.

In addition, there’s a risk that we might default on the federal debt. Now, I should emphasize that I expect the Treasury will do everything in its power to make debt service payments on time if it’s pushed to the limit. But there’s a risk that it won’t succeed.

Indeed, we have precedent for this. In 1979, Treasury accidentally defaulted on a small sliver of debt in the wake of a debt limit showdown. That default was narrow in scope but financial markets reacted badly and interest rates spiked.

If a debt limit impasse force Treasury to default today, the results would be much more severe. Interest rates would spike, credit would tighten, financial institutions would scramble for cash, and savers might desert money market funds.

Anyone who remembers the financial crisis should shudder at the prospect of re-living such disruptions.

Second, Treasury doesn’t have any super, extraordinary measures hidden away in a desk drawer if the debt limit isn’t raised in time.

Pundits have suggested that Treasury might sidestep the debt limit by invoking the 14th Amendment, minting extremely large platinum coins, or selling gold or other federal assets. But administration officials have said that none of those strategies would actually work.

Third, debt limit brinksmanship is costly, even if Congress raises the limit at the last minute.

As we saw in 2011, brinksmanship increases interest rates and federal borrowing costs. The Bipartisan Policy Center building on the work by the Government Accountability Office estimates that that crisis will cost taxpayers almost $19 billion in extra interest costs.

Brinksmanship also increases uncertainty, reduces confidence, and undermines the economy.

In 2011, for example, consumer confidence and the stock market both plummeted while measures of financial risks skyrocketed.

Finally, brinksmanship weakens America’s global image. The United States is the only major nation whose leaders talk openly about self-inflicted default. At the risk of sounding like Vladimir Putin, such exceptionalism is not healthy.

Fourth, as this committee knows well, our economy remains fragile. Now is not the time to hit it with unnecessary shocks.

Fifth, as the CBO confirmed yesterday, the long-run budget outlook remains challenging.

Deficits have fallen sharply in the past few years but current budget policies would still create an unsustainable trajectory of debt in coming decades.

Congress should address that problem, but the near-term fiscal priorities are funding the government and increasing the debt limit.

Finally, Congress should re-think the debt limit and indeed the entire budget process.

Borrowing decisions cannot be made in a vacuum separate from other fiscal choices. America borrows today because this and previous Congresses chose to spend more than we take in, sometimes with good reasons, sometimes not.

If Congress is concerned about debt, it needs to act when it makes those spending and revenue decisions, not months or years later when financial obligations are already in place.

When the dust settles on our immediate challenges, Congress should re-examine the entire budget process, seeking ways to make it more effective and less susceptible to dangerous after-the-fact brinksmanship.

Now, I’ve completely failed at the challenge of saying something upbeat. So in conclusion, let me say that I think actually all of these challenges are solvable with good spirit of working together…

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One Comment on “Transcript: Donald Marron’s testimony on the economic impact of debt ceiling brinksmanship before the Joint Economic Committee – Sept. 18, 2013

  1. Pingback: Spotlight: Debt Limit 2013 | What The Folly?!

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