Log in

No account? Create an account

Who suffers at the debt ceiling?

There's been a lot of debate over how dreadful it would be to hit the debt ceiling. Some R's say "it won't be that bad," which ironically would weaken their bargaining position that the D's have to give them what they want or terrible things will happen. There's talk about the government's ability (or not) to "prioritize" which of its obligations will actually get paid on time: do we protect bond holders in order to keep interest rates down (at the political risk of being seen again as bailing out rich investors while screwing the little guy)? Do we protect Social Security recipients? Medicare? Military employees? Left-handed fnord-twerglers?

I was recently reminded of this 2011 post, pointing out that Social Security (and, I think, Medicare) aren't immediately affected by the debt ceiling because their assets are held in special bonds. When they need to make $1bn in payments, they redeem $1bn worth of bonds for cash, thus reducing the debt by $1bn below the ceiling so Treasury can issue another $1bn in bonds to restore its cash balance. And this can go on for years until the bonds in the Social Security trust fund run out. The only thing Social Security can't do at the ceiling is use incoming SS tax revenues to buy bonds as usual; they'll need to store that stuff as cash.

So just as Republicans' government shutdown over Obamacare ironically had no effect on Obamacare, their debt-ceiling game over entitlement spending could ironically have no immediate effect on the two biggest entitlement programs.

Who will suffer when we hit the ceiling? I think it comes down to food stamps, unemployment, government employees (those left after the sequester and the shutdown), and private companies with government contracts.

Of course, in a sense it doesn't matter who suffers first. Any way you pull over a billion dollars a day abruptly out of the economy will mean People Not Buying Stuff, which shortly leads to People Losing Jobs, which means they too will Not Buy Stuff (especially since they won't get food stamps or unemployment insurance), which means more People Losing Jobs. And as Krugman points out, that means fewer people paying taxes, which increases the budget shortfall, which means more spending cuts immediately, which means more people Not Buying Stuff, etc. Under these unusual circumstances, Krugman estimates a multiplier of 2.5, so since the initial cuts would be about 4% of GDP, that means a slowdown of 10% of GDP, which means a 5% increase in unemployment.


How fortunate that we have no official way of keeping track of the unemployment.

But the real issue is: we don't know. We are in very uncharted territory. And much damage to the long-term U.S. global position is already being done.

Much of the potential damage is psychological. What when trust is lost in U.S. Treasuries as the ultimate safe investment. Morons who talk about 'prioritization' do not understand how people in the money world react to prioritization. If you need a safeguard, then you are *automatically* less reliable. That the push for prioritization comes from the people who want to avoid raising the debt limit makes folks very nervous, because it means they are more likely to refuse to raise the limit.

It is always possible that financial people will collectively refuse to believe it is happening, just as they refused to change their behavior when the S&P downgraded U.S. debt. But if the money isn't there, it isn't there.
Yes: even the direct economic effects of the cutbacks are tricky to estimate, while the psychological and "confidence" effects are utterly unknown.