Friday, July 8, 2011

Is Kristi Noem Playing Political Poker With My Money?

One of poker's most basic unwritten rules is never bet more than you can afford to lose. The only exception to that rule is when one is betting with someone else's money. Today's Mitchell Republic reports,
U.S. Rep. Kristi Noem, R-S.D., said any budget deal will need to include “trillions” in budget cuts before she would vote to raise the nation’s debt ceiling.
“In order for me to vote to raise the debt ceiling, we need to cut trillions and change the way we spend money in Washington, D.C. That’s what I’ll be looking for,” Noem told reporters Thursday.
In short, Noem is willing to risk default.  Most of the debate about the effects of a US government default has been theoretical.  Today, however, Kevin Drum points to a case study and its results.
Here's an interesting factlet from Bruce Bartlett. He's addressing the question of whether a "technical" default — i.e., one in which the Treasury Department misses payments to bondholders for just a few days — would affect interest rates. It turns out that we actually have a case study on just this question:
Some may think that a rise in rates would be temporary. But there was a case back in 1979 when a combination of a failure to increase the debt limit in time and a breakdown of Treasury’s machines for printing checks caused a two-week default. A 1989 academic study found that it raised interest rates by six-tenths of a percentage point for years afterward.
Six-tenths of one percent interest rate hikes sound like trouble to me especially given the current job crisis and the rising cost of food and fuel.  Drum does a little math to drive the point home.
My back-of-the-envelope chicken scratching suggests that if this happens again it would cost the government something like $50-100 billion per year. In other words, no matter what debt ceiling deal we reach, upwards of half of it could be wiped out by higher interest costs if it comes too late to prevent default on the debt.
Looking at Drum's numbers, default will cost at least $1 trillion, wiping out one-third to one-half of the cuts Noem claims she wants.  Plus, no one knows the full economic effect of rising interest rates.  If rising rates cause another economic downturn, the deficit will probably increase even with Noem's desired "trillions" in cuts.

(HT @coralhei for Mitchell Republic link)

No comments: