by James Hamilton, Econbrowser
Making a political game out of the debt ceiling is playing with fire.
Treasury Secretary Timothy Geithner has been warning of serious repercussions if the debt ceiling is not raised, for example, in this letter written May 13 to Senator Michael Bennett (D-CO):
Others question whether it’s really such a big deal. Here’s former Governor Sarah Palin (R-AK):
The truth is that there is no drop-dead date. This is because the debt ceiling is an inherently mushy concept. There are plenty of accounting gimmicks that the government can use, and is using, to postpone the crisis Geithner sketched in the quote above. Indeed, in his letter to Congress dated April 4, Secretary Geithner described the measures the government is using at the moment. These derive from the fact that much of the debt that the government has accumulated is owed to itself or to other branches of the government, such as State and Local Government Series Treasury securities, the Civil Service Retirement and Disability Fund, Government Securities Investment Fund (G Fund) of the Federal Employees’ Retirement System Thrift Savings Plan, and the Exchange Stabilization Fund. Intragovernmental obligations subject to the debt ceiling are essentially IOU’s from the government to itself, which could in principle be swapped with less formal IOU’s in order to stay within a statutory ceiling. The government can also redirect funds appropriated but not spent or postpone accounts payable and tax refunds.
Keith Hennessey, who served as Director of the National Economic Council under George W. Bush, warned last April that the mushiness of this boundary is precisely what makes the game of brinkmanship very tricky:
I know the pressure to define every problem in terms of a “drop-dead date.” I talk to reporters all the time who always want me to summarize any situation, whether it’s government debt, oil prices, or the Fed’s balance sheet, in terms of when the “tipping point” is really going to be reached. I always try to explain that the world doesn’t work that way. Instead, there are risks that gradually increase as the pressures become more significant. How far is too far? I don’t know. But why would you voluntarily choose to pile up the risks?
If buyers of U.S. Treasuries are already getting nervous and making plans for alternatives, I would have some concerns, about how the dynamics of a Greek default could play out if it were to occur, for example, next week, even though we still have a month to go before the supposed drop-dead date.
Josh Barro summed up this way:
I agree. Republicans have picked the wrong line to draw in the sand.
James D. Hamilton is Professor of Economics at the University of California, San Diego.