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Home Publications Blogs Beat the Press Many Economists Say the Debt Ceiling Battle Had No Notable Impact on the U.S. Economy

Many Economists Say the Debt Ceiling Battle Had No Notable Impact on the U.S. Economy

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Tuesday, 27 August 2013 04:32

That was the missing sentence in a Washington Post article on the battle over the debt ceiling. The article referred to the 2011 battle that brought the country within days of hitting the legal limit on borrowing. It told readers:

"Many economists say that episode led to uncertainty that harmed the economy."

It's hard to find evidence for this assertion in the data. The economy grew at a 2.3 percent annual rate in the second and third quarters of 2011, the period most immediately affected by the crisis. This is slightly higher than its 1.9 percent rate over the last three years. Non-residential investment, the category of spending that might be most responsive to such fears, rose at a 13.3 percent annual rate over these two quarters.

There also was no evidence of a lasting effect on the credibility of the government as a debtor. The interest rate on Treasury bonds plummeted following the crisis (they should have risen if people were fearful), although this was primarily due to the euro-zone crisis. When investors became fearful about the future of the euro they turned to Treasury bonds as a safe alternative.

Comments (5)Add Comment
Interest rates
written by Chris G, August 27, 2013 7:46
> The interest rate on Treasury bonds plummeted following the crisis...

I believe the key word in that sentence is "following". Would rates have fallen if the debt ceiling battle had dragged on for months? We don't know what conditions are likely to cause investors to demand a higher risk premium and that's not an experiment I want conducted. "It didn't happen last time so it won't happen this time." is bad logic which potentially very bad consequences. If it looks like the debate is likely to drag on then I say mint the multi-trillion dollar coin and move on. Risk there as well I'm sure but I think I'd rather face those risks than those posed by an extended debt ceiling standoff.
Get 'Er Done ... Or Not
written by Last Mover, August 27, 2013 7:52

It's a well known fact in mainstream media that the uncertainty created by yellow traffic lights when changing to green or red has caused many injuries and fatalities.

Drivers don't know when the light is going to be green or red due to the pause of uncertainty created by the yellow light. Some step on the accelerator and some slam on the brakes which causes many accidents.

Eliminate yellow traffic lights now. They do to driving what the debt ceiling does to the economy. Drivers need the certainty of a green or red light to known when to proceed or stop. Either shut down the government or not. No more playing games with the yellow light.
the debt, and the DEBT
written by pete, August 27, 2013 9:51
as James Hamilton points out, for economic purposes the actual "accounts payable" versus "accounts receivable" should be the correct measure of the financial well being of a country. The "debt" is mismeasures as is, highly overstated, since the Fed and other internal agencies have absorbed some. The elephant is the projected spending on SS and medicare versus projected taxes. This is the $70T in present value. A huge "leverage". THis iis not affected by arguing about the "debt" so therefore interest rates should not be affected by minor quibbling over a small number.
the article claimed that the debt crisis last time slowed the economy
written by Dean, August 27, 2013 10:18
Chris,

i was referring to the claim in the article about what happened as a result of the last debt ceiling battle, not making a forecast about a future one.
S&P downgrade
written by Peter K., August 27, 2013 10:33
I believe it's been reported that when S&P downgraded the country's credit, interest costs went up and it cost the country.

Not that I agree with the downgrade. In fact I'm glad that the Feds downgraded S&P in return and are suing them.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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