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NPR Says Rivers Will Flow Upstream if the Government Misses a Debt Payment

Wednesday, 16 October 2013 04:24

The media seem to be on a crusade to scare readers into thinking that hitting the debt ceiling will be the end of the world. One item that has been useful in this process is the story that a technical default (a missed interest payment) in the spring of 1979 led to lasting rise in interest rates.

This story is apparently derived from an obscure 1989 article by Terry Zivney that claims this default led to a lasting 60 basis point increase in Treasury bill rates. NPR highlighted this study in the last debt crisis and it is apparently enjoying a resurgence of popularity in the current crisis.

There is nothing necessarily wrong with a study being obscure. That doesn't mean it is wrong. After all, my warnings about the housing bubble from 2002-2007 were pretty damn obscure. However the fact that the study is obscure means that the economics profession does not accept its conclusion.

Interest rates are one of the most heavily studied topics in economics. None of the major analyses of trends in interest rates over the last four decades has the debt default in 1979 as a major explanatory variable. Thousands of economists have looked at the movement in interest rates over this period and none (other than Zivney) thought there was an unusual jump in interest rates in the spring of 1979 that need to be explained.

Here's what the data look like:


See the jump in late April and early May when the default took place? Yeah, I don't either. Of course there is the possibility that interest rates otherwise would have fallen, but the default prevented this drop from occurring, but that seems like a big lift.

The moral of this story is that a debt default would be bad news for reasons that I and others have written about, but there is also a lot of silliness going around on the topic. We have a disastrous economy right now that is almost 9 million jobs below its trend level simply because we don't have enough demand (e.g. government spending). That is really awful news. A debt default makes things worse, but I'm afraid that I can't join the panic.

Comments (4)Add Comment
Long Term High Unemployment and Climate Change is Old News to American Frogs
written by Last Mover, October 16, 2013 6:35

Not to worry. Rivers will flow upstream as climate change is allowed to carry out its destiny onto a world too busy getting jerked around with short term crises created by MSM, to which NPR has increasingly veered with bot-like baritone voices of male commenters who talk fast with resonant airhead clarity of childlike concern.

Like climate change, long term high unemployment cannot get past the decline of a shrinking American attention span conditioned by MSM to believe that debt and "entitlements" are worse. Somehow they keep popping up over and over per the latest shutdown/default circus, as the real dangers march on to impervious irreversible destruction.

After all, old news is not news ... except for debt and "entitlements" of course. Let the American Frogs boil on.
This time it might be different...
written by JayR, October 16, 2013 8:16
One potentially big and unknown variable is all of the complex financial contracts floating around. Some of these contracts have clauses in them concerning defaults. You could see companies suddenly owing large chunks of money to third parties. Warren Buffet refereed to these contracts as financial weapons of mass destruction.
written by Jay, October 16, 2013 11:30
I am confused. Why shouldn't we be concerned about the default and the failure to pass a budget? We keep hearing about the importance of government spending. How is this different from deliberative austerity? It is reported the gov has 30 billion and an unspecified about of receipts to fund the government. Who is going to collect and handle these receipts when hundreds of thousands of gov employees are furloughed or working without pay? We saw interest rates go up with the percieved Fed waffling on QE several months ago. This seems much more significant than that.
How'd NPR or the Washington Post find Zivney?
written by Hugh Sansom, October 16, 2013 12:31
I have never seen much evidence that NPR or Post reporters are particularly knowledgeable about economics or finance, so how did they find the Zivney paper? A plausible explanation is that reporters or editors or others with an axe to grind went in search of something that would support a predetermined conclusion.

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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.