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Friday, October 11, 2013

Paul Krugman: Dealing With Default

Don't listen to the default deniers:

Dealing With Default, by Paul Krugman, Commentary, NY Times: So Republicans may have decided to raise the debt ceiling without conditions attached — the details still aren’t clear. Maybe that’s the end of that particular extortion tactic, but maybe not, because, at best, we’re only looking at a very short-term extension. The threat of hitting the ceiling remains...
So what are the choices if we do hit the ceiling? ... What would a general default look like? ...
First, the U.S. government would ... be ... failing to meet its legal obligations to pay. You may say that things like Social Security checks aren’t the same as interest due on bonds... But ... Social Security benefits have the same inviolable legal status as payments to investors.
Second, prioritizing interest payments would reinforce the terrible precedent we set after the 2008 crisis, when Wall Street was bailed out but distressed workers and homeowners got little or nothing. We would, once again, be signaling that the financial industry gets special treatment because it can threaten to shut down the economy if it doesn’t.
Third, the spending cuts would create great hardship if they go on for any length of time. Think Medicare recipients turned away from hospitals...
Finally, while prioritizing might avoid an immediate financial crisis, it would still have devastating economic effects. We’d be looking at an immediate spending cut roughly comparable to the plunge in housing investment after the bubble burst... That by itself would surely be enough to push us into recession.
And it wouldn’t end there. As the U.S. economy went into recession, tax receipts would fall sharply, and the government, unable to borrow, would be forced into a second round of spending cuts, worsening the economic downturn, reducing receipts even more, and so on. So ... we could ... be looking at a slump worse than the Great Recession.
So are there any other choices? Many legal experts think there is another option: One way or another, the president could simply choose to defy Congress and ignore the debt ceiling.
Wouldn’t this be breaking the law? Maybe, maybe not — opinions differ. But not making good on federal obligations is also breaking the law. And if House Republicans are pushing the president into a situation where he must break the law no matter what he does, why not choose the version that hurts America least? ...
So what will happen if and when we hit the debt ceiling? Let’s hope we don’t find out.

    Posted by on Friday, October 11, 2013 at 12:33 AM in Budget Deficit, Economics, Politics | Permalink  Comments (67)



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