[credit provider=”CATO Institute”]
Another day, another economist advocating that the US default on its debt.The latest is Jagadeesh Gokhale of the Cato Institute, who has a big piece advocating an immediate freeze of the debt ceiling.
It’s so convoluted, we hardly know where to begin, but let’s just address a few sloppy parts.
Many knowledgeable federal officials, like Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, as well as left-leaning lawmakers, insist that the answer lies in lifting the debt limit. They warn Congress about the dire consequences if it fails to do so. President Barack Obama has chimed in — though he voted against raising it when he was a senator.
They all assert that failing to increase the debt limit could sharply undermine the economic recovery.
But that view could be wrong. A temporarily frozen debt limit could instead signal U.S. lawmakers’ resolve to get our fiscal house in order. It may even reassure investors about long-term U.S. economic prospects.
This line about “reassuring investors” is nonsense. Investors are already reassured, which is why interest rates have only fallen amidst all the squawking from the political class about this “crisis.”
He then gets to the discussion of a default.
…the current prospect of a technical default, from failing to increase the debt limit, would not be due to any real national insolvency. Given today’s low interest rates, the federal government could easily raise the resources needed to meet today’s contractual government obligations.
This doesn’t make any sense. How do “low interest rates” matter to the government in a situation where it’s legally unable to borrow?
Anyway, here’s the biggest whopper of them all:
How might investors really view this ersatz U.S. debt crisis? If some lawmakers’ refusal to vote for increasing the debt limit without also passing prudential fiscal policies resulted in a technical U.S. default, it would demonstrate their significant political strength.
Might that not actually induce investors to buy long-term U.S. debt — reducing long-term interest rates and improving the U.S. investment climate?
Oy, where to begin? First of all, the notion that a “technical default” would induce investors to buy long-term US debt is prima facie absurd.
Second, as we stated above, longterm US interest rates are at historical lows, so the idea of needing to reduce them further to improve the US investment climate is rubbish. And finally, why do we want people to buy more long-term US debt? Ideally we want people going out and actually investing in things with their money: companies, employees, lending to corporations, etc. Aren’t debt hawks supposed to hate the idea of government borrowing crowding out private spending.
Basically, Gokhale is just throwing a bunch of stuff at the wall, failing to produce an argument, and hoping you don’t really get it. Sorry.