Greg Mankiw title's this post "No Risk of Default":
My Harvard colleague Martin Feldstein writes me in an email:The WSJ and FT continue to write about the risk of default, quoting the Treasury, Boehner and others.There really is no need for a default on the debt even if the debt ceiling is not raised later this month. The US government collects enough in taxes each month to finance the interest on the debt, etc. The government may not be able to separate all accounts into "pay" and "no pay" groups but it can certainly identify the interest payments. An inability to borrow would have serious economic consequences if it lasted for any sustained period but it would not have to threaten our credit standing.
What strikes me as odd is that the logic may be sound but our credit standing is determined by bond holders. If they (e.g., China) think that U.S. bonds are a more risky investment because we're scrambling the cover the interest on the debt from tax receipts and avoiding paying government workers (see below) then they'll buy fewer bonds, bond prices will fall and interest rates will rise. Drs. Mankiw and Feldstein might tell China and others that they are silly to back off U.S. bonds but I'm worried they won't necessarily bow down to the wisdom of the Ivy League.
This sort of logic has become the talking point of politicians who don't want to cave into demands to fund the government budget:
Senator Richard Burr, Republican of North Carolina, a reliable friend of business on Capitol Hill and no one’s idea of a bomb thrower, isn’t buying the apocalyptic warnings that a default on United States government debt would lead to a global economic cataclysm.
“We always have enough money to pay our debt service,” said Mr. Burr, who pointed to a stream of tax revenue flowing into the Treasury as he shrugged off fears of a cascading financial crisis. “You’ve had the federal government out of work for close to two weeks; that’s about $24 billion a month. Every month, you have enough saved in salaries alone that you’re covering three-fifths, four-fifths of the total debt service, about $35 billion a month. That’s manageable for some time.”
As President Obama steps up his declarations about the dire consequences of not raising the debt limit, increasing numbers of Congressional Republicans are disputing that forecast, as well as the timing of when the Treasury might run out of money and the implications of a default, further complicating the negotiating situation for both Mr. Obama and Speaker John A. Boehner, who must find a way out of the impasse.
Both men were counting on the prospect of a global economic meltdown to help pull restive Republicans into line. On Wall Street, among business leaders and in a vast majority of university economics departments, the threat of significant instability resulting from a debt default is not in question. But a lot of Republicans simply do not believe it.
Senator say what? “You’ve had the federal government out of work for close to two weeks ...." If Senator Burr said this yesterday, then he was off by about a week. I agree that it seems like two weeks but the calendar says otherwise. The partial government shutdown began its second week yesterday, it won't get close to two weeks until around Friday.
These are the sorts of things that bother me about my Senator.