Treasury Reports on 2011 Debt-Ceiling Crisis

The US Treasury just released a report that explains the economic effects that the 2011 debt-ceiling crisis had on the US economy. Given the Treasury says the government will bump up against that ceiling onOctober 17 and run out of cash a few days thereafter, the report has special significance. What is important to recall is that the crisis was resolved, America did not default on any of its financial obligations, and the damage was still significant. It is also important to note that the economic illiterates in Congress are traveling the same path now.
The report states that, in 2011, “consumer and business confidence fell sharply, and financial markets went through stress and job growth slowed. In 2011, U.S. debt was downgraded, the stock market fell, measures of volatility jumped, and credit risk spreads widened noticeably.” Since the US government is currently shut down, the Treasury experts say that this time around, the effects of a debt-ceiling dispute would be even worse due to the synergy.

The key findings of the report make for grim reading. From June to August 2011, business confidence fell by roughly 3%. Consumers were less phlegmatic; consumer confidence dropped by 22%. Volatility on the S&P 500 increased during this period, but the overall trend was down. The index was off 17% by the time the matter was resolved. Translated into practical terms, $2.4 trillion of household wealth was destroyed; $800 billion of that was retirement money. Interest rates also rose, 50 basis points on corporate loans and 70 bp on mortgages.

Of course, there were other factors in the mix that may have had an influence on the 2011 episode. For example, the euro crisis was still undermining the confidence in European economies. So, one cannot put the entire blame for the poor economic numbers on the debt-ceiling argument in the US. Nevertheless, a qualitative review of newspaper headlines demonstrates that the debt-ceiling at the time was deemed to be the major cause of the decline.

The Treasury report also is bold enough to apply these observations to the current situation. The report notes that a week-long shutdown of the government will cost GDP growth a quarter of a percentage point. Longer than that, obviously, could push things toward recession. “A precise estimate of the effects is impossible, and the current situation is different than that of late 2011, yet economic theory and empirical evidence is clear about the direction of the effect: a large, adverse, and persistent financial shock like the one that began in late 2011 would result in a slower economy with less hiring and a higher unemployment rate than would otherwise be the case.”

Then, the economists consider an actual default. They conclude it would rival or surpass the disaster of 2008, making what lies ahead the worst thing since the Great Depression. “Considering the experience of countries around that world that have defaulted on their debt, not only might the economic consequences of default be profound, those consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation.”

Those are the stakes, and Congress needs to take a step back and ask whether the good of the country or the good of the party matters more.