With the Deficit Super Committee’s deadline to engineer $1.5 trillion in deficit reduction over the next decade, approaching this week, we thought it fitting to share some related faculty research on the impacts of raising the U.S. Debt Limit, featured in the Fall 2011 edition of B. Magazine.
There are three primary short-term impacts of the increase in the U.S. debt ceiling. First, government continued without interruption to the U.S. economy, which could not afford a government shutdown. Second, in the present economy, the alternatives (reduce spending, increase taxes) would have had a greater negative economic impact. Reducing government spending or increasing taxes under duress in the short term would be very poor public policy and would have had a dramatic negative economic impact. Third, there was an unintended and unexpected impact: with the Standard and Poorís downgrade, which was due to the political circus in Washington, U.S. government bonds should have been perceived by the market as having greater risk, resulting in higher priced bonds. Because of a worldwide investor “flight to quality,” the opposite occurred, and bonds rallied. More risk, lower returns? Go figure. Some believe there would have been a greater downgrade if the debt level was not increased.
The long term impact is obvious: we have to pay for this some way in the future. There are three options: (more…)