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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

May 31, 2011 at 9:36 AM

Debt-ceiling politics, economic Russian roulette with a fully loaded gun

Members of Congress, and specifically House Republicans, are playing a very dangerous game by hinting they may not raise the federal government’s debt limit. Today, the first vote on the debt limit is coming up, with the GOP demanding deep cuts, including to Medicare, in exchange for raising the ceiling.

If the debt limit is not raised by mid-August, the United States will default on its debt. Some politicians have mentioned that this might not be such a big deal. But there’s no serious disagreement about it among economists. If it happens for even a few days, the consequences will be disastrous. “The full faith and credit” of the federal government will be destroyed. The extent of the world market reaction is impossible to gauge, but it won’t be pretty. A collapse in the debt market, a double-dip recession, a sharp rise in interest rates are all likely. This is not Greece we’re talking about, but the world’s largest economy and the world’s largest debtor.

As this chart shows, the largest components of the federal debt are the Bush/Obama tax cuts, the Great Recession and two simultaneous wars.

Republicans refuse to even discuss increasing taxes and the wars aren’t anywhere near an end. Meanwhile, a very slow increase of gross domestic product in the first quarter — likely to repeat itself in the second — shows the economy is not growing its way out of the problem. As UC Berkeley economist Brad DeLong, among others, has pointed out, deep government spending cuts right now will make another recession more, not less, likely.

Prepare for an interesting summer.

Today’s Econ Haiku:

Time to redefine

The real American dream

It’s not a mortgage

Comments | More in Federal debt/deficit, Politics and the economy

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