I find it strange that self-avowed patriotic Americans are willing to shut down the government, breach the debt ceiling, and throw the world economy into tumult, when those same self-avowed patriots have been asserting that policy uncertainty has slowed down the economy. Let’s stipulate for the sake of argument policy uncertainty has been an important determinant of slow growth [0]; when do we see the spikes in policy uncertainty?
Figure 1: CBOE VIX (blue, left axis), Policy uncertainty index (red, right axis). September VIX observation is for 9/19; September Policy Uncertainty observation is for week ending 9/22. NBER defined recession dates shaded gray. Source: FRED, and Baker, Bloom, and Davis via http://www.policyuncertainty.com.
In other words, going to the debt ceiling precipice again will, if we take the conservatives’ assertions at face value, possibly throw the economy into another slowdown or even recession, using their own logic. Of course, internal consistency has never been a particularly prominent characteristic of those arguing for breaching the debt ceiling.
When will Treasury hit the ceiling? The Bipartisan Policy Center estimates it will occur between October 18 to November 5.
Figure from Bipartisan Policy Center.
It’s possible that Treasury could technically default (defaulting on vendor payments, but not on debt related payments). Note, this is default. The Bipartisan Policy Center (BPC) observes that a more plausible option might be to delay payments until sufficient funds come in. They provide an example of how that would work if X date happens to be October 18th.
Figure from Bipartisan Policy Center.
Notice over time how the delays become longer and longer.
Even prioritizing the payments to only cover debt related payments (so technical default) would encounter problems over time. “Treasury must “roll over” well over $370 billion in debt that will mature this year during the Oct 18 – Nov 15 period.” If interest rates rise to account for an elevated risk premium, then a larger amount will be required. There’s also the possibility that the issues would be undersubscribed, forcing use of cash, or debt default (in addition to defaulting on payments to vendors).
Even if the debt ceiling is raised, the resulting uncertainty could raise borrowing costs; GAO estimated elevated costs of $1.3 billion for FY2011 from the 2011 crisis. BPC estimates the ten year cost at $18.9 billion using the same GAO methodology.
Here are some discussions by Jim regarding the 2011 debt ceiling crisis: [1] [2] [3].
Update, 9/24 5:45PM Pacific: From Tankersley/Wonkblog, indications of increasing risk associated with debt ceiling crisis:
Figure from Tankersley, “Markets are starting to worry about the debt ceiling, in one chart,” Wonkblog/WaPo (9/24/2013). Original source: Markit.
Update, 9/25 11AM Pacific: Reader Rick Stryker argues that it’s all elevated tax policy uncertainty since Obama was inaugurated (and implicitly it’s all ACA driven). Well, there has been a lot tax provision uncertainty, and it would have been a lot less had Republicans agreed to the measures forwarded by the President. But, I did think it useful to consider exactly how each of the components of the uncertainty have changed, in percent terms, over the past 18 years. The results are interesting, and shown in Figure 2 below:
Figure 2: Year-on-year changes in log of policy uncertainty components. News component (blue), forecaster disagreement on expenditures (red), forecasters disagreement on inflation (green) and expiration of tax provisions (black). Source: Policy Uncertainty and author’s calculations.
If Treasury has $370 billion in maturing debt which needs to be rolled it would remain $370 billion to roll whether rates are zero or 10 per cent. The future cost of financing that debt is greater but that would not be a problem for at least six months when the first interest payment is due.
So that is a longer term problem but not a worry in the short run.
I call it “Cyclical Insanity.”
During the Clinton years, a lot of Republicans went crazy.
During the Bush 43 years, a lot of Democrats went crazy.
And now during the Obama years, a lot of Republicans have gone crazy again, but I think it’s materially worse now, and a sizable faction of the Republican Party seems to think that Angry White Crazy Males (AWCM’s) represent a winning coalition.
Except policy uncertainty in fall 2011 was associated with an acceleration of the US economy away from its European peers. Since that period, the US economy has outgrown Europe by 2-3 percentage points per year.
So it appears that policy uncertainty actually promoted growth, unless you’re prepared to introduce some other factor. Oil, maybe?
Ronald Wilson Reagan, in debate with Jimmy Carter (as you can see on the History Channel – history.com):
“There will be no negotiation with terrorists”
Dr. Chinn: Isn’t it obvious that causing uncertainty and preventing growth are the goals of those “self-avowed patriotic Americans”?
Menzie wrote:
“I find it strange that self-avowed patriotic Americans are willing to shut down the government, breach the debt ceiling, and throw the world economy into tumult, when those same self-avowed patriots have been asserting that policy uncertainty has slowed down the economy.”
Menzie,
I totally agree. After the Republican House has passed a continuing resolution to fund essential services, it is absolutely absure for the Senate Democrats and President Obama to threaten to shut down the government because they want to spend more money. If the Senate would pass the House bill and then President Obama would sign it there would be no uncertainty. The primary uncertainty has come from week to week, day to day not knowing which laws the Obama administration will choose to enforce and who will receive another prosidential pardon from the impact of laws passed against the wishes of the American people. It is good to see that we agree.
I agree, the Republicans in the House are taking the wrong approach.
I think we should fully fund ObamaCare.
It will fall apart on its own in a few years, anyway.
This issue is deeper than good or bad economics. The government has been infiltrated by two-faced self-interested opportunists who protect their interests and those of their friends, while pretending to be sincerely working on your behalf.
One would be naive to expect anything like wholesome goodness or profound social wisdom from the government. The country is being socially and economically damaged and the mean-spirited are in control. They provoke fights by their very nature. and they plot to win at the expense of the weak.
We need someone like John Commons from the old Wisconsin School to return in an updated version.
I was thinking this post was the silliest thing I’d come across in a while, but while reading it I heard a radio newscaster say that financial markets are down on worries about a government shutdown.
Evidence; the Dow is down 21 points!
Brian,
The Republican rank and file has already tried this:
In 2006 – Result: The Great Recession
In 2008 – Obamacare
In 2012 – The brink of WWIII
I don’t know what more you want. Over 80% of the people say that we should delay Obamacare unitl the spending problems are resolved. The people also say they do not want the Democrats to shut down government over Obamacare.
So if you fully fund Obamacare and things do fall apart, how is that going to help you and your family? Please, don’t fall for the Democrats diversion. Fight for good government!
Brian,
The Republican rank and file has already tried this:
In 2006 – Result: The Great Recession
In 2008 – Obamacare
In 2012 – The brink of WWIII
I don’t know what more you want. Over 80% of the people say that we should delay Obamacare unitl the spending problems are resolved. The people also say they do not want the Democrats to shut down government over Obamacare.
So if you fully fund Obamacare and things do fall apart, how is that going to help you and your family? Please, don’t fall for the Democrats diversion. Fight for good government!
Ricardo:
Your post are clear evidence of how ideology trumps logic and evidence. They are, however, reassuring, because a they reveal the paucity of your argument
Ricardo You’re confused. CBO has shown that Obamacare saves money, so killing it would mean increasing the deficit.
You’re also confused as to what defunding Obamacare actually means. Most of Obamacare is in the non-discretionary pot (e.g., Medicaid) or is funded by new subscribers to the exchanges. As a practical matter there is no line in the budget for Obamacare, so I have no idea what that idiot Sen. Cruz is talking about when he says he wants to defund Obamacare.
Most people actually like each of the major components of Obamacare. They like no lifetime limits. They like being able to keep their kids on their policy until age 26. They like ending pre-existing conditions. They like exchanges with community ratings. They like the idea of making health insurance portable beyond your current job. They like the idea of insurance companies not dropping you as soon as you make a claim. What they don’t like is the name “Obamacare.” I’m sure you’ve heard the story of the conservative white Tea Party geezer in Kentucky who attended one of those information meetings on the exchanges. The geezer was impressed and said it was a lot better than that damn Obamacare. You can’t make this stuff up. I wonder if it was the same clueless geezer that told some Congressman to keep his government hands off of Medicare.
We have already been operating at the ceiling for weeks, Professor Chinn, with inter-department borrowing…
“Most people actually like each of the major components of Obamacare.”
Have you been watching the polls, slubbaits?
When you are giving away the store, you can offer anything…
“As a practical matter there is no line in the budget for Obamacare, so I have no idea what that idiot Sen. Cruz is talking about when he says he wants to defund Obamacare.”
If this is the case, then the senate will agree with the house Republicans and the federal government will stay open…
Hans: Yes, as the BPC document linked to in the post explicitly states, we have been using “extraordinary measures” since May.
Slug wrote:
As a practical matter there is no line in the budget for Obamacare, so I have no idea what that idiot Sen. Cruz is talking about when he says he wants to defund Obamacare.
Slug, if this is correct then what are Harry Reid and his totalitarian Progressive minions squealing about? Why don’t they just pass the CR and stop threatening to shut down government?
I think your bias has gotten ahead of your reasoning – again!
So where is the evidence from financial markets that this matters at all?
Start by delaying social security payments and forget all the other items. Just one day delay and the GOP will be toast forever. This is a golden opportunity to turn Florida blue as the ocean
2slugbaits: CBO has shown that Obamacare saves money, so killing it would mean increasing the deficit.
The CBO is NEVER EVER right. Furthermore, it only showed that it would save money in the first ten years, after which it would increase the deficit.
You don’t have to be a rocket scientist to deduce Obamacare will increase healthcare costs.
If you cap premiums for old people, cap deductibles, force coverage for pre-existing conditions, force coverage to include many luxury items, cover the poor with the govt paying for it, premiums MUST go up. How else do you think this gets paid for?
Anonymous, I also hate those damn old, sick, poor bastards!!
Menzie,
Your chart is very misleading. The picture will be much more clear if you graph the uncertainty series from its start in the 1980s up to the present. Once you do that, you’ll see spikes associated with big events, such as the stock market crash, 9-11, Gulf War, etc. But what will also jump out at you is how generally elevated the index has been over the Obama presidency compared to the past.
When you look into the components of the index, you see that that the news component over the Obama presidency is dominated by uncertainty about health care and the level of taxes and spending. The level of the index is also dominated over the Obama presidency by the components that measure tax code provisions that are scheduled to expire as well as forecast uncertainty about Federal, State, and Local expenditures. In a nutshell, that’s why the uncertainty index is so much higher in general than it was in the past.
The index only partially reflects the policy uncertainty the Administration has imposed with its ill-advised policies. Can any index really capture the true uncertainties produced by Obamacare, financial regulation, and uncontrolled spending? The level of the index over the Obama period is a symptom of the disease. The spike, like a fever, is actually part of the cure.
Over the course of the recession, spending as a percent of GDP climbed from about 19% to about 24%. 24% is unsustainable given the trajectory of current tax revenues. Even so, the President’s 2011 budget proposed that the spending would continue, with spending as a percent of GDP still inching back to 24% in 2021 rather than coming down to something like its historical average of 18-19% of GDP. That’s the crux of the problem–unsustainable reckless spending.
That spike in the index was a partial cure, because conservative resistance led to the President and his party signing on to the Budget Control Act of 2011. While not perfect, it will lead to spending coming down to about 22% of GDP in 10 years. That’s progress but not good enough.
It’s time for more progress, and, as always, the defenders of the spending spree want us to think that conservatives who are saying “no” to the spending are jeopardizing the economy as well as their party, since the public will blame Republicans over a government shutdown. These defenders often point to the shutdown in 1995 as an historical warning.
But the truth is that the shutdown in 1995 worked. Republicans in 1996 kept control of the House, something that had not been accomplished in 50 years. They picked up 2 seats in the Senate. And they got the President to agree to a balanced budget deal in 1997 that helped to bring about a string of balanced budgets.
This time, the conservative Intifada is firing a Cruz missile right into the belly of the spending beast. The payload on that Cruz missile is the defunding of Obamacare, an often misunderstood proposal. The proposal to defund Obamacare would take away any funds for implementing the system and would cancel any entitlements resulting from it. As far as I know, it would not cancel the reductions in Medicare spending implicit in Obamacare. So, no one need fear that defunding Obamacare will increase the deficit. But defunding Obamacare will reduce the level of the uncertainty index as well as eliminate the future massive spending increases that are certainly in the cards if the system survives, providing some much needed stimulus to the economy.
Hans The level of funding for Obamacare that’s in the discretionary budget is not much. Cutting that funding would make Obamcare less efficient and drive up costs for those who already have health insurance, but 90% of Obamacare would be unaffected. Now the debt ceiling is a completely different matter. Not raising the debt ceiling would have a big impact on Obamacare because that would impact both discretionary and non-discretionary spending. It would also crash the global economy, so what it did to Obamacare would be a second order concern.
Anonymous it only showed that it would save money in the first ten years, after which it would increase the deficit.
You must be one of those who badly misread and misunderstood the CBO report. Spending did indeed go up in the second ten year horizon, but that was because the first ten year horizon included many years in which Obamacare would not be enacted. In other words, not surprisingly, spending over a 10 year horizon will be greater than spending over an effective 6 year horizon. What CBO found was that savings in the second 10 year horizon were likely to be greater than they had previously estimated.
If you cap premiums for old people, cap deductibles, force coverage for pre-existing conditions, force coverage to include many luxury items, cover the poor with the govt paying for it, premiums MUST go up. How else do you think this gets paid for?
Well, for starters, Obamacare actually taxes “luxury” health items. That’s the part of Obamacare that many labor unions oppose because labor wants to keep its Cadillac health insurance programs. And just about every health economist I’ve read argues that these Cadillac plans are cost pushers. More people will be paying into health insurance through the exchanges, so the revenue base will increase. Obamacare also cuts Medicare payments for unproven and useless medical procedures. If your private health insurance company wants to waste money on useless procedures, then Obamacare will still allow that to happen. But there is no reason why taxpayers should pay for pure waste. Obamacare also includes funding to help hospitals and medical labs streamline and digitize their records. That’s one reason hospitals agreed to lower costs upfront. Oh wait…monies to digitize medical records is the part of Obamacare that does have a line in discretionary spending and that is what Sen. Cruz wants to cut.
Menzie opened this post questioning the patriotism of those who want to crash the economy and shut down the government out of spite because their side lost. It’s worth noting that the heart and soul of the Tea Party movement is in the Old Confederacy. Need I remind readers that this region of the country has some acquaintance with treason? So I think Menzie’s implied question answers itself.
Ricardo Why don’t they just pass the CR and stop threatening to shut down government?
One reason is that Continuing Resolution 2014 goes beyond the funding of Obamacare. As I noted earlier, talk about “defunding” Obamacare is silly because most of Obamacare is either self-funded through new subscribers to healthcare plans on the exchanges, or funded under non-discretionary accounts. So even though the GOP amendment is attached to an appropriation bill, there is very little appropriating required. The reason the Administration will go to the wall over the language of CR 2014 is that it proscribes all benefits under Obamacare and it contains language to nullify the ACA itself.
Rick Stryker: You will excuse me if I see an elevation of the policy uncertainty index begin at 2008M09, some four months before President Obama takes office, two months before Obama is elected, and long before ACA is passed. If I run a regression of the index on a constant over the entire sample, and use a one-step-ahead recursive residuals test for structural break, the first break identified after 2003M03 (guess what that is associated with)is 2008M09 (using 1% msl).
Rick Stryker Over the course of the recession, spending as a percent of GDP climbed from about 19% to about 24%.
What spending are you talking about? According to the NIPA tables govt spending as a percent of GDP maxed out at 21.4% in 2009. In 2012 it was down to 19.5%. To put this in some perspective, over Obama’s first four years govt spending averaged 20.6% of GDP. Under St. Ronald Reagan’s eight years govt spending averaged 20.8% of GDP. But wait, there’s more. Unlike the 1980s, federal spending has been trending down while state and local govt spending has been trending up. So if you don’t like govt spending, blame all those Republican legislatures and governors. In 2012 federal spending was 8% of GDP while state and local govt spending was 11.5%.
Or perhaps you are referring to federal govt consumption plus transfer payments. But if that’s the case, then why would you expect the sum of those two things to converge to some long-run historical average? News flash: the country is aging, so you should expect transfer payments to represent a larger share of GDP.
As to the uncertainty index. Are you seriously claiming that the GOP did not deliberately create uncertainty about Obamacare, taxes, government shutdowns and default? Do you honestly believe the markets would have been just as jumpy if the Tea Party had not won big in 2010?
As to the “Cruz missile,” his latest antics have proven to my satisfaction that he is indeed a true Texan and not a Canadian.
Menzie,
You don’t really need any fancy econometrics to see the truth. Just breaking out the components of the series will show I’m right.
The elevation in the final months of 2008 reflected the news component jumping dramatically in the fall of 08. However, once the administration came in, the other components, forecast uncertainty about taxes and spending, and expiring tax provisions began to become much more significant. Plus, the news component over the Obama period was dominated by stories about uncertain health care policy, taxes, and spending, while it reflected market conditions in September and October of 08. I’ve listed components of the index below, reflecting Obamacare and tax and spending uncertainty.
Notice how the news component spiked up in September and October of 2008, not surprising given market conditions. But after the election, uncertainty about spending and taxes took over and the news component settled down. Look at how the tax expiration component continues to rise over the Obama presidency. Compared even to 2008, you can see inflation uncertainty is pretty constant but spending and tax uncertainty and tax expiration are uniformly higher than the past.
Year Month News SpendingTax Inflation TaxExpire
2008 1 177 54 111 284
2008 2 108 48 128 284
2008 3 114 48 128 284
2008 4 98 48 128 284
2008 5 89 65 109 284
2008 6 89 65 109 284
2008 7 115 65 109 284
2008 8 81 60 136 284
2008 9 238 60 136 284
2008 10 242 61 136 284
2008 11 163 109 128 284
2008 12 158 109 128 284
2009 1 185 109 128 771
2009 2 203 128 136 771
2009 3 168 128 136 771
2009 4 108 129 136 771
2009 5 126 141 115 771
2009 6 112 141 115 771
2009 7 104 141 115 771
2009 8 111 166 190 771
2009 9 99 166 190 771
2009 10 86 167 190 771
2009 11 100 142 84 771
2009 12 108 142 84 771
2010 1 137 144 84 1310
2010 2 117 104 88 1310
2010 3 125 104 88 1310
2010 4 124 106 88 1310
2010 5 148 103 90 1310
2010 6 130 103 90 1310
2010 7 197 104 90 1310
2010 8 127 118 114 1310
2010 9 187 118 114 1310
2010 10 155 118 114 1310
2010 11 175 89 147 1310
2010 12 152 89 147 1310
2011 1 111 88 147 1324
2011 2 105 111 163 1324
2011 3 154 111 163 1324
2011 4 125 112 163 1324
2011 5 85 123 125 1324
2011 6 139 123 125 1324
2011 7 207 123 125 1324
2011 8 284 134 129 1324
2011 9 214 134 129 1324
2011 10 138 134 129 1324
2011 11 144 143 136 1324
2011 12 183 143 136 1324
Rick Stryker: OK, I will eschew 1st semester econometrics. I will focus on when year-on-year changes in uncertainty rise — see Figure 2. Tell me what you think about news component versus tax component.
Rick Stryker
You have a really bad habit of taking your ideology as fact, stating trends that are not apparent in the data, and saying “this is the way the world works”. Unfortunately, it keeps intelligent people like Prof. Chinn chasing their tales proving to you that your “facts” are bogus. Quit wasting peoples time. A three strike rule should apply to you. After you make Menzie show you three times that your view of the data is flawed, you are out of this blog!
2slugbaits,
Yes, I’m talking about transfer payments too. I’m not saying I expect spending as a percent of GDP to naturally converge to some long term average. I’m saying a responsible policy would be to reduce the rate of growth of government spending so that it converges to some reasonable long term average that’s worked in the past.
Slug,
You are definitely Progressive. You talk out of both sides of your mouth and I don’t think you even realize it. On the right side you say the CR cannot stop Obamacare, then on the left side you say the CR would defund Obamacare. Huh?
Perhaps you would be better understood if you tried straight talk out of the center of your mouth.
Ricardo Try to keep up. The CR contains language that would seriously undercut Obamacare, but that undercutting is not due to defunding. The GOP is being disingenuous as to what the House CR actually says. Selling it as a mere defunding action gives the appearance of trying to stop runaway spending, blah, blah, blah. Talking about defunding gives the CR a veneer of responsibility. The actual language in the CR is something else altogether. The CR tries to reverse the 2012 election by nullifying large chunks of the ACA that don’t even require funding.
Stryker is baffling,
You just assert I’m wrong without providing any evidence and then accuse me making up facts to suit my ideology. Then you say that I should be censored. You are a perfect example of the modern liberal. You are so sure you are right that you don’t need to provide any evidence. And you think it’s fine to shut up people that you disagree with.
Anyone who has followed my comments honestly knows that I never make assertions that I can’t back up.
The first point I made is that peaks in the index have occurred historically for big events such as the Gulf war, etc. but that what is unique is how high the level of the uncertainty index has been over the Obama years. I said you can see that if you graph the whole series.
Indeed, if you look here you will see a graph of the whole series that makes those points.
I also said that if you break out the components of the index, you can see which components are contributing to the high values of the uncertainty index during the Obama years. I even posted some of those components. But if you want to see them for yourself, download the spreadsheet available here and open the second tab.
Although you can see the point if you download the spreadsheet and look at the components, you can also look at the methodology paper for further insight. I claimed that the high uncertainty index during the Obama years also resulted from news about health care uncertainty, regulatory uncertainty, and tax and spending uncertainty. Open the paper and look at table 2 and you will see that point illustrated clearly.
Will you respond with any facts of your own or just continue to suggest that I be censored?
Menzie,
I assume your point in that new chart is that changes in tax expenditure uncertainty is very high around recessions and their aftermath. Therefore, it’s not the administration’s fault.
However, what you are ignoring is that those large percentage changes in the tax expiration component before the Obama administration were from relatively low levels. What’s remarkable about the current situation is how high the levels of the tax expiration component of the index have been and that even with those high levels how the percentage changes are still large.
It’s also worth noting that the tax expiration component is 1/6 of the index. The administration has piled plenty of uncertainty into the other components of the index.
I think the debt ceiling needs to go away, or be changed. It should not be possible to congress to approptiate money without increasing the debt ceiling first. And paying debt should be prioritized, always.
Rick Stryker,
Nothing you just stated is clearly defined in the data. Again you simply make assertions without data to support your outcome, you simply shift your position. You assume your outcome is fact. strike two.
Stryker is baffling,
I posted the links to the evidence backing up my statements. Rather than refute them with evidence and argument of your own, you just continue to assert ex cathedra that I’m wrong and am on “strike two.”
If you could have refuted my statements, you would have. Obviously you can’t and want to censor me. I don’t know how you think you can censor me though.
Uh oh. I just had a chilling thought. You are not with the IRS are you?
Actually, when I look again at the data I realize that there’s nothing there. No evidence of an uptick in policy uncertainty at all. You’re totally right. I should have listened to Menzie. And that tea party? It wasn’t a rally. I was just having tea with friends to celebrate the upcoming wonderful benefits of Obamacare.
Rick Stryker,
I was going to let you foul off a pitch, but that was just strike three! you are out! as i said before, quit wasting people’s time with fallacies and then expecting them to dig up the dirt to explicitely show you are wrong. you fill the blog with sooooo many inaccuracies it is hard to even keep tabs. i for one am not going to clean up all your turds. and menzie certainly shouldn’t waste his time as well. when you start making factually accurate statements, we can comment directly. until then, it is not censureship. it is simply challenging you to state the TRUTH! hence the silence from your side…
Stryker is baffling,
I don’t seem to getting through to you. You apparently don’t want to listen to my point of view or be instructed by it. Let me offer some different instruction then. Maybe this will elicit a “strike 4” from you.
“Censor” and “censure” are different words. To censor is to suppress speech that is considered harmful, objectionable, etc. To censure is to express severe disapproval, often formally.
“Censorship” is a word. “Censureship” is not a word.