Anti-Debt Ceiling Sorts, Innumerate, or Pining for Great Depression 2.0?

From StreetLight:

[In the absence of debt ceiling increase] federal spending would instantly have to be reduced by about $100bn per month. By the end of 2011 federal spending would be about $500 bn lower for the year than it would have been otherwise.

I’ve made this point before, but for numbers that large, anyone who wants to pretend to have some understanding about the economy has to think about macroeconomic effects. In particular, spending cuts of that size would reduce the US’s 2011 GDP by multiple percentage points. The Q3 and Q4 GDP growth rates wold probably be on the order of between -5% and -10%. Recall that during the recession of 2008-09, GDP only fell by about 4% in total. The unemployment rate would be likely to rise by several percentage points from its current level of 9.2%, to perhaps 15% or more of the US population. Recall that at its worst, the unemployment rate during the Great Recession only reached 10%.

So when you read someone blithely writing that the federal government will not default in the absence of a debt ceiling deal, and instead will merely have to trim excess spending, remember that what they’re really advocating is a new and deliberately caused Great Depression.

via The Street Light: Great Depressions.


  1. Nostradamus says:

    All that doom-mongering is predicated on the Fed not QEasing to a sufficient extent to offset any drop in demand from a cut to fiscal spending. And they surely would. The situation would become not unlike Britain's during the Great Depression, where the fiscal budget was broadly balanced, and monetary policy was used to exit the slump.

  2. A $100B per month cut would take federal spending back to around the 2007 level. TARP, the bailouts and the stimuli would be rendered temporary.

    A couple of years ago there was a lot of blithe writing about the beneficial effects of the stimulus. A lot of economists pretending “to have some understanding about the economy”.

  3. Two things:

    1. I call a strawman here. The argument being made is not that no debt ceiling increase be made ever – but that the government could manage for a short while if necessary while a proper solution was being negotiated. The writer pretends otherwise in order to create fear

    2. The writer ends up proving the case – our government spending levels are dependent on borrowing. When you look at the rate of increase of government spending since 2006 vs ANY historical growth rate in government revenues, it is clear (a) we have a spending problem and (b) we would have much less of a deficit/debt problem if we took care of our spending problem.

  4. john haskell says:

    There are a lot more unemployed people than there were in 2006. Those bums need to be kicked out on to the street and starve to death if necessary. No additional spending should be allocated to them.

  5. Like the Fed's job is save immature politicians from themselves. It may consider the only real solution is to see them hoisted on their own petards in favor of better ones. The ludicrous suggest a few days won't matter, but default makes agreement less likely because there is no longer anything to avoid. We have a revenue problem due to the depression, spending is only up due to stabilizers in the face of it. The question is whether we have a recovery solution but we may not.