The Columns

Economic Consequences Huge in Debt Ceiling Standoff, Says W&L Professor

— by on July 14th, 2011

For Washington and Lee University economics professor Linda Hooks, who specializes in the study of money and banking, there is no way to overstate the potential calamity that would befall the U.S. and world economies if Congress and the president do not reach an agreement to raise the debt ceiling.

“From the economics perspective, the consequences are huge and deep. No one is distorting that,” said Hooks. “If the debt ceiling is not increased, the first thing we would see is a crisis in the U.S. Treasury securities market, something like we’re seeing in Greece. It would be the U.S. essentially saying that they don’t know what is going to happen with their debt any more.”

The U.S. Treasuries market, Hooks noted, is one of the largest markets and generally considered one of the most efficient. It is also a very quiet market, safe and secure because the U.S. does not tamper with its debt, as it is threatening to do in this instance.

A Pew Research Center survey, released Thursday, indicated that only 25 percent of the American public was closely following the issue of the debt-ceiling crisis. At the same time, the survey concluded that the issues are not well understood, with only 18 percent of the respondents indicating that they understand this issue very well, while another 37 percent said they understand it fairly well.

Hooks said that President Obama’s recent comments about how Social Security checks may not be available if the agreement isn’t reached might personalize the matter in ways that cause people to pay more attention.

“While it is true that the government could be forced to stop payments on all kinds of things, I see that as almost the smallest of the threats given how bad the financial market fallout could be,” Hooks said. “We just had a huge financial crisis that we’ve said is the sort that happens only once in 100 years. We don’t want two in 10 years.”

Hooks believes the odds are high that a politically feasible solution will be found, precisely because the economic consequences are so dire.

“The politics perspective makes it so hard to analyze,” she said. “There may be a lot of bluffing going on right now, and they’re going to come together and cut a deal at the last minute.

“This isn’t really rocket science. It’s pretty simple and basic. We have to either cut spending or raise revenues. It’s not that nobody knows what to do; it’s just that we don’t like our choices.”