Tag Archives: Interest rates

I’ve been saying for several years that the best person to manage our way out of the current economic doldrums would be George Balanchine (if only he weren’t dead) – because this will need to be the most carefully choreographed dance of monetary and fiscal policy in all history.  The Federal Reserve will at some point need to raise interest rates that currently are on the floor (“at the zero bound,” in econ speak) and draw down a balance sheet that is orders of magnitude greater than its normal size, to head off inflation – all in a shaky economy nestled in a shaky world economy.  Meanwhile, the fiscal policymakers will have to head off a mounting debt by slashing a far-oversized budget deficit, which is driven by complex structural problems with their own powerful political self-defense mechanisms – all the while avoiding crunching that same vulnerable economy, and somehow acting in harmony with the aforementioned independent Federal Reserve.  It is a situation only an academic economist could love:  It offers plenty of ivy-covered reward for writing theoretical papers which will never be tested in practice, and so have no real-world consequences.

And that is the good news.  A recent more-practical (but still plenty wonkish) paper by two Federal Reserve economists, Christopher J. Erceg and Andrew T. Levin, explains that today’s labor market is not only painful, but also puzzling to policymakers.  It identifies yet another unprecedented challenge that is layered upon all the others to make the path back to Normal, wherever that is (unfortunately not the town that is readily visible on the map of Illinois), even more tortuous.

The Erceg and Levin paper already has gotten plenty of press (for example, see a New York Times reference here), but is worth your attention if you have not seen a close discussion.

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***An abbreviated version of this blog post appeared in The Hill’s Congress Blog on April 4. This version takes a deeper dive than is possible with 750 words.***

The temporary “suspension” of the nation’s debt limit expires on May 19, 2013.  On that date, the limit will become the amount of debt already incurred (see here).  The Treasury is prohibited from “borrowing ahead” to build up a cash balance, which makes the determination of the precise amount of the limit as of that date quite complex.

But the concept is clear enough.  On May 19, the debt limit will be (approximately) what the debt actually is as of that moment.  So the Secretary of the Treasury will need immediately to revert to the use of his “extraordinary measures” – highly technical authorities granted to him by law or custom, which over the last two decades or so have become unfortunately all too ordinary – to keep the debt subject to limit below the statutory ceiling.  As always, the public is not privy to the Treasury’s own internal estimates, and the future is always uncertain; but the best analysis available suggests that the Secretary will have run out of tricks by some time in this coming August.

Therefore, with the temporary tax cut expirations resolved, with appropriations for the federal agencies finally completed for the ongoing fiscal year, and the next fiscal year not beginning until September 30, 2013 (and with that appropriations process sure to be procrastinated down to the wire), it is likely that a collision with the debt limit will be the next budget-process bottleneck that the Congress and the White House will have to traverse.

Institutional memories are short in Washington, and history often is revised before it is written.  Somehow, a decent interval after the fact, 100 percent of the players on both sides of each Washington contest believe that they won the game.  So it is likely that the lessons of August, 2011 – and of the last several debt-limit standoffs – have not been learned as they should.  Thus, it is worth taking the opportunity of the waning days of the Easter/Passover congressional break to review just why going to the brink over the nation’s debt limit is such a bad idea.

This should not be a partisan issue.  The points below would apply regardless of who is in control of the White House, the Senate, or the House of Representatives.  Today’s situation is unique in detail, as is every day in Washington; but the amount of the stakes on this issue is always the same: approximately everything we’ve got.  So both current and future Congresses and Administrations should consider the following:

A fight over the debt limit is prone to disaster.  Even though the stakes on the debt limit are monumental, Members of Congress will always be inclined to grasp any opportunity to extract concessions from a President with different views.  Still, over time, standards of behavior on this front have deteriorated.  As they push a President further and further toward the brink, Members today should consider the precedent they risk setting.

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Let’s assume for a minute that the economy continues to recover and that the interest rate environment follows normal historical patterns.  In ten years, the cost of servicing our national debt would triple – from about $200 billion now to $600 billion in 2022.

But what if the markets get nervous and interest rates rise more than expected?

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