What Economists Think of the U.S. Defaulting on its Debt: ‘We Aren’t That Stupid!’ – Real Time Economics

The U.S. Capitol.

Economists watch Congress the way that ancient Sumatrans watched the volcano at Krakatoa: They don’t really understand at all what’s going on inside the caldera but they smell the ash and know there’s some chance of a catastrophic explosion. In recent years, economists have been forced to heed the rumblings from Congress: The U.S. has had several close calls leading to tremors in financial markets, including a government shutdown lasting more than two weeks in 2013 and a near-default on the U.S. debt in 2011 that led to a downgrade of the U.S. triple-A debt rating.

With Congress once again confronting a vote over raising the debt limit, we asked participants in the latest Wall Street Journal survey of 64 economists what they think of the possibility of the U.S. defaulting on its debt. (Not all economists answered every question.) Some responses:

  •  “This is (almost) unthinkable.  Most in Congress understand that.” – James Smith, Parsec Financial
  • “Not enough wackos to do that.” – Joel Naroff, Naroff Economic Advisors
  • “This would require the political system to implode, which is unlikely other than at the extremes. However, a policy mistake could occur.” – Nathaniel Karp, BBVA Compass
  • “They are not THAT irresponsible.” – Jim O’Sullivan, High Frequency Economics
  • “[Treasury Secretary Jack] Lew moving the date up to Nov. 5 opens the door for [Speaker of the House John] Boehner to cut a bipartisan deal before he leaves. It is also hard to imagine that extremists would be so grossly irresponsible with our obligations.” – Diane Swonk, Mesirow Financial
  • 14th amendment of Constitution: ‘Validity of the public debt of the United States […] shall not be questioned.’” –Gregory Daco, Oxford Economics
  • “With 2016 elections not far away, the political risks surrounding default are huge.” – John Lonski, Moody’s Capital Markets
  •  “Stupid is what stupid does. We aren’t that stupid!” – Stuart Hoffman, PNC Bank
  •  “Jittery global financial markets would exacerbate the costs of default well beyond any political benefit.” – Sean Snaith, University of Central Florida

For what it’s worth, economists assigned a less than 2% probability to a default in August. That has since jumped to 4%. That’s still low, but, then again, how comfortable would you feel living next to a volcano with a 4% chance of eruption?

Related reading:

Economists See U.S. on Cusp of ‘Full’ Employment, WSJ Survey Says

WSJ Survey: Economists Cite Budget Battle as a Top Threat

WSJ Survey: Economists Still See Fed Rate Increase in 2015

Interactive: Economic Forecasting Survey



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8 October 2015 | 2:09 pm – Source: blogs.wsj.com


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