The Statutory Debt Limit
by Simon Johnson, Peterson Institute for International Economics
January 22, 2013
A. Main Points
- This is a difficult time for the United States and global economy. Financial markets can easily become unsettled. A serious sovereign debt crisis remains unresolved in Europe's euro area. There are serious potential risks on the horizon in countries such as Japan, China, and Brazil. International Monetary Fund (IMF) Managing Director Christine Lagarde warns about a potential "relapse" in the world economy.
- In this context, continuing uncertainty around the US federal budget in general and the debt ceiling in particular is not helpful—and may prove destabilizing both at home and around the world.
- Even a partial shutdown of federal government in the United States would have a significant negative effect on the economy. The private sector—particularly small business—would be greatly damaged by any lack of clarity about when and how the government will pay for goods and services purchased or make the transfer payments promised to citizens.
- In addition, we have seen repeatedly over the past few years that congressional deadlock over fiscal issues worsens uncertainty and makes it harder for the private sector to make sensible decisions—including regarding the consumption of durables and all kinds of business investment.
- Empirical research by Scott Baker (Stanford), Nick Bloom (Stanford), and Steve Davis (Chicago) finds that over the period 1985–2012, policy uncertainty reached its highest peak with the debt ceiling crisis in the summer of 2011. (See figure 1 below; this is reproduced from Baker, Bloom, and Davis, "Measuring Economic Policy Uncertainty," [pdf] with permission.)
View full document [pdf]
Policy Brief 13-21: Lehman Died, Bagehot Lives: Why Did the Fed and Treasury Let a Major Wall Street Bank Fail?
Op-ed: Misconceptions About Fed's Bond Buying
September 2, 2013
Op-ed: After Bernanke, Make Unconventional Policy the Norm
July 15, 2013
Testimony: The Fed at 100: Can Monetary Policy Close the Growth Gap and Promote a Sound Dollar?
April 18, 2013
Op-ed: How the IMF Can Help Cut US Joblessness
February 4, 2013
Policy Brief 12-25: Currency Manipulation, the US Economy, and the Global Economic Order
Policy Brief 12-15: Restoring Fiscal Equilibrium in the United States
Book: The Global Outlook for Government Debt over the Next 25 Years: Implications for the Economy and Public Policy June 2011
Book: The Long-Term International Economic Position of the United States April 2009
Article: The Dollar and the Deficits: How Washington Can Prevent the Next Crisis
Speech: Rescuing and Rebuilding the US Economy: A Progress Report
July 17, 2009
Book: US Pension Reform: Lessons from Other Countries February 2009
Testimony: The Dollar and the US Economy
July 24, 2008
Testimony: Why Deficits Matter: The International Dimension
January 23, 2007
Book: Accountability and Oversight of US Exchange Rate Policy June 2008
Op-ed: Bubbles Are Getting Blown Out of All Proportion
September 8, 2004
Book: The United States as a Debtor Nation September 2005
© 2016 Peter G. Peterson Institute for International Economics. 1750 Massachusetts Avenue, NW.
Washington, DC 20036. Tel: 202-328-9000 Fax: 202-659-3225 / 202-328-5432
Site development and hosting by Digital Division