Third Way, the organization perhaps most obsessed with using the debt limit vote as a means to extract major cuts to the social safety net, created a paper that includes a number of consequences of a default event. Treasury bond rates would rise by 50 basis points (0.5%). GDP would crash by 1%. The increased cost of borrowing would rise to $75 billion per year, should we ever get back to being allowed to borrow. The US would lose 640,000 more jobs. The S&P 500 would fall 6.3%. The average 401(k) plan would fall $8,816. Increased mortgage rates would cost new homebuyers another $19,000. Consumer lending would tighten.

It’s a speculative but fairly accurate scenario. Third Way wants to use it to force a grand bargain deal. But there’s no reason to quibble with the numbers. In fact, we have a real world example of what could happen, from back in 1979. It’s something the country is still paying for.

In fact, there was one short-lived incident in the spring of 1979 that offers a glimpse of some of the problems and costs that might arise if the stalemate on Capitol Hill continues. Then, as now, Congress had been playing a game of chicken with the debt limit, raising it to $830 billion – compared with today’s $14.3 trillion – only after Treasury Secretary W. Michael Blumenthal warned that the country was hours away from the first default in its history.

That last-minute approval, combined with a flood of investor demand for Treasury bills and a series of technical glitches in processing the backlog of paperwork, resulted in thousands of late payments to holders of Treasury bills that were maturing that April and May […]

“It was quickly forgotten,” said Jim Angel, a finance professor at Georgetown University.

And yet, the study by Zivney and his partner, Dick Marcus, found that even that brief failure to meet some obligations had expensive consequences. The pair concluded “that the series of defaults resulted in a permanent increase in interest rates” of more than half a percent, which over time translated into billions of dollars in increased interest payments on the nation’s debt, a cost shouldered by taxpayers.

“The impact is smaller at first because only new debt is affected,” they wrote. “But over time, as the older debt matures and becomes refinanced at higher rates, the entire cost of the default is realized.”

That’s in the event of a temporary default. Most observers believe that, once the consequences of default are realized after a short time, a deal will be made to raise the debt limit. But the 1979 episode shows that even a temporary default will have wide-ranging consequences.

This is what Republicans are trying to convince the media is the concession they’ve agreed to – allowing this catastrophe to not happen. In their reading, the fact that they will agree to raise the debt limit is such a concession, that the rest of the deal can be put together on their terms. In other words, they had to be dragged into the position of stopping an $8,816 loss in people’s retirement porfolios, and a 1% loss of GDP, and 640,000 jobs.

You would think that these numbers would be announced by Democrats on television every day, and the urgency ticked up and up, so that Republicans would have to think about the consequences of inaction, and eventually go ahead and raise the debt limit with a clean bill. But of course, that’s not really where the party leader’s head is at.

David Dayen

David Dayen

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