Over the last couple of years, a common conservative talking point about federal policy changes has been that uncertainty is dangerous. When people dont know what future government policies will look like, the risk inherent in business investment is greater, without average returns being higher. Higher variance in returns means greater reluctance to invest, and lower economic growth.
This argument is true, although sometimes the importance of uncertainty can be overstated. Still, isnt it odd that were not hearing it in regard to the debt limit negotiations? A debt limit standoff certainly fosters uncertainty, discouraging investment and growth.
The biggest problem that a debt limit impasse could create would be the creation of uncertainty about whether the government will default on interest payments. However, as Ive written before, I think there is actually very little risk of that (and the bond markets seem to agree, as bond yields are not spiking.)
But there are other ways that the debt limit fight certainly creates uncertainty. The biggest unknown is this: if we get to early August without an increase and Treasury starts selectively delaying payment of bills, what will go unpaid?
Will the government shut down infrastructure projects, as happened in California during a 2010 budget impasse? That risk may be discouraging investment in the construction industry. Will national parks shut down? That risk might be discouraging investment in tourism. Will federal workers be paid with IOUs instead of cash? That is a relevant risk for any person considering investment in the federal worker-heavy Washington area. The possibility that Social Security checks could be delayed is a worry for any business that caters to seniors. And so on.
As with any policy, there could be good reasons to manufacture a debt limit impasse despite the uncertainty it creates. (In my view, there arent, but there could be.) Still, opponents of a clean debt limit increase need to account for the uncertainty that their preferred policy will foster.
Original Source: http://www.nationalreview.com/agenda/267340/debt-limit-and-uncertainty-josh-barro