Congress Can Learn From 1995-96 Debt-Ceiling Debate

Fox News ^ | July 26, 2011 | John R. Lott Jr.

[JohnRLott]

Failure to raise the Federal debt ceiling limit could "roil the financial markets and cause severe economic problems," "cause profound damage to our country," and have “dire consequences.” So wrote the Los Angeles Times, Washington Post, and New York Times. But the year was 1995, not 2011.

Other ills predicted during that contentious debate were rising unemployment, reduced GDP growth, and soaring interest rates. That was at a time when President Clinton and Democrats were fighting off attempts by Republicans to link cutting the deficit to the increase in the debt ceiling and a continuing resolution on spending.

Then as now, there was a widespread misperception that failure to increase the debt ceiling would produce a default: "congressional Republicans are threatening to provoke the nation's first-ever default" (Washington Times). The Los Angeles Times reported: "the first real risk of a government default could occur November 15 [1995]." Even the then Chairman of the Federal Reserve, Alan Greenspan, warned that congressional Republicans should drop their efforts, declaring: "To default for the first time in the history of this nation is not something anyone should take in any tranquil manner." . . .

[RC2]

The debate with the Democrats, Republicans and the President needs to go public with no monitors. Make it a two hour debate. Get it out in the open.....NOW.

[DrC]

Unfortunately, Lott hasn’t done his history homework very well. A tiny default in 1979 caused long-term interest rates to rise permanently by 0.6%, i.e., 60 basis points.
http://www.washingtonpost.com/business/economy/delayed-payments-in-1979-offer-glimpse-of-default-consequences/2011/07/10/gIQARRBj7H_story.html?hpid=z1

Every 100 basis point increase in long term interest rates will cost the U.S. $150 billion in added interest costs.