Austerity vs. Downgrade: What Would Be Worse for the Economy?

More
dowjuly23.png

The Dow dropped 100 points this morning after Republicans and Democrats spent another weekend failing to reach an agreement to raise the debt ceiling.

How certain are we that a AA-downgrade would be worse for the U.S. economy than austerity?

Standard & Poor's director of sovereign bond ratings told me Friday that a debt ceiling lift is not enough for the credit rating agency. Without a deal to find trillions of dollars in savings in the next 90 days, the U.S. stands a 50-50 chance of a historic downgrade, the agency said last week. Congress can't agree on a final deal, but they agree on a starting principle. We have to cut trillions of dollars in spending over the next decade in conjunction with raising the debt ceiling.

Here's my question: How certain are you that the economy be better off if we (a) accepted hundreds of billions in cuts to avoid a downgrade versus if we (b) accepted the possibility of a downgrade and refused to accept specific spending cuts this year or next?

This isn't a rhetorical question. I find it extremely difficult to answer conclusively. One trillion dollars in cuts beginning this fiscal year would almost certainly result in more layoffs at every level of government, less government spending on contracters, military hospitals, and other firms, and less support for unemployment. But it would also help us preserve our sterling AAA-rating, which would keep borrowing rates low for government, businesses, and families.

On the other hand, in the absence of a major deal, the markets could freak, appetite for U.S. debt could decline, borrowing costs could rise, and a downgrade would mark an unprecedented blow to our international reputation. But it's fair to point out that today, in the absence of a 10-year deal, interest rates on 10-year U.S. bonds are hovering around 3.0% -- down a fifth over the last six months. If bond vigilantes are freaking out today, they're freaking out very quietly.

The debt ceiling is an easy question. We have to raise it. But accepting immediate austerity vs. accepting the possibility of a downgrade is a closer call. The first involves a high probability of ongoing economic distress, and the second involves a lower probability of a more severe economic shock. What bet would you take?

Jump to comments
Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

Get Today's Top Stories in Your Inbox (preview)

What Do You See When You Look in the Mirror?

In a series of candid video interviews, women talk about self-image, self-judgment, and what it means to love their bodies


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.

Video

What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.

Video

Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.

Video

Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Writers

Up
Down

More in Business

Just In