People are calling the Trillion Dollar coin, crazy, a farce, and even dangerous, but there is a common, mainstream proposal which is far more dangerous to our economy than the Trillion Dollar Coin.
Over the next page or so, you’ll find out exactly how this seemingly harmless proposal will result in 1,000,000 per month losing their jobs. The total economic impact will rival and perhaps even exceed the worst months of the great depression.
Hitting the Debt Ceiling without using the coin would be catastrophic to the U.S. and world economy.
I first started doing research on this topic because of a post by Brian Buitler post at the Talking Points Memo. I did not expect the impact to be very bad.
It turns out the impact is way, way, way worse than bad. The impact of hitting the debt ceiling would be catastrophic to the U.S. economy.
Here is the logic:
We have about a $100bn per month deficit.
The fiscal multiplier right now is close to 1.5 for new spending with monetary policy at the zero bound, according to the IMF. But this for ADDITIONAL spending. The multiplier on existing spending is probably higher. Back of the envelope, it probably ranges for 3+ on the first dollar of spending down to 1.2 on the most recent dollar of spending. Call the multiplier 1.8 across the entire range of deficit spending- and I think that is being conservative.
This puts us at 100bn * 1.8 = $180bn per month in impact to our economy. That number sounds like a lot, but we don’t have a good mental image of how much that would impact the economy.
Let’s put it into terms which are easier to understand, like an annual hit to our economy. Annualized, this would be $2.16T for the entire year. This is 14.5% of the U.S. economy! Wow! That is a huge impact.
Next, we know the rough relationship between 1% point of the economy and unemployment through Okun’s Law.
We can use Okun’s law to figure out the change in unemployment given a change in GDP. Okun’s law relates the amount of change in unemployment given a loss to the economy.
We estimate GDP would fall by 14.4%, and the Okun’s law divisor is 1.8. Therefore a fall in GDP of gives us 14.4%/1.8 = 8% more unemployment! The current unemployment rate is 7.9%, so hitting the debt ceiling would eventually cause 16% unemployment.
How many actual jobs would be lost? That’s easy to figure out. The total non-farm payrolls today is 134 million people. We would lose approximately 8% of this if we shut off deficit spending entirely, which is 10.7 million jobs.
This is probably a high estimate – this would imply losing nearly 1 million jobs per month. But we are certainly talking losses above 600,000 per month. The impact of hitting the debt ceiling would be like the worst months of the great Recession.
This policy of letting us hit the debt ceiling is casually thrown around, as though nothing bad would happen. Just something to jabber about on CNBC, or Sunday morning talk shows, or threaten in press conferences.
This doesn’t even take into account the impact on financial markets, or the hit to our credibility from shutting down the government. The trillion dollar coin is unusual, but laying off 10 million people and chopping 14% off our economy is way, way crazier.
What kind of insane person would consider doing something like this to the U.S. economy? If a terrorist was able to cause losses 1/100 the size of this, we would declare war, like we did after the twin towers and it’s $100bn of damage to our economy. I guess if it is CNBC hosts dismissing the Trillion Dollar Coin as something that would cause “ZIMBABWE’, it’s fine to joke around with chopping 15% off our economy.
But when sitting Senators say hitting the debt ceiling wouldn’t be bad, I start to get really worried. A senator is one of the most powerful people in the United States. Senators are the individuals who would be directly responsible for making us hit the debt ceiling. It’s like being in a bus with a drunk bus driver who is speeding down an icy road. There is a legitimate reason to be worried.
Here is Senator Pat Toomey:
“A temporary disruption because we have to furlough the workers at the Department of Education, or close down some national parks, or not cut the grass on the Mall, that’s not optimal, it’s disruptive, but it’s a hell of a lot better than the path that we’re on.”
This is a sitting Senator, talking absolute bullshit. He didn’t even bother to look at what the impact of hitting the debt ceiling might be – he literally does not care. He is tinkering with our economy on a massive scale, and can’t even be bothered to do the homework on what might happen. He thinks hitting the debt ceiling would involve furloughing a few workers, and not cutting the grass.
Senator, you are wrong. You are dangerously wrong. Hitting the debt ceiling would be catastrophic.
Hitting the debt ceiling would be so very awful, it is worth it to consider using tactics like a Trillion Dollar coin to combat the crazy. Yes, Peter Schiff and Zero Hedge will scream “ZIMBABWE”. They always do, so why would this be any different.
But people who actually bother to figure out what will happen when the coin is used will realize it should be called Platinum Coin Easing. Using a Platinum coin has nearly identical accounting to quantitative easing, therefore the impact on our economy would be nearly identical to quantitative easing.
Heck, you can ask Ben Bernanke if this is right at the next Humphrey Hawkins testimony. I bet the Beard has already pulled out his notebook and went through exactly how the Coin would work, just to see for himself. It’s his day job, and for once he would have something fun to work through.
If you are a famous economist with a big megaphone, feel free to work through it yourself! Use JKH’s work as a starting point. You’ll see – it’s Platinum Coin easing.
On one hand, we have a policy which results in job losses as large as the worst months of the recent crisis but is supported by sitting senators and goofs on CNBC. On the other hand, we have a policy which has a strange name but allows our fragile recovery to continue. One of these policies is mocked relentlessly in the mainstream, and one is a respected policy stance.
Hitting the debt ceiling is totally insane but a respected policy stance. Hitting the debt ceiling would be catastrophic for our economy. It’s insane, and using a platinum coin is “reasonable” in comparison.