At his news conference today, President Obama went on at great length about what a stupid idea it is to not raise the debt ceiling. “It would slow down our growth, might tip us into recession,” he said. “And ironically it would probably increase our deficit.”
The president is right — if we hit the debt ceiling, the deficit will almost certainly increase, and perhaps by a great deal. Here are the three main mechanisms through which that will happen…
<strong>2. It would cause interest rates to spike</strong>
Again, this isn’t hypothetical. A <a href=”http://www.jstor.org/stable/2676273″>2001 study</a> by economists Srinivas Nippani, Pu Liu and Craig T. Schulman found that the 1995-6 debt ceiling fight raised interest rates temporarily, which, depending on the duration of the debt issued during that period, could affect federal budgets as far as 30 years in the future. The <strong>Bipartisan Policy Center</strong> <a href=”http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/07/this-is-what-would-happen-if-we-breach-the-debt-ceiling/”>found</a> similar effects from the 2011 fight, estimating that it cost us $18 billion in increased interest payments going forward.