The Cost of House Republicans

We know that recent budget cuts have depressed economic growth. Paul Krugman talks about the Macroeconomic Advisers' estimate on the costs that the House Republicans have inflicted on the US economy via fiscal policy: $700 billion of wasted economic output and an unemployment rate that is 1.4 percentage points higher than it otherwise would have been. But the cost of House Republicans is even higher than that.

Felix Salmon notes the damage that they have done to the financial markets:

Rather, the harm done would be a function of the way in which the Treasury market is the risk-free vaseline which greases the entire financial system. If Treasury payments can’t be trusted entirely, then not only do all risk instruments need to be repriced, but so does the most basic counterparty risk of all. The US government, in one form or another, is a counterparty to every single financial player in the world. Its payments have to be certain, or else the whole house of cards risks collapsing — starting with the multi-trillion-dollar interest-rate derivatives market, and moving rapidly from there.

I think that this is a subtle point that has been missed in the entire debt-ceiling/budget debate but deserves some echo: even in the unlikely event that Republicans recant all of their demands and agree to a clean debt ceiling hike, the mere fact that they even attempted to govern as a minority party via threat of default could increase borrowing costs forever for everybody.

Essentially, Republicans introduced risk into the one risk-free investment. And this one risk-free investment is used as a baseline to price all risky investments. And so, while we may not see it now (because of being up against the zero lower bound), it's entirely possible that in the future we could see a slight risk premium being charged to the US government that will increase the costs of borrowing for everybody else. In other words: priced into all investments is the assumption that Treasury payments are 100% certain; as long as this assumption is questioned in the minds of investors, then borrowing (for everybody) will cost more than it otherwise would have. So congratulations, Republicans! Not only have you stunted economic growth for the past couple of years, you have permanently stunted all future economic growth!