U.S. Treasury Secretary Janet Yellen announced last week that the federal government had reached the statutory debt limit and that her department had begun “extraordinary measures” to meet required spending obligations. It is estimated that by July these extraordinary measures will no longer be able to keep some spending obligations from being missed.
The value of what it measures—the nominal dollar level of outstanding gross public debt—has zero relationship to the economic fundamentals of the nation’s fiscal health. The debt limit is not inflation-adjusted, measures debt the government owes itself, does not include federal government assets, and is completely uncorrelated with genuine measures of fiscal health .
Normally, the federal budget acts as an automatic stabilizer when recessions hit—taxes fall and spending rises and debt increases, all of which spurs economic activity. But a recession caused by an arbitrary legal rule that spending cannot exceed taxes means that the budget would actually act as an automaticIf the spending cutbacks occur for a month, say, and then federal transfers make up for the lost month, then much of the damage could be undone pretty quickly. But not all of it.
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