What is the cost of playing chicken?

Each week, Symposium Magazine invites authors to guest-blog. This week’s featured article is Why U.S. Financial Hegemony Will Endure by Sarah Bauerle Danzman and W. Kindred Winecoff.

Over at Foreign Policy, Dan Drezner is befuddled by continued brinkmanship over the debt ceiling and asks why so many resist “the expertise offered by economists” who repeatedly warn that even the threat of default could be disastrous for our economy. Neil Irwin, writing for The Washington Post, says the spike in 1-month treasury yield “should terrify you.”

Through our network model, we’ve shown the U.S. based financial system is most likely robust to a technical default. The empirical record on interest rate movements during previous debt ceiling debates largely confirms this assessment. The GOP threatened to prevent a debt ceiling increase in 1996, and another debt ceiling standoff in 1979 resulted in technical default on some short-term Treasury bills before resolution. Empirical study of both episodes finds that technical default resulted in a modest but permanent 60 basis point increase in T-bill interest rates, while the 1996 standoff incurred temporary yield increases for short-term government debt.

In other words, playing chicken over the debt ceiling does bear a cost, but it also is probably not suicidal.

If academics want to be heeded, the public needs to believe our assessments are dispassionate. When economists are continually make doomsday predictions and then life goes on, policymakers begin to regard our contributions as noise. A continued pattern of debt ceiling standoffs does have real costs to taxpayers, and also may accelerate shifts toward fit alternative financial centers over time. But each time a fiscal crisis occurs and is resolved without a major meltdown in the global economy, policymakers further discount academics’ warnings of catastrophe. So perhaps one of the most important policy-relevant implications of our network model of financial hegemony is its moderating influence on how social scientists might think and talk about fiscal standoffs in the core.

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