Top Republican Economist: Default Would Be An Economic Disaster

June 7, 2011 12:08 p.m.

Contradicting GOP lawmakers who have suggested a US default would not lead to economic disaster, a bipartisan group of budget officials warned on Tuesday that even a brief lapse in payments could trigger a crisis. Among them were Douglas Holtz-Eakin, former CBO director under President Bush and a frequently cited Republican economic advisor.

“It’s a bad idea,” Holtz-Eakin said at a panel discussion of former CBO heads in Washington. “Little defaults, big defaults; default’s a bad idea period and there should be no one who believes otherwise.”

Holtz-Eakin has supported the GOP’s efforts to secure cuts in exchange for raising he debt ceiling, but made clear that at the end of the day it had to be raised. He cited numerous dangers from a default scenario, such as its effect on the bond market.

“The idea that somehow it’s a pro-growth strategy to raise interest rates on a permanent basis in the United States is just crazy,” he said. “We need to grow at this point more than anything else.”

He added that the market would not be easily reassured even after a brief default, likening it to wrecking one’s house and then asking for a second mortgage on the property.

CBO directors are chosen by Congress and tasked with providing a nonpartisan assessment of the budget.

Rudy Penner, CBO director under President Reagan, also slammed the suggestion that default was anything but dangerous.

“The dumbest thing to do would be to default even for one day right at this point,” he said. “I don’t see much good coming out of these notions that somehow if we got a big budget deal it would be OK not to pay interest for a few weeks or few days.”

Penner added: “It’s playing with matches around gasoline as far as I’m concerned and would be an incredibly stupid thing to do.”

Robert Reischauer, CBO director under Presidents Bush Sr. and Clinton, said while he could envision a scenario in which a sudden plunge in the stock market shocked both parties into compromising on a deal, it was too unstable and dangerous an approach to trifle with.

“Do I advocate that? No,” he said. “Do I think that’s risky? Yes. But we’re looking for adult behavior here and seeing none. ”

Republicans lawmakers have raised eyebrows in the bond market in recent weeks by suggesting that defaulting on US debt as part of a partisan standoff may not have major consequences for the economy. Last week Moody’s warned Congress that even approaching the August 2 deadline that the Treasury Department has set before defaulting on their payments would lead them to downgrade US bonds.

Note: This story has been updated.

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