Financially speaking, the United States has been a Teflon nation. Bad things happen — near defaults, giant budget deficits, a Capitol invasion — but nothing sticks for long. The world’s investors keep pumping money into the country, which keeps interest rates low and stock prices high.
That nonstick finish doesn’t have a lifetime guarantee, though. If the United States becomes dysfunctional enough, global investors will rationally conclude that the safe haven isn’t safe anymore.
They will move some of their money elsewhere — to Canada, Germany, Japan, maybe China. Financing costs in the United States will rise, economic growth will slow, and living standards will fall short of expectations.
Treasury Secretary Janet Yellen is slated to give a speech Friday afternoon in Arizona on accountability, economic freedom and rule of law. “Democracy is not just intrinsically good,” her prepared remarks read. “Promoting democracy is also good economic policy.” I assume her speech is at least partly politically motivated, but I also think she’s right.
Ernie Tedeschi has tried to put some numbers on the risks of political chaos of various sorts. He is the director of economics at the newly formed Budget Lab at Yale. Until March he was the chief economist of President Biden’s Council of Economic Advisers. He gave me a first look at a report on the topic that he wrote for the Budget Lab.
By Tedeschi’s estimates, adjusted for inflation, if the United States came to be perceived as carrying a similar risk for investors as Britain, after 10 years, average stock-market wealth per household would be $50,000 lower and the economy would be 1 percent smaller than if the status quo were to continue.
Things could get worse than that. “A truly catastrophic scenario is difficult to estimate,” Tedeschi acknowledged. But he said that if there were a risk shock three times as bad as the one following the federal government’s brush with default in 2011, and unlike that one it lasted, it would shrink average stock-market wealth per household by more than $200,000 and lower annual labor earnings by about $6,000 per worker after a decade (both figures also adjusted for inflation). There would be decade-long effects even if the U.S. risk premium receded after, say, four years, Tedeschi estimated.
Those numbers could be off quite a bit, because they require a lot of assumptions about inherently unknowable things, such as the future mind-set of investors. But I give Tedeschi credit for at least trying to put a dollar figure on the potential financial consequences of bad government.
For the analysis, Tedeschi assembled estimates of geopolitical risk from a variety of sources, including the PRS Group, which prepares an annual International Country Risk Guide, the World Bank, the International Monetary Fund and the University of Gothenberg in Sweden. The chart below shows the PRS Group’s composite score for the geopolitical safety of the United States, which accounts for the quality of democracy, government stability, socioeconomic conditions, conflict, investor protections, the economy’s performance and foreign debt, among other factors.
The quality of democracy is one of the criteria that Tedeschi zooms in on. “By their nature, some amount of unpredictability and volatility is the norm with democracies, but changes tend to be incremental,” he wrote in his report. “In contrast, authoritarian regimes can lead to more policy stability for a time, but they heighten discontinuous risks: the possibility of catastrophic and difficult-to-manage changes.”
Risks of authoritarianism include “corruption, capricious legal systems and nationalization/expropriation,” he wrote.
Since Tedeschi worked for Biden until recently, I asked him if his warnings about authoritarianism concerned a certain other presidential candidate. He didn’t address the Trump in the room but said the Budget Lab is nonpartisan and “strives to be independent.” He said it evaluates ideas from both parties, for example the Family Security Act 2.0, which has been proposed by Republican Senators Mitt Romney of Utah, Richard Burr of North Carolina and Steve Daines of Montana. The Budget Lab’s advisory board includes N. Gregory Mankiw, who was a chair of the Council of Economic Advisers under President George W. Bush.
Politicians and investors who are blithe about American dysfunction tend to point to what happened in 2011. A stalemate over raising the debt ceiling nearly caused the Treasury Department to default on payments on U.S. debt. Yields on riskier corporate debt rose, making borrowing for companies more expensive. Investors did what they always do when they get nervous, namely buy more Treasury bonds, which were perceived as ultrasafe. So a crisis that began in the Treasury market ended up benefiting Treasuries.
Investors have a “blind spot” when it comes to Treasuries, but they can’t be counted on to remain blind forever, Tedeschi told me. “We are not claiming that the United States is Venezuela,” but “it would not take much loss of that safe harbor premium for us to see meaningful economic impacts over time.”
Brinkmanship and other political stunts may stir the blood, but voters won’t be happy with America’s political leaders if the fighting starts hitting them in the wallet.
The Readers Write
I’m the board chair-elect of a nonprofit that has several million dollars in an operating account with a regional bank, above the amount insured by the Federal Deposit Insurance Corp. This is needed to meet payroll and other financial obligations. Now, we could move our account to a larger institution, but if others did the same thing, we would see the quick demise of regional banks that often provide better service. Obviously, our deposits are at some small risk, but what is our alternative?
Alan Goldhammer
Bethesda, Md.
Peter here. I actually agree with this. I wrote last year, “If market discipline works in theory but not in practice, one alternative is to bow to reality and explicitly insure all bank deposits.” For now, though, that’s not the law.
I am a health care executive, and I am in favor of noncompetes, actually, on a limited basis. It takes a tremendous amount of resources to recruit, onboard and credential a physician. It is very detrimental to a practice to train someone and then have him or her work for a competitor or set up shop and then compete against us. It is much more nuanced than the Federal Trade Commission has made it out to be.
Dr. Hesham A. Hassaballa
Chicago
Quote of the Day
“Starvation is the characteristic of some people not having enough food to eat. It is not the characteristic of there being not enough food to eat.”
— Amartya Sen, “Poverty & Famines: An Essay on Entitlement & Deprivation” (1981)
