Tuesday, July 24, 2012

The Cost of Partisan Politicking in America

Updated October 3, 2013

Now that we're stuck in the middle of yet another debt impasse, its time to review a study released by the U.S. Government Accountability Office (GAO) entitled "Debt Limit - Analysis of 2011 - 2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs".  This study takes an interesting look at how much the debt ceiling machinations of August 2011 actually cost American taxpayers through the impact on the Treasury's borrowing costs.

The delays in raising the debt limit in August 2011 and again in January 2012 made it difficult for the U.S. Treasury to manage its burgeoning debt load which, effective July 20th, has reached:


In case you've forgotten, the Budget Control Act of 2011 resulted in a three phase increase in the debt ceiling; on August 2, 2011 ($400 billion increase), after the markets closed on September 21, 2011 ($500 billion increase) and again after the market close on January 27, 2012 ($1,200 billion increase).  These actions raised the debt limit to its current level of $16.394 trillion.  

Here is a graph showing the rise in the debt limit since 1996:


Largely because of the childish behaviour of Congress last year, the U.S. Treasury found itself in a situation where it had to take extraordinary actions to avoid exceeding the debt limit.  Here is a chart showing what measures the U.S. Treasury can take when delays in raising the debt limit occur, most of which were used during the “crisis”:


Basically, the Treasury is forced to creatively "juggle" accounting items from one government account to another to prevent pushing the debt beyond its mandated ceiling.

While all of this fun and games was entertaining, particularly to those living inside the Beltway, delays in raising the debt limit created uncertainty in the Treasury market, resulting in an increased "risk premium" since, in bond market transactions, as prices drop, yields rise.  The GAO's analysis suggests that the delays in raising the debt limit in 2011 resulted in increased borrowing costs on certain securities.  This increased cost is measured using a multivariate regression analysis of the spread between the yields on private securities (i.e. corporate bond yields which are deemed more risky) and the yields on Treasuries over the period of time between the debt limit event timeframe and the previous three months.  A decrease in the spread indicates that the market perceives the risk of Treasuries to be closer to that of the more risky private securities, resulting in an increasing cost to the Treasury and, most importantly, to American taxpayers.  Here is a graph showing the result of the GAO's analysis:




Notice that the spread on 5 year Treasuries decreased by 0.33 percentage points, a rather large risk premium.  The GAO analysis shows that there was a premium on Treasuries with a maturity longer than two years.  Applying that to all of the debt issued by the Treasury during the 2011 debt ceiling stalemate results in an increase in borrowing costs of $1.3 billion for fiscal 2011 alone.  Since many of the Treasury instruments issued during that time have multi-year maturities (ranging from 2 to 30 years), the increase in borrowing costs arising from the Congressional boondoggle will far exceed the $1.3 billion mark and will be with American taxpayers for decades to come.

On top of that, during the stalemate, the actions taken by the Treasury Department to creatively manage the debt resulted in the accrual of an estimated 5750 hours of additional work, including overtime, which also comes at a cost to taxpayers.

While last year's debt ceiling tussle looked like partisan game-playing from the viewpoint of the Democrats and Republicans residing in Congress, as our mothers were fond of saying, someone's going to get hurt and it's going to end in tears.  Sadly, it's taxpayers that are the ones who are crying.

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