WASHINGTON – The US economy could quickly shed a million jobs and slip into recession if lawmakers fail to raise the country’s borrowing limit before the federal government exhausts its ability to pay its bills on time, Moody’s Analytics chief economist warned, Mark Zandi, a Senate session on Tuesday.
The damage could extend to seven million lost jobs and a 2008-style financial crisis if the debt ceiling, in which House Republicans have been refusing for months to join Democrats in voting to raise the ceiling, sir, continues to be exceeded Zandi and his colleagues Cristian deRitis and Bernard Yaros wrote in an analysis prepared for the Senate Banking Committee’s Subcommittee on Economic Policy.
The warning comes at a time of fiscal exuberance. House Republicans are demanding deep spending cuts from President Biden in return for voting on raising the debt ceiling, which limits how much money the government can borrow.
That debate is likely to escalate this week when Mr. Biden releases his latest budget proposal on Thursday. The President is expected to propose reducing America’s dependence on borrowed money by raising taxes on high earners and corporations. But he almost certainly won’t achieve the level of spending cuts that will meet Republican demands for a balanced budget a decade from now.
The report also warns of severe economic damage if Mr. Biden agrees to these demands in an attempt to stave off a default. In this scenario, the “dramatic” spending cuts that would be required to balance the budget would push the economy into recession in 2024, cost the economy 2.6 million jobs and effectively destroy a year’s worth of economic growth over the next decade, Mr Zandi and his colleagues wrote.
Mr. Zandi testified Tuesday before the Economic Policy Subcommittee, where Senator Elizabeth Warren, a Massachusetts Democrat, was holding a hearing on the debt ceiling and its economic and financial implications.
Understand the US debt ceiling
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What is the debt ceiling? The debt ceiling, also known as the debt limit, is a cap on the total amount that the federal government can borrow through U.S. Treasury securities, such as bills of exchange and savings bonds, to meet its financial obligations. Because the United States runs budget deficits, it has to borrow huge sums of money to pay its bills.
The limit has been reached. What now? America reached its technical debt limit on January 19th. The Treasury will now begin “extraordinary measures” to continue paying the government’s obligations. These measures are essentially tax accounting tools that curb certain government investments to keep the bills paid. Those options could be exhausted by June.
What’s at stake? Once the government exhausted its extraordinary measures and ran out of cash, it would be unable to take on new debt and pay its bills. The government could default on its debt if it is unable to make the required payments to its bondholders. Such a scenario would be economically devastating and could plunge the globe into a financial crisis.
Can the government do anything to prevent a disaster? There is no official playbook for what Washington can do. But there are possibilities. The Treasury could try to prioritize payments, such as paying bondholders first. If the United States defaults on its debt, which would shake markets, the Federal Reserve could theoretically step in and buy some of those government bonds.
Why is there a borrowing limit in the US? Under the Constitution, Congress must approve borrowing. The debt limit was introduced in the early 20th century so that the Treasury didn’t have to ask for permission every time it had to issue debt to pay bills.
“The only real option,” Mr. Zandi said in a pre-testimony interview, “is for lawmakers to agree and raise the debt ceiling in a timely manner. Any other scenario will result in significant economic damage.”
“The economy is very vulnerable,” he added. “Even without the debt limit drama, the risks of a recession are high. It doesn’t take much to push us in, and that’s certainly a lot more than ‘a lot’.”
Mr. Zandi’s analyzes are frequently cited by the Biden administration in support of its economic policy proposals. In this case, Ms. Warren is using Moody’s work to get Mr. Biden to resist Republican calls for spending cuts and instead continue to push for an increase in the debt limit, in a letter sent to the White House this week exist, which is not tied to changes in fiscal policy.
“Everyone up until now has been talking about how dangerous it would be to default on the national debt, and that’s right,” Ms Warren said in an interview. “But it would be even more dangerous to cave in to Republican cuts.”
“The President has remained strong,” she said, “and I urge him to continue to do so.”
Mr. Zandi’s forecasts add to a growing list of warnings from Wall Street forecasters and Washington think tanks about the consequences of failing to raise credit limits on time.
House Republicans have refused to raise the limit unless Mr. Biden agrees to deep but unspecified cuts in federal spending. They say the nation’s current debt, accumulated in bipartisan fashion over two decades in which the federal government has spent more than it collects in taxes, poses a current and future threat to economic growth.
Mr. Biden said he welcomes talking about fiscal policy with Republican leaders but refuses to negotiate the debt ceiling, which allows the government to borrow money to cover debt already approved by Congress.
The government hit its statutory debt ceiling of $31.4 trillion in January. The Treasury essentially employs accounting maneuvers that allow it to continue paying all its bills on time. But these maneuvers only work for a limited time.
Independent groups like Washington’s Bipartisan Policy Center and the Congressional Budget Office have estimated that sometime this summer or early this fall, the government will be unable to pay everyone — including bondholders, Social Security recipients and federal employees — on time. The Moody’s team estimates that deadline, known as the X-date, will fall on August 15th.
The analysis considers several ways in which the impasse in Washington could be resolved. In one instance, Mr. Biden acts unilaterally to circumvent the debt limit without congressional help, inviting a constitutional challenge but potentially minimizing the damage to the economy. White House officials have said repeatedly that Mr. Biden will not pursue this path.
In a scenario where lawmakers’ inaction forced the Treasury Department to miss some required payments to make others, the analysis predicted a rapid financial markets backlash, similar to the 2008 stock slump when Congress initially rejected a support program by Wall – Street banks when a global financial crisis hit. If Congress responded by quickly raising the debt limit, as it did in 2008, the lasting damage would be enough to cause a mild recession and the loss of nearly a million jobs.
If lawmakers ignored market warnings and months passed without the limit being raised, the analysis concluded “that the hit to the economy would be catastrophic.” Government spending would collapse, a deep recession would set in and the unemployment rate would rise from 3.4 percent to over 8 percent.
But if Mr. Biden accepted the Republican budget, the analysis said, the resulting drop in federal spending on health care, education and other domestic programs would lead to a recession and widespread job losses. Low-income Americans would most likely bear a disproportionate brunt of the economic pain, she concluded.
Mr Zandi said he supports the complete abolition of the statutory debt limit to end the threats a potential default poses to the economy. “I just think you want to break that cycle as best you can, once and for all, because it’s very counterproductive,” he said.
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