The White House and allied Democrats want Americans to focus on how a US debt default would affect the economy and markets as officials prepare for a much-anticipated meeting with House Speaker Kevin McCarthy ( R-CA), prepare next week.
The past 24 hours have been symbolic as both sides of the debt ceiling standoff appear to be waiting for the other to be flashed as a possible default as June 1st approaches.
First, President Biden’s ambassador to business, in an interview with Yahoo Finance on Wednesday, warned that America’s CEOs come to her with concerns about the debt ceiling “because the last thing markets and the economy need is a disruption like this right now.” .”
Trade Secretary Gina Raimondo added during the Yahoo Finance call on Wednesday, “When I speak to US CEOs, there is great concern about the debt ceiling and the view that it is not the time to play politics.”
Secretary of Commerce Gina Raimondo at the US Capitol in April. (Tom Williams/CQ-Roll Call, Inc via Getty Images)
Just hours later, a new analysis from Biden’s in-house economic think tank warned of “severe damage” to the economy if a default occurs, including a worst-case scenario they say will see markets fall 45% could.
That message was reinforced Thursday during a Senate hearing where Senate Democrats pilloried the House debt ceiling plan, passed by the House last week, as a plan that would send the economy into recession.
“Trying to extort partisan concessions by threatening to deliberately throw the American economy off a cliff is the very definition of extremism,” Senate Budget Committee Chair Sheldon Whitehouse (D-RI) said at the start of the hearing on Thursday.
Republicans, meanwhile, continue to say that the White House — which has so far refused to negotiate anything other than a debt ceiling hike without preconditions — will be responsible for any economic woes.
“President Biden has refused to do his job — threatening to plunge our nation into its first default — and the clock is ticking,” McCarthy said in a statement earlier this week.
Fears of “an immediate, sharp recession”
Perhaps the sharpest economic warning came from Biden’s Council of Economic Advisors, which calculated the economic impact of three scenarios in a blog post on Wednesday afternoon.
They write that a default would cause the economy to “slip into reverse quickly, with the depth of losses dependent on how long the break lasts.”
Even a near-miss with last-minute negotiations would have an impact, analysts say, causing major disruption in financial markets and costing 200,000 jobs.
President Joe Biden gestures as he boards Air Force One earlier this year. (REUTERS/Ken Cedeno)
There is a recent historical example that underpins fears of a narrowly averted default that could nonetheless have lasting repercussions.
In 2011, markets tumbled that summer as Washington faced a similar standoff before recouping some of the losses in the fall after reaching a deal. Still, the S&P 500 ended 2011 essentially where it began.
The clash with default also led to rating agency Standard & Poor’s downgrading the US credit rating for the first time in history.
The White House added that a worst-case scenario is a default, which is protracted and lasts through the third quarter. In that scenario, they predict, the US economy would face “an immediate, sharp recession of the magnitude of the Great Recession,” with the stock market falling 45% and unemployment rising 5 percentage points.
The White House cited research from Moody’s Analytics and Chief Economist Mark Zandi in its Wednesday post. Zandi is an independent economist who also projected some of the economic costs and discussed his finding as a leading witness in Thursday’s Senate hearing.
“We need to end this drama as soon as possible or we will go into recession and our fiscal challenges will only get worse,” Zandi told the assembled senators.
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The focus is on the economic cost as both sides publicly harden their positions ahead of a much-anticipated meeting next Tuesday.
The White House session is scheduled for May 9 and is scheduled to include Biden and McCarthy, along with House Minority Leader Hakeem Jeffries (D-NY), Senate Majority Leader Chuck Schumer (D-NY), and Senate Minority Leader, Mitch McConnell (R-KY).
Ben Vershkul is the Washington correspondent for Yahoo Finance.
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