The U.S. economy could quickly shed a million jobs and fall into recession if lawmakers fail to raise the nation\u2019s borrowing limit before the federal government exhausts its ability to pay its bills on time, the chief economist of Moody\u2019s Analytics, Mark Zandi, warned a Senate panel on Tuesday.
The damage could spiral to seven million jobs lost and a 2008-style financial crisis in the event of a prolonged breach of the debt limit, in which House Republicans refuse for months to join Democrats in voting to raise the cap, Mr. Zandi and his colleagues Cristian deRitis and Bernard Yaros wrote in an analysis prepared for the Senate Banking Committee\u2019s Subcommittee on Economic Policy.
Senator Elizabeth Warren, Democrat of Massachusetts, held the subcommittee hearing on the debt limit, and its economic and financial consequences, at a moment of fiscal brinkmanship. House Republicans are demanding deep spending cuts from President Biden in exchange for voting to raise the debt limit, which caps how much money the government can borrow.
That debate is likely to escalate when Mr. Biden releases his latest budget proposal on Thursday. The president is expected to propose reducing America\u2019s reliance on borrowed money by raising taxes on high earners and corporations. But he almost certainly will not match the level of spending cuts that will satisfy Republican demands to balance the budget in a decade.
The report also warns of stark economic damage if Mr. Biden, in an attempt to avert a default, agrees to those demands. In that scenario, the \u201cdramatic\u201d spending cuts that would be needed to balance the budget would push the economy into recession in 2024, cost the economy 2.6 million jobs and effectively destroy a year\u2019s worth of economic growth over the next decade, Mr. Zandi and his colleagues wrote.
\u201cThe only real option,\u201d Mr. Zandi said in an interview before his testimony, \u201cis for lawmakers to come to terms and increase the debt limit in a timely way. Any other scenario results in significant economic damage.\u201d
\u201cThe economy is very vulnerable,\u201d he added. \u201cEven without the debt-limit drama, the recession risks are high. It won\u2019t take much to push us in, and this is certainly a lot more than \u2018much.\u2019\u201d
Mr. Zandi\u2019s analyses are frequently cited by the Biden administration in support of its economic policy proposals. In this case, Ms. Warren is using the Moody\u2019s work to push Mr. Biden, in a letter sent to the White House this week, to resist Republican demands for spending cuts and instead continue insisting on a debt-limit increase that is not tied to any changes in fiscal policy.
\u201cEveryone has been talking up to now about how dangerous it would be to default on the national debt, and that\u2019s right,\u201d Ms. Warren said in an interview. \u201cBut it would be even more dangerous to give in to the Republican cuts.\u201d
\u201cThe president has stood strong,\u201d she said, \u201cand I urge him to continue to do that.\u201d
Mr. Zandi\u2019s projections join a growing list of warnings from forecasters on Wall Street and at Washington think tanks about the consequences of failing to increase the borrowing limit in a timely manner.
House Republicans have refused to raise the limit unless Mr. Biden agrees to deep but unspecified cuts in federal spending. They say the nation\u2019s current levels of debt, accumulated in bipartisan fashion over two decades of the federal government spending more money than it receives in tax revenue, pose a current and future threat to economic growth.
Mr. Biden has said he welcomes a conversation about fiscal policy with Republican leaders but refuses to negotiate on the debt limit, which allows the government to borrow money to cover debts already approved by Congress.
he government hit its statutory $31.4 trillion debt limit in January. The Treasury Department is employing what are essentially accounting maneuvers that allow it to continue to pay all its bills on time. But those maneuvers work only for a limited time.
Independent groups like the Bipartisan Policy Center in Washington and the Congressional Budget Office have estimated that sometime this summer or early this fall, the government will no longer be able to pay everyone \u2014 including bondholders, Social Security recipients and federal employees \u2014 on time. The Moody\u2019s team estimates that deadline, known as the X-date, will fall on Aug. 15.
The analysis considers several ways the impasse might be resolved in Washington. In one, Mr. Biden acts to circumvent the debt limit without the help of Congress, inviting a constitutional challenge but potentially minimizing the harm to the economy. White House aides have said repeatedly that Mr. Biden will not pursue that route.
In a scenario where lawmakers\u2019 inaction forced the Treasury Department to miss some required payments in order to make others, the analysis predicted a swift backlash from financial markets, akin to the stock plunge in 2008 when Congress at first voted down a program to shore up Wall Street banks as a global financial crisis set in. If, as in 2008, Congress reacted by quickly raising the debt limit, the lingering damage would be enough to cause a mild recession and nearly one million job losses.
If lawmakers ignored the market warnings and went months without raising the limit, the analysis concluded, \u201cthe blow to the economy would be cataclysmic.\u201d Federal spending would plunge, a deep recession would set in and the unemployment rate would spike to more than 8 percent from 3.4 percent.
But if Mr. Biden were to accept Republicans\u2019 budget blueprint, the analysis found, the resulting drop in federal spending on health care, education and other domestic programs would lead to a recession and widespread job loss. Low-income Americans would most likely bear a disproportionate brunt of the economic pain, it concluded.
Mr. Zandi said he favored eliminating the statutory debt limit entirely to end the threats that a potential default posed to the economy. \u201cI just think you want to break that cycle once and for all as best you can, because it\u2019s very counterproductive,\u201d he said.<\/p>\n\n\n\n