Update 674 — X-Date Approaching Fast
Prioritization: Pushing Default to the Limit
The two hearings held in Congress this week on the debt limit showed a stark but all-too-familiar partisan contrast. Senate Democrats agreed that the full faith and credit of the United States must not be questioned, consistent with the command of the Constitution and 78 consecutive votes of Congress. Anything else and the nation could face economic consequences for generations to come.
The House GOP, on the other hand, had a different idea in mind. Legislation considered at a House Ways and Means markup this morning would aim to “prioritize” which obligations the federal government should uphold and which it should defer on. The bill was approved by the committee today in a vote of 21-17.
In today’s update, we review these two hearings and assess the status of the nation’s debt limit.
The Senate’s Economic Policy Subcommittee held a hearing Tuesday to examine the consequences of the failure to raise the federal debt limit – a phenomenon expected to plague the nation in as little as three months. Leading the hearing, Subcommittee Chair Elizabeth Warren emphasized the catastrophic consequences of not raising the debt limit and highlighted the Republican party’s disastrous proposals disguised as “solutions”. The grave tone underscored the urgent need for Congress to act, otherwise it risks crashing an already fragile economy and its respective supply chain issues.
Just hours ago, the House Ways and Means Committee met to debate H.R.187, inaptly named the Default Prevention Act. The bill, a three-page outline for an untested and largely unworkable plan, authorizes the Treasury Department to satisfy selective debt obligations while deferring others. The debate surrounding the bill demonstrated deep confusion about its innate provisions and operations, with one GOP member going as far as to ask, “How can you prioritize the Chinese Communist Party over our veterans?”
Because the bill allows for vague prioritization of “debts held by the public,” critics have argued that the bill has the potential to prioritize “wealthy, foreign bondholders — including billionaires and banks in China.” Experts in the field, including conservative economist Brian Riedl, have expressed doubt over the administrative feasibility of the proposal, arguing the technology to prioritize payments does not currently exist: “unless they can build a new system in the next four months, it doesn’t matter.”
Dangers of Default
New estimates by Moody’s Analytics project that even a short-term breach of the debt limit would trigger a mild recession, costing the economy nearly a million jobs and sending the unemployment rate to nearly five percent. Treasury yields, mortgage rates, and other borrowing rates would shoot up until the crisis was resolved and would likely not return completely to pre-default levels.
A more prolonged breach would spark a more severe recession, comparable to the global financial crisis. This scenario would send the unemployment rate skyrocketing to 8 percent, wiping out $10 trillion in household wealth, and cost nearly seven million jobs. Stock prices would drop by nearly a fifth at the peak of the recession, and after ten years, the economy would still be feeling the effects of the crisis, with real GDP nearly a full percentage point below a clean debt limit scenario and 900,000 fewer jobs.
Default would also rock the global financial system, calling into question the safety of US Treasury bonds. Even in a near-default scenario, consumer and investor confidence would be shaken, stock prices would fall, and the country would risk a credit downgrade similar to 2011. Uncertainty increases the cost of borrowing for the Treasury, and there are already signs that the market is wary of the possibility that Congress fails to address the debt limit – bonds that mature around the time that the Treasury is expected to exhaust extraordinary measures have higher yields than those that mature safely before.
Dangers of Cuts
Particularly striking were the estimated job losses under a scenario in which Republicans extract deep spending cuts in exchange for raising the debt limit. As part of a deal to become Speaker, Kevin McCarthy pledged to cut discretionary spending in Fiscal Year 2024 back to Fiscal Year 2022 levels. Republicans, including McCarthy, have already gone on the record that Social Security and Medicare cuts are off the table, and members on both sides of the aisle are likely to reject any cuts to defense spending whatsoever. This leaves little room for other discretionary spending, particularly if veterans’ medical care is also off the table, as it seems to be. Protecting the above programs while meeting Republicans’ targets for budget cuts would require 78 percent cuts to all other non-defense discretionary spending programs on average, according to Warren. Many programs are likely to be wiped out entirely in such an instance.
According to Moody’s report, such deep cuts would spark a recession in 2024 that would cost an estimated 2.6 million jobs at the height of the downturn. Real GDP would be 2.8 percent lower after ten years than in the clean debt limit scenario – the equivalent of the economy standing completely stagnant for a year – and the economy would still be short a million jobs after ten years.
While it seems unlikely that Republicans will be able to reach an agreement on such draconian cuts even within their own caucus, the threat of steep cuts to programs that serve as lifelines to America’s working families is very real. SNAP and Medicaid have been prominent targets of GOP proposals, but if the House majority insists on pursuing deep, immediate budget cuts, no beloved federal initiative is truly safe. Programs to support housing, education, infrastructure, public safety, and much more would be at risk. Furthermore, even if Social Security benefits remain untouched, cuts to the Social Security Administration’s funding could seriously impair the ability of the already funding-starved agency to fill vacancies, respond to customer service requests, and fulfill its basic obligations.
Getting Serious About Revenue
Sen. Warren was sure to remind viewers that if Republicans wanted to seriously tackle the deficit, there were a number of revenue-raising options on the table. These options would make the wealthiest Americans and corporations pay their fair share while raising money that could be used for deficit reduction. Warren specifically cited repealing Trump-era tax cuts for the wealthy and corporations, establishing a global corporate minimum tax, raising the tax on stock buybacks and instituting a new tax on the ultra-wealthy. Combined, these ideas would raise trillions of dollars and create a fairer, more balanced tax code with only a marginal impact on the economy.
Warren and other Congressional Democrats’ proposals stand in stark contrast with Republicans’ promises to refuse tax increases of any kind. Americans overwhelmingly support making the wealthy and corporations pay their fair share and also rely on government spending for everything from their children’s education to knowing the food they buy at the grocery store is safe. Pledging to slash spending without raising any kind of new revenue is simply not in line with the public’s best interests. Congress does need to be mindful of the deficit in the long term, but any arguments about the deficit that do not include serious consideration of revenue raisers and the real-world costs of budget cuts should not be taken in good faith.
By presenting the options on the table as a binary choice between default and the near-elimination of non-defense discretionary spending, Congressional Republicans risk seriously damaging the American economy on the one hand or seriously damaging the American economy on the other. Congress needs to take prompt, no-strings-attached action on the debt limit now and deal with budget disputes later. The consequences of the debt limit being used as a political bargaining chip in 2011 are still being felt, and now is not the time to repeat and even exceed the mistakes of the last decade. The only way to avert economic disaster is for Congress to find a way around conservative demands for budget cuts at any cost and simply pass a clean bill to raise or suspend the debt limit this summer, well in advance of the X-date.
President Biren’s FY 24 budget proposal, out today, seeks to address the fiscal issues underlying the debt limit, but the debate will continue. Tomorrow, Treasury Secretary Yellen will appear before the same Committee that adopted H.R. 187 today. While formally presenting the President’s FY 24 budget request for Treasury, Secretary Yellen will also no doubt be asked for her views on the bill’s prioritization scheme, likely adding her skepticism to that already expressed by such observers as her predecessor, former Trump Treasury Secretary Steven Mnuchin, who said simply, “it won’t work.”