Debt ceiling uncertainty will wreak economic havoc, even without default

Republicans in the House of Representatives plan to hold the federal government’s portfolio hostage to impose massive cuts to Social Security, Medicare, Medicaid and other programs. This irresponsible brinkmanship of allowing the federal government to foot the bills that Congress, including the controlled by republicans, have already incurred will create great uncertainty. Businesses and households will reduce their spending, and find it more difficult to get financing for future projects as the fiscal outlook for the coming months becomes more murky. This will slow down an economy that is already weakening. Republicans don’t have to push the US government into default to wreak havoc on the economy. His threat of default and/or unspecified cuts to government spending will already do substantial damage on its own.

The United States government reached the debt limit in January 19, 2023. This is an artificial and globally almost unique limit: only Denmark has one, too — about how much the government can borrow without Congress passing an increase to this limit. Treasury Secretary Janet Yellen said her agency will use a variety of extraordinary measures to continue paying bills until the summer. At the same time, newly-majority House Republicans have said they won’t pass an increase unless they can make significant gains yet. unspecified cuts to key programs including Social Security and Medicare. To be clear, this debt has accumulated over decades. It includes, for example, billions in money the government borrowed to ineffective background Y regressive drip tax cuts under Presidents Reagan, George W. Bush, and of trump time in office. But if Congress doesn’t approve an increase in the amount the US government can borrow by the time the Treasury runs out of extraordinary measures, the US will default on its debt. The clock is ticking on a high-stakes and totally unnecessary fiscal policy showdown.

This creates great uncertainty in economic policy along at least two lines. First is the question of “will they or won’t they?” – actually US government debt default, that is. To put it mildly, a default would create a whirlwind of economic pain not just in the US but around the world. Stock markets would crashthe the value of the dollar would plummetinflation would rise and the economy would go into recession Similar to the Great Recession. Even a short-term default would be accompanied by a government shutdown, as the government will no longer be able to pay for services. When the government shut down during the Trump administration, it cost workers, families, businesses, and the economy. expensive with an estimated cost of 0.13 percentage points less growth for each week of closing. Second, even without the nightmare scenario of a full-blown default, people and businesses are left wondering what the Republicans will want to cut, when, and by how much. They have said they want to cut Social Security and Medicare. But specific cuts and their time not clear It’s also not clear whether Republicans will stop at cutting those programs so necessary in an aging society or pursue other spending, both defense and non-defense. After all, this is the party that he flatly refused to state his political priorities before voters went to the polls last fall, leaving everyone wondering what they really want and what they will do.

This huge uncertainty will contribute to slower growth, even before the country hits the final deadline for a potential US government default in the summer. People they prefer not to spend their money when they are faced with an onslaught of the unknown, including an ever-increasing possibility of layoffs. Households will reduce spending on nondurable goods like clothing and food, but also on services like housing, utilities, furniture, and appliances. Spending on consumer goods it’s gone down a bit for much of 2022. New home sales also fell 29.7 percent in the third quarter of 2022 compared with their recent peak in the first quarter of last year, before the Federal Reserve began raising rates. of interest. The pall that irresponsible Republican policy casts on the economy will only accelerate this recession and result in a slower economy with attendant layoffs in manufacturing and construction, among other industries.

Similarly, companies abhor uncertainty when it comes to committing their money to longer-term investments. Republican-induced uncertainty about the country’s ability to make its payments therefore, it is likely to reduce investments. Business investment is recovering from its lows during the pandemic, but still below pre-pandemic levels relative to the size of the economy. In particular, spending on structures like offices, manufacturing plants, and mines continues to decline, while spending on equipment like computers and trucks is barely above its 2019 levels. Only spending on software and other intellectual property, like patents, is up. That is, spending on things that companies can get out of fairly quickly has picked up, while things that require longer-term commitments by companies have not. The contrived fiscal crisis created by House Republicans will only continue this trend, again resulting in a slowdown in job growth in manufacturing and construction.

Uncertainty about the Republicans’ plans related to allowing the US to service its debt also causes swings in the stock market and possible downward pressure on the value of the dollar. Investors are reassessing their outlook for economic growth amid these massive political risks, leading to sharp up-and-down moves in stock markets. This already happened when Standard and Poor’s downgraded the vaunted credit rating on US government debt in 2011in the middle of another fiscal stagnation due to the debt ceiling. They will also start moving money into capital markets abroad, where the debt stalemate doesn’t directly apply. In the process, the value of the dollar will continue to fall as people sell dollars to invest abroad, as the US government will be seen as a riskier financial bet. The dollar has already lost 5.8 percent of its inflation-adjusted value compared to the currencies of other advanced economies from October to December 2022. Additionally, investors will want to be compensated by the US government for these increased risks by charging higher interest rates: a process that is already happening. These market movements will make it difficult for companies to obtain financing at reasonable interest rates, as they increasingly have to compete for money in international markets and pay for the increased risks in the US economy with higher interest rates.

The US economy is already facing headwinds from higher interest rates and the fallout from continued supply chain bottlenecks. Republican fiscal recklessness only further jeopardizes the recovery and, along with it, people’s financial security. The United States has experienced a historically rapid recovery from the depths of the pandemic. Even with very low unemployment rates, many people struggle to make ends meet. Economic growth and a strong and sustainable labor market recovery should continue to help people thrive financially. However, the new Republican majority in the House of Representatives is putting its own political talking points ahead of the economy and people’s livelihoods by creating massive economic risks for no good reason.