The US economy already is on a knife edge, with fears of a looming recession amid a historic effort to tame decades-high inflation.
Now, members of the new House Republican majority have amped up the uncertainty by saying they won’t let the federal government keep borrowing money this year without an agreement to significantly cut spending. A standoff over increasing the $31.4 trillion debt limit when it’s reached later this year could roil financial markets, trigger higher borrowing costs, and push the economy into a recession it might otherwise have avoided, experts said.
The economic fallout would be even worse if, unlike in previous showdowns, Congress doesn’t ultimately raise the limit in time to avoid a first-ever US government default on its bills. The difficulty that the narrow House Republican majority had in electing Kevin McCarthy as speaker last week has amplified the concerns.
“I think the the economy’s going to struggle this year, but we have a fighting chance to avoid a downturn, assuming we don’t make a big mistake, like breaching the debt limit or even threatening to breach the debt limit,” said Mark Zandi, chief economist at Moody’s Analytics, an economics research and consulting firm. “The dysfunction in Washington is a very, very serious threat to the economy and our ability to avoid a recession in 2023.”
One of the concessions McCarthy made to win the speaker’s gavel was to use the need to raise the debt limit to force Democrats to agree to federal spending cuts. House Republicans have loudly complained about the rising national debt under President Biden, although they were largely silent as it shot up during the Trump administration.
The table is already being set for a high-stakes clash.
“I’ve never voted for a debt ceiling increase, and I won’t unless it’s paired with meaningful reform,” Representative Mike Gallagher, a Wisconsin Republican, said last week. Former president Donald Trump egged on Republicans this week, writing on Truth Social that they should be “playing tough in the upcoming debt ceiling negotiations.”
That’s got Democrats worried. While there is bipartisan agreement that the rising debt needs to be addressed, the White House has said Biden won’t negotiate over raising the debt limit, which is required to pay for spending already authorized by Congress.
“There will be no hostage-taking,” White House press secretary Karine Jean-Pierre said this week. “The full faith and credit of our country is too important to allow any of that, because to default would be to force extraordinary costs on the American economy and American families.”
Biden knows the damage a debt limit standoff can cause. He was vice president in 2011 when House Republicans under speaker John Boehner, fresh off winning control of the chamber after four years in the minority, balked at increasing the limit until the last minute during the Obama administration.
“It was terrifying, and the terror came from not being sure that Speaker Boehner had the ability to control his caucus,” said Harvard economist Jason Furman, who was a top White House economic official at the time. “The debt limit is just an existential threat to the US economy.”
Boehner had about a 50-seat majority in the House. McCarthy has only a four-seat majority, giving him much less flexibility to make a debt limit deal with Biden and the Democrats.
Fr. Boston Globe 1/11: https://www.bostonglobe.com/2023/01/11/nation/debt-limit-fight-could-cause-financial-chaos-push-economy-into-recession-experts-warn/?et_rid=1312764944&s_campaign=todayinpolitics:newsletter
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