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