Ahead of congressional leaders’ Tuesday meeting at the White House, economists and other experts have renewed warnings about what the GOP’s threatened first-ever U.S. default—or even coming precariously close to it—could mean for the country.
“Any time would be a bad time to default, but right now, in particular, would be pretty catastrophic,” said Mike Konczal, director of macroeconomic analysis at the Roosevelt Institute, during a Monday press conference. “The conservative agenda right now is to try to reduce the standard of living for many people without having to have their fingerprints on it.”
Openly backed by most Senate Republicans, the House GOP—led by Speaker Kevin McCarthy (R-Calif.)—is pushing for sizable cuts to federal spending, as made clear in the so-called Limit, Save, Grow Act they passed last month. The bill, which Senate Majority Leader Chuck Schumer (D-N.Y.) has called “dead on arrival,” would raise the debt ceiling by $1.5 trillion or until March 31, 2024, either way with severe austerity and on the backs of working people.
After months of zero progress on increasing the debt limit and amid estimates from Treasury Secretary Janet Yellen and others that the U.S. government could run out of money to pay its bills as soon as June 1, President Joe Biden is set to host McCarthy, Schumer, House Minority Leader Hakeem Jeffries (D-N.Y.), and Senate Minority Leader Mitch McConnell (R-Ky.) at 4:00 pm ET.
“We cannot allow extremists in the House to make devastating ransom demands in exchange for not cratering our economy.”
“President Biden will discuss the urgency of preventing default and stress that Congress must take action to avoid default without conditions,” Michael Kikukawa, a White House spokesperson, said in a statement to The Washington Post early Tuesday. “He will discuss how to initiate a separate process to address the budget and FY2024 appropriations.”
Despite similar votes under GOP presidents, House Republicans keep refusing to pass a clean bill raising the nation’s arbitrary borrowing limit—and the budget blueprint Biden unveiled in March, featuring major social investments paid for with tax hikes targeting rich individuals and corporations, differs dramatically from GOP priorities, leaving few optimistic about the meeting.
Still, Claire Guzdar, a spokesperson for the ProsperUS coalition—which is made up of over 85 progressive groups—declared Tuesday that “Congress and the White House must move quickly to pass a clean debt limit bill before it’s too late. We cannot allow extremists in the House to make devastating ransom demands in exchange for not cratering our economy—period.”
“The Republican House majority’s shameful default bill is completely unworkable. Their plan is full of wildly unpopular and damaging cuts to healthcare, food assistance, clean energy jobs, and more,” said Guzdar. “This bill would be devastating for workers and the economy while doing nothing to make corporations and the wealthy pay their fair share. Negotiating on the debt limit should be a nonstarter at any time and rejected immediately as an egregious attempt to push our economy into crisis.”
Experts warn that “we can’t afford to undo the extraordinary economic progress we’ve made in the last two years,” as Groundwork Collaborative executive director Lindsay Owens said during the Monday media briefing with other economists.
“President Biden should not agree to negotiate a deal on the debt ceiling that increases unemployment or slows growth—not when there [is] a myriad of easier and softer ways to avoid default,” she argued. “We’re at a 53-year record low in unemployment. It would be an incredible tragedy to undermine the gains that we’re finally seeing in the labor market, particularly for marginalized workers.”
Similarly stressing that “the labor market is actually starting to produce gains for workers who tend to be the last hired and first fired,” Demos chief of programs Angela Hanks said that “the dangerous brinkmanship over the debt ceiling and the extremist position that Speaker McCarthy has staked out really poses a deep threat to that progress and threatens to trigger a recession.”
Republicans’ proposed spending cuts “will be borne by people who are already marginalized… who cannot afford to have another economic crisis triggered by our politics,” Hanks warned. “This default would be a crisis for our economy and our democracy, and it threatens to devastate communities across the country.”
“The dangerous brinkmanship over the debt ceiling and the extremist position that Speaker McCarthy has staked out really poses a deep threat to that progress and threatens to trigger a recession.”
The high stakes have led some to urge the White House to take unilateral action if GOP lawmakers continue to hold the global economy hostage. Options include minting a platinum coin worth $1 trillion and invoking a section of the 14th Amendment to the U.S. Constitution that states the validity of the national debt “shall not be questioned.”
Proponents and opponents of the 14th Amendment route have suggested that Biden invoking it could lead to a consequential decision by the right-wing U.S. Supreme Court. Such a ruling could already be in the works, thanks to a federal lawsuit filed Monday by the National Association of Government Employees, which aims to have the debt limit law declared unconstitutional.
Robert Hockett, a Cornell University law professor of law and Westwood Capital senior counsel who previously worked at the Federal Reserve Bank of New York and the International Monetary Fund, told the Post Monday that “I don’t think the Supreme Court is prepared to bring on global financial calamity by finding in favor of the congressional Republicans.”
“I think the Supreme Court would expedite review very quickly on this, and for that reason, I don’t think we’d see terrible turmoil in the markets,” he said. “I think we’d have more turmoil if we have to wait to see if McCarthy and Biden will come to an accommodation.”
In a Tuesday opinion piece for The New York Times, Hockett wrote that if the U.S. defaults, “we would see a great tottering—if not worse—of U.S. banking, U.S. financial markets, and the world’s capital markets.”
For one thing, U.S. Treasury securities, valued at over $24 trillion (by far, the largest asset market in the world), are the primary safe asset held in banking, pension fund, mutual fund, and other business portfolios. Our present regional bank crisis involving Silicon Valley Bank and others is occurring in response to a relatively slight, temporary drop in the value of low-yield Treasuries largely because of the Fed’s interest rate hikes. An outright default would leave us nostalgic for the comparable placidity of this troubled moment.
We would also probably see a rapid plunge in the value of the dollar worldwide as a global reserve asset. Our currency’s value in relation to others’ is rooted primarily in global demand for dollar-denominated financial assets, since we have relinquished our primacy as a goods exporter to China. Since Treasury securities are by far the most voluminous asset, their slide would be the dollar’s slide. This would quickly render imports, on which we continue to rely, far more expensive. Inflation could look more like that of Argentina or Russia 20 years ago than that of the present or even the 1970s.
This is to say nothing of our subsequent incapacity to maintain our military bases and other assets abroad and pay thousands of U.S. military personnel.
“Even the serious prospect of U.S. default would quickly raise debt-servicing costs, rendering our deficit larger than it currently is—a consequence dramatically at odds with Republicans’ professed concerns about tying the debt ceiling hike to massive budget cuts,” he added, advocating an end to the debt limit, which comes from a 1917 law. “Let us now end the absurdity.”‘
After outlining the impacts of a default—including cuts to Inflation Reduction Act climate provisions that “would be literally catastrophic”—Economic Policy Institute experts Josh Bivens and Samantha Sanders also asserted Tuesday that “all of this clearly calls for abolishing the debt limit to keep irresponsible congressional majorities from holding the nation’s economy hostage to its policy preferences in the future.”
“But what makes today’s debt limit showdown so bad is how normalized it has become—often with the encouragement of too many in D.C. policymaking circles who should know better,” the pair added. “If this drive to normalize debt limit brinkmanship does not spark an economic meltdown this time, we all know where it leads next time.”
This post has been updated with comment from the Economic Policy Institute.
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