Failure to raise the debt ceiling could trigger another recession
About the Author: Paul Van de l’Eau is a senior researcher at the Center on Budget and Policy Priorities.
Lawmakers on both sides face a critical decision: will they protect the full confidence and credit of the United States by raising or suspending the debt ceiling, or will they let our nation default for the first time, with devastating consequences for households, federal civilians and the military, financial markets and the economy?
The decision must not be partisan. Both sides have supported increasing the debt ceiling in recent years to avoid default. Under President Trump, Democrats joined Republicans in suspending the debt ceiling three times.
To be clear, suspending or increasing the debt ceiling does not authorize any new spending; it simply allows the federal government to meet its legal obligation to foot the bills of past budget decisions. As the Government Accountability Office States, “The debt ceiling does not control the amount of debt. Instead, it is an afterthought measure that restricts the Treasury’s ability to borrow to fund decisions already passed by Congress and the President.
Almost all of the debt to be contracted over the next few months will come from legislation enacted under previous Congresses and administrations. This includes bipartisan bills such as the 2020 Cares Act to address the pandemic and the economic fallout; legislation enacted during Republican administrations such as the 2017 tax cuts; and bills passed during Democratic administrations, such as the extension of George W. Bush’s tax cuts.
We never let the nation fail, and that’s because it would have profound consequences. If we don’t suspend or increase the debt limit, the treasury’s cash balances and borrowing privileges will likely be exhausted in October, leaving the federal government to default on its obligations. The Treasury could not borrow to meet it.
At that point, the federal government would be forced to impose drastic and massive spending cuts of about $ 1.2 trillion just in fiscal 2022, which begins October 1. That’s a 30% reduction in one year for every federal program except Social Security and Hospital Medicare. Insurance (which have their own trust funds) and interest on debt. Protecting some programs from cuts would require even larger cuts elsewhere. These spending cuts, totaling around 5% of GDP, would plunge the economy back into recession.
“A Default”, Moody’s Analytics declared this week, “would be a catastrophic blow to the nascent economic recovery … Global financial markets and the economy would be turned upside down, and even if resolved quickly, Americans would pay for this default for generations, as global investors would believe in Rightly so that the federal finances have been politicized and that a time may come when they would not be paid what is owed to them when they owe it. “
Unable to borrow, policymakers could not use fiscal policy to revive an economy that had fallen back into recession or ease the inevitable hardship millions of Americans would face. The spending cuts would leave households, businesses, and nonprofits unable to pay their bills while they wait for their federal payments. Military service members could see their pay delayed for weeks or even months. Veterans receiving pensions, low-income households receiving food assistance and communities receiving disaster assistance could all see their benefits delayed. Road contractors may not be paid quickly, preventing them from purchasing materials and paying their workers. State and local governments would face large budget deficits due to drastic cuts in federal funding for education, Medicaid and other vital services.
Some lawmakers say they oppose increasing the debt limit because they think the debt is too high. This assertion is wrong. The United States can afford what the federal government has borrowed. Federal interest payments, which are the inevitable cost of debt, are low and are expected to remain below average for many years due to low interest rates. The current low interest rates show that rising debt is not overheating the economy or crowding out private investment. They also suggest that the economy can support higher debt as a percentage of GDP than was appropriate when interest rates were much higher.
Additionally, as Congress strives to advance economic recovery legislation, some policymakers say they oppose the suspension or increase of the debt ceiling, fearing that the legislation behind the The administration’s “Build Back Better” program does not significantly increase debt. This is not the case. The legislation report the cost is much less than its gross cost. This is because Build Back Better includes significant income increases and healthcare savings for gap most or all of its cost, making the legislation largely or fully paid for. The infrastructure bill before Congress also costs less than is frequently cited, as some of its spending was expected to occur even without the legislation.
Under the current circumstances, it is entirely reasonable to add modestly to debt to help finance these important investments, which would grow the economy, expand opportunities, reduce racial and ethnic disparities, and build a more equitable nation. In any event, Congress should debate these measures on their merits, and opposing them is no excuse to reject the suspension or increase of the debt ceiling and the fulfillment of existing federal government obligations. .
The stakes of not suspending or increasing the debt ceiling are huge. US households and the economy are recovering from the deep recession. If Congress does not make the right choice, with Republican lawmakers joining Democrats in suspending or raising the debt limit, we will not only end up with another recession and widespread hardship, but also with a global calamity that we are witnessing. will pay the price for years to come.
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