White House Warns of ‘Severe’ Damage From Debt Default

White House Warns of ‘Severe’ Damage From Debt Default

By Yuval Rosenberg and Michael Rainey
Wednesday, May 3, 2023

Good evening! Today is World Press Freedom Day and as we honor the important job journalists do in maintaining our democracy and pursuing truth around the world, we join The Wall Street Journal, President Joe Biden and many others in calling for the release of Evan Gershkovich and all journalists who have been unfairly imprisoned.

White House Warns of ‘Severe’ Damage From Debt Default

Here’s a quick update on the debt limit standoff: Nothing much has changed.

Ahead of a White House meeting on May 9 between President Joe Biden, House Speaker Kevin McCarthy (R-CA) and the other congressional leaders, “Democrats and Republicans appear to be waiting for next week’s meeting to decide their next steps, and remain dug in on their respective positions,” The Washington Post reported this morning.

As the game of chicken continues, with each side trying to ramp up pressure on the other, the Post’s Jacob Bogage details five possible outcomes for the debt limit standoff. Here’s a brief overview:

1. Biden and McCarthy reach a deal. It’s not clear what this might look like or how it could be achieved, but a deal could also come with economic costs and lingering uncertainty if it means the debt limit has to be revisited within a couple of years.

2. Rank-and-file lawmakers make an end run around congressional leadership. A long shot.

3. Congress passes stopgap legislation to delay a default. “If lawmakers decided to, they could suspend the debt ceiling until the end of September,” Bogage says. “That would align a new debt ceiling deadline with another deadline: the budget. Congress must pass new spending bills by the end of September, or the government would partially shut down. That would allow policymakers to put all of these issues in one debate, but it would raise the stakes even more if they don’t act.”

4. The White House acts unilaterally to resolve the crisis. The White House has a couple of options for acting on its own to defuse the crisis: a trillion-dollar coin and invoking the 14th Amendment to the Constitution, which says, “The validity of the public debt of the United States … shall not be questioned.”

Neither option seems likely.

5. The United States defaults. This would be ugly.

The White House Council of Economic Advisers on Wednesday warned that a breach of the debt ceiling “would likely cause severe damage to the U.S. economy” and that a protracted default would likely lead to millions of job losses.

The White House report examined the potential results of three scenarios: brinkmanship, where default is ultimately averted; a short default; and a protracted default. Each would cause damage, according to the analysis, as summarized in the chart below. In the worst case, a protracted default would prompt “an immediate, sharp recession on the order of the Great Recession.” The stock market could plummet 45% and the unemployment rate would jump more than 5 percentage points as more than 8 million jobs are wiped out.

The deadline for raising the limit and avoiding such a catastrophe could be as soon as June 1, and it’s rapidly approaching in part because of better service by the IRS, Politico’s Brian Faler notes: “It’s not just weaker-than-expected tax receipts that are pushing up the drop-dead deadline for raising the legal cap on borrowing. It’s also that the IRS is processing people’s tax returns faster. Because of its newfound efficiency, the government will run out of money to service its debts earlier than it expected.”


Quote of the Day

“The speaker is in a much weaker position within his own conference than John Boehner was 12 years ago. That ought to be a four-alarm-er for anybody who wants to land this economic plane safely.”

Sen. Ron Wyden (D-OR), in a Washington Post column by the left-leaning Greg Sargent and Paul Waldman, who argue that Republicans are to blame for recklessly initiating this risky standoff — but also that Democrats are only now fully realizing that the Republicans they are dealing with might actually be willing to allow the country to default and suffer massive economic costs, especially if it weakens Biden’s reelection chances. As Rep. Jim McGovern (D-MA) said: Republicans “started this crisis … but I don’t know whether Kevin McCarthy has the political capital to end it.”

The Republican Debt Limit Bill Would Raise Taxes: TPC

The House Republican debt limit bill would rescind clean energy tax breaks enacted last year as part of Democrats’ Inflation Reduction Act. In a new analysis, the Urban-Brookings Tax Policy Center finds that those tax changes would result in a reduction in after-tax incomes of 0.2 percent on average, or $810 for the top 20% of earners (who make at least $195,000 a year). The top 1% of taxpayers (with incomes of about $1 million and up) would see their after-tax incomes fall by an average of $6,400 in 2024 and $11,700 in 2027. And the top 0.1% of taxpayers (earning $4.3 million and higher) would see their after-tax incomes fall by an average of $31,700 in 2024 and $55,700 in 2027.

Low- and middle-income households would face smaller increases, with those earning up to $60,000 seeing an average drop in after-tax income of $40 or less next year.

“House Republicans have, at least temporarily, redefined what they mean by a tax increase. By doing so, they have turned their backs on their decades-old pledge to never, ever, not under any circumstances, raise taxes,” writes the Tax Policy Center’s Howard Gleckman.

He says that the GOP decision not to label this a tax increase (because the credits function like direct spending) could create a new path to raising revenues that could be used to cut deficits or offset new outlays and tax cuts. It could, but it almost certainly won’t, Gleckman says. The GOP’s “brief conversion feels more like a one-off aimed at canceling a Biden legislative success. But cutting tax expenditures in a thoughtful and systematic way could both clean up the revenue code and help reduce federal deficits.”


The Fed Raises Rates Again — and Signals It May Be Ready to Pause

The Federal Reserve on Wednesday raised its benchmark interest rate by 25 basis points and signaled that it may be ready to suspend its rate hike campaign.

The widely expected move marks the 10th time the central bank has raised rates in a little over a year. Since March 2022, the Fed has raised its key rate by 5 percentage points, to a range between 5% to 5.25%, a 16-year high.

Although Federal Open Market Committee did not explicitly say that it will pause its campaign of interest rate increases, it did change the language used in its closely watched post-meeting statement, removing a phrase saying that “the Committee anticipates that some additional policy firming may be appropriate.” Instead, Fed officials said they would continue to monitor the economic data to see if any further changes in its policy are necessary in the future as the central bank pursues its target inflation rate.

“In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the FOMC said. According to The Wall Street Journal’s Nick Timiraos, the FOMC used similar language in 2006 when it signaled that was finished raising interest rates at that time.

Speaking to reporters, Fed Chair Jerome Powell called out the significance of the new language. “That’s a meaningful change that we’re no longer saying that we anticipate” further increases, he said. The Fed chief also emphasized that the bank’s next move will be determined by how the economy performs. “Looking ahead, we’ll take a data-dependent approach in determining the extent to which additional policy firming may be appropriate,” he added.

Economy looks healthy: The economy expanded at a “modest pace” in the first three months of the year, the FOMC said. Unemployment is still low, and the labor market is “robust.” The committee members also said that the banking sector is “sound and resilient.”

Powell said that while the labor market seems to be moving toward more normal conditions, with wage growth easing and the number of vacant positions falling, it still has a way to go. “[O]verall, labor demand still substantially exceeds the supply of available workers,” he said.

Still, the steady improvement in conditions from the Fed’s perspective suggests that a “soft landing” for the economy may still be an option. “There are no promises in this, but it just seems to me that it’s possible that we can continue to have a cooling in the labor market without the big increases in unemployment that have gone with many prior episodes,” Powell said.

Keeping options open on rates: KPMG Chief Economist Diane Swonk described the Fed’s stance as a “hawkish pause,” one that gives the central bank the leeway to continue to ratchet up rates if conditions call for it. JPMorgan’s Michael Feroli agreed, saying in a note that while the FOMC’s change in language hints at a pause in interest rate hikes, “the language also retained the option to tighten at the next meeting if conditions warrant.”

A message on the debt ceiling: Asked about the current showdown over the debt ceiling, Powell said that the Fed defers to Congress on fiscal matters. At the same time, he said it is important the debt limit be raised in a “timely way.” We “should not even be talking about a world in which the U.S. does not pay its bills,” he said. “It should not be a thing.”

Powell also warned that the Fed cannot prevent or undo any damage that may occur in the event that lawmakers are unable to raise the debt limit in time. “No one should assume that the Fed can … protect the economy and our financial system or reputation globally from the damage such an event may inflict,” he said.


Views and Analysis