GOP Debt Plan Raises Odds of Recession: Economist

GOP Debt Plan Raises Odds of Recession: Economist

Mark Zandi
SIPA USA
By Yuval Rosenberg and Michael Rainey
Thursday, May 4, 2023

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GOP Debt Plan Could Push US Into Recession: Moody’s Chief Economist

Moody’s Analytics chief economist Mark Zandi told lawmakers Thursday that the bill passed by House Republicans to raise the debt limit in the short run while slashing spending over a period of 10 years would drag on economic growth and possibly push the U.S. into a recession.

Speaking at a Senate Budget Committee hearing, Zandi said the government spending cuts included in the bill would reduce economic growth by 0.67 percentage points in 2024. That alone would not be enough to cause a recession, Zandi said, but it could hasten a slowdown that many economists expect to develop later this year or in early 2024.

“The timing of the government spending cuts in the Limit, Save, Grow Act is thus especially inopportune — it would meaningfully increase the likelihood of such a downturn,” Zandi said in his prepared testimony. “Indeed, under the legislation, GDP growth is so weak that employment declines in the first three quarters of 2024, and the unemployment rate rises by more than a percentage point to nearly 4.6% by the fourth quarter of 2024.”

The fact that the bill would raise the debt limit for less than one year is also a problem, Zandi said, since the likelihood of another political showdown over the issue in just a few months would “weigh on investor, business and consumer confidence and thus economic activity.”

Zandi also noted that the spending cuts outlined in the House GOP bill would push nondefense spending to lows not seen in decades when measured as a share of the economy. “If nondefense discretionary outlays were to bear the full brunt of the proposed budget cuts, they would fall to 2% of GDP by fiscal 2033, the lowest since at least the early 1960s,” he said.

Lawmakers spar: The hastily arranged Senate hearing gave Democratic lawmakers a platform to push back against the bill passed by House Republicans last week. Sen. Patty Murray (D-WA) charged that the GOP was using the debt ceiling as a hostage. “House Republicans are saying if you don’t let us wreck the economy and whittle down essential government services to the point where we are laying off air traffic controllers, then we will just wreck the economy by refusing to pay the bills instead,” she said.

In response, Republicans focused more on the long-term issue of the national debt while calling on President Biden to come to the negotiating table. “House Republicans have acted responsibly by passing a debt ceiling increase,” said Sen. Chuck Grassley (R-IA), the top Republican on the committee. “In contrast, President Biden and Democrats have sat idly by.”

Brian Riedl, a tax and budget specialist at the conservative Manhattan Institute, said the current fiscal trajectory is unsustainable and must be addressed “immediately.” He warned that international investors would punish the U.S. if it continues to increase its debt. “If we don’t deal with this, the bond market will cut us off at some point and it will be much more painful,” he said.

At the same time, Riedl declared that lawmakers must avoid a default. “I agree that the debt limit must be raised on time, no matter what,” he said. “Hitting the debt limit would force an immediate 20% cut in federal spending, and possibly default on the national debt. The effect on families, businesses, financial markets, and the broader economy would be devastating. That is not a solution to soaring debt. The debt limit must be raised.”

Another expert appearing before the committee, Jason J. Fichtner, chief economist at the Bipartisan Policy Center, emphasized that raising the debt ceiling should be lawmakers’ top priority. “First, Congress must raise the debt ceiling. Period. Full stop,” he said. “Taking the nation near the brink of defaulting on any payment obligations—or going over the cliff and failing to make any obligated payments—will cause unnecessary fiscal expense, potentially damage the full faith and credit of the United States, cause financial harm to millions of Americans (through possible delayed government payments and loss of stock market value and retirement account wealth) and, in the end, cost more than any potential savings being discussed or imagined.”

After the debt ceiling threat is removed, Congress can work to improve the country’s unsustainable fiscal trajectory, Fichtner said. He called on lawmakers to work on a bipartisan basis. “While the debt limit is not a good mechanism to facilitate the necessary and thoughtful conversation on addressing the nation’s fiscal challenges, it is the opportunity currently present and available,” he said. “I encourage members of the House and Senate, Democrats and Republicans, and President Biden, to sit down and negotiate before the Treasury Department runs out of options to continue making full payments on the government’s obligations.”

The bottom line: Although the experts testifying before the Senate committee agreed that the U.S. needs to address its long-term fiscal challenges, there was no agreement on whether using the threat of default provided a proper framework for doing so. All did agree, however, that default should not be an option. “We need to end this drama as quickly as possible," Zandi said. “If we don't, we're going to go into recession and our fiscal challenges will be made even worse.

White House Surprised by Lack of Establishment Support for Its Debt Stance: Report

As President Biden prepares to meet next week with House Speaker Kevin McCarthy and other congressional leaders to discuss raising the debt limit, The Washington Post’s Jeff Stein reports that the White House has been surprised that business groups and budget hawks that it thought would be in its corner in this fight are instead siding with Republicans.

The White House has insisted that Congress should raise the debt limit without conditions, as it has done before, and that the risk of a debt default should not be used as leverage to force spending cuts, which can be discussed as part of budget talks. Republicans insist they won’t raise the borrowing limit without some concessions to address the country’s fiscal outlook.

Stein cites a range of groups, from the Business Roundtable and Chamber of Commerce to the Bipartisan Policy Center and the Committee for a Responsible Federal Budget, all of which have come out in favor of negotiations between the administration and House Republicans. None have pushed for the clean debt limit increase that Biden is seeking.

“Rather than join Biden in urging the GOP to simply raise the borrowing limit — as many administration officials had hoped — these groups have called for bipartisan budget negotiations, implicitly endorsing McCarthy’s position and rejecting Biden’s opposition to talks” about the debt limit, Stein writes.

He adds that administration officials were “stunned” by a statement from the Committee for a Responsible Federal Budget calling the House Republican debt limit bill a “realistic and extremely welcome first step.” Biden officials reportedly saw that as encouraging further brinkmanship over the debt limit. “We were livid,” one told the Post.

We should add here that much of the media is taking a similar approach to those outside groups. We’ve noticed television news anchors and reporters asking Democrats why they don’t just try to find a middle ground with Republicans, questioning whether Biden’s position is sustainable or asserting outright that it isn’t.

While business groups have urged the White House to negotiate, corporate leaders have largely stayed on the sidelines, as NBC News notes — and it’s not clear if pressure from companies would sway a House Republican conference that has empowered some of its most far-right members and seen relations with the Chamber of Commerce grow strained. “A battery of phone calls from the nation's executives may do little to persuade Republican stalwarts to get on board with the Biden administration to lift the debt limit – or to persuade the White House to agree to spending cuts demanded by the GOP,” NBC’s Kayla Tausche, Shannon Pettypiece and Kristen Welker write.

Republican strategist Liam Donovan told the Post that the White House made a bad bet on GOP dysfunction. “But with the passage of a GOP debt limit proposal, any industry group or think tank that is more interested in keeping the economy on the rails understands that the path of least resistance is for Biden to sit down with McCarthy and come to a deal that allows everyone to save face,” he said.

Lindsay Owens, the executive director of the liberal Groundwork Collaborative, was harsher: “The so-called ‘fiscally responsible’ adults in the room have actually been happy to participate in a reckless strategy of hostage-taking and trying to force the White House to accept MAGA cuts,” she told the Post.

What’s next: Biden faces increasing pressure to work out a deal, but the White House has stuck to its position, arguing that there’s an important principle at stake. We may get some indication next week whether the unexpected political dynamics, combined with time pressure, drives Biden to try to reach a face-saving deal.

“Mr. Biden could negotiate without ‘negotiating’ by trying to broker an early agreement on spending levels for the next fiscal year, before the X-date,” Jim Tankersley of The New York Times suggests as one of several possible options. “In exchange, Mr. McCarthy would commit to passing a clean extension of the debt limit.”

Number of the Day: 4

From The New York Times: “Covid was the fourth leading cause of death in the United States last year, dropping from its place as the third leading cause in 2020 and 2021, when virus fatalities were superseded only by heart disease and cancer, the National Center for Health Statistics reported on Thursday.”

The top three causes of death were heart disease, cancer and unintentional injury.

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