WASHINGTON — A Senate subcommittee on the Banking, Housing and Urban Affairs Committee heard from witnesses Tuesday about the implications of not raising the $31.4 trillion debt limit amid a stalemate between Republican lawmakers and the White House over a bill that may allow the federal government to proceed to pay its debt obligations.
A recent report released by financial services company Moody’s Analytics, which outlines alternatives to a debt-limit bill, was a key feature of the hearing of the Subcommittee on Economic Policy. Mark Zandi, chief economist at Moody’s, said an impending default would “be a catastrophic blow to the already fragile economy.”
“Global financial markets and the economy could be upended, and even when resolved quickly, Americans would likely pay for this default for generations, as global investors would rightly consider that the federal government’s funds have been politicized and that a time may come after they wouldn’t be paid what they’re owed when owed it,” Zandi said in opening remarks released before the hearing.
The Moody’s analyst also said that a Republican budget proposal to incorporate large spending cuts with the goal of decreasing fiscal spending to 2022 levels over 10 years would prompt a recession next yr and lead to as much as 2.6 million jobs lost.
“Since Republicans have stated there might be no tax increases, and Social Security and Medicare advantages will remain untouched, to realize a balanced budget would likely mean all however the elimination of nondefense discretionary spending and the Medicaid program,” he said. “Given the dramatic reduction in government spending on this scenario and the already fragile economy, the economy suffers a recession in 2024. The economy’s long-term growth prospects are also meaningfully diminished given the severe fiscal restraint.”
Some Republican members of Congress, led by House Speaker Kevin McCarthy, R-Calif., are holding out on a debt ceiling agreement for negotiations with the White House over budget priorities, however the U.S. Treasury Department will exhaust all temporary measures to delay default between July and September unless lawmakers raise the debt ceiling, the Congressional Budget Office has warned.
As time runs out, a growing variety of lawmakers are weighing the Treasury’s ability to avoid a debt-limit breach by prioritizing payments to Treasury bondholders, based on the report. Analysts called the answer “badly misguided.”
“It might be challenged within the courts,” Zandi said of the workaround. “Bond investors, unsure of how this legal uncertainty could be resolved would demand a much higher rate of interest in compensation. Furthermore, politically, it seems unimaginable that bond investors, that features many foreign investors, would get their money ahead of American seniors, the military, and even the federal government’s electric bill for long.”
Douglas Holtz-Eakin, president of the American Motion Forum, a right-leaning fiscal policy organization, told the senators that the U.S. will effectively hand economic power to China if it defaults on its debt and endangers its international creditworthiness.
“The notion that we could quit the creditworthiness of the Treasurys and have the world stand by and never go find one other reserve currency is missing the massive point,” Holtz-Eakin said. “They might, after which we would be handing that chance to China. And at this juncture, there is not any reason to do this.”
In his opening remarks, Holtz-Eakin also said that skirting default would have “serious and opposed economic effects.”
“It might result in reductions in stock prices, reducing the wealth of many taxpayers. It would cut back economic confidence, which in turn could reduce consumer spending. It might increase rates of interest, leaving taxpayers on the hook for billions of dollars of interest payments. And it will increase the percentages of an accidental default,” he said.
Sen. Elizabeth Warren, chair of the economic policy subcommittee, compared the Republican pushback on the debt-limit decision to refusing to pay a bank card bill.
“The House Republicans have decided to make use of the debt ceiling to carry our government and our economy hostage, the Massachusetts Democratic senator said in the course of the hearing.
“They’re demanding massive cuts in government spending, investments within the American economy, investments in American staff, or they will not allow the USA to pay the debts that it has already incurred, you already know, a bit of like running up a bill on the bank card after which declaring that your recent budget plan is: We’re not going to pay the bill on the bank card.”
“House Republicans don’t seem concerned in regards to the upcoming debt limit deadline,” Warren said in her opening remarks. “As a substitute, they appear downright thrilled to have a possibility to make use of it as leverage to demand tax cuts for billionaires and giant corporations.”