White House economists said in a new analysis released Wednesday that an extended breach of the nation’s borrowing limit could wipe out more than 8 million jobs and cause “severe” economic damage, as lawmakers run out of time to resolve the fiscal impasse.
The Council of Economic Advisers also warned that less dramatic failures around the debt limit — including “brinkmanship” in which the limit is approached but not breached — could cost hundreds of thousands of U.S. jobs.
“There is broad consensus amongst economists that such an event would generate an entirely-avoidable economic catastrophe,” the report states. “The economy would quickly shift into reverse, with the depth of the losses a function of how long the breach lasted.”
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End of carouselWhat is the debt ceiling?
It’s a restriction Congress has put on how much money the federal government can borrow to pay its bills, which has been in place since 1917. Because the government usually spends more than it takes in, Congress needs to raise the debt ceiling fairly frequently to pay for its operations (sort of like a credit card bill).
What is a default?
If Congress doesn’t raise the debt ceiling, the government can’t borrow and might not be able to pay its bills (like bond interest) on time. That’s called a default, and it’s never happened before on this scale (though the U.S. got close in 2011). It would probably tip the U.S. into a recession and shake the global economy.
Why does the U.S. keep raising the debt limit?
Congress needs to raise the debt ceiling so the U.S. can keep issuing bonds, which investors around the world buy because they’re seen as a safe and reliable investment. In turn, the government can fund projects from the military to social programs.
Why is raising the debt limit a fight?
Until recently, it was routine for Congress to raise the debt ceiling. Since 1960, Congress has intervened 78 times to change it in some way. But it has become a political battle because it is one of the few must-pass bills, so lately Republicans have seen it as an opportunity to make demands.
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The new warnings come days ahead of President Biden’s meeting with congressional leaders Monday about the debt limit and government spending. While acknowledging the United States cannot default, Speaker Kevin McCarthy (R-Calif.) has been adamant that House Republicans will not increase the federal government’s borrowing limit unless Biden agrees to trillions of dollars in spending cuts — a position the administration has rejected.
The meeting Monday is expected to kick-start negotiations between the speaker and president, but Treasury Secretary Janet L. Yellen has warned that lawmakers may have only until June 1 before the United States runs out of money to meet all its payment obligations.
Congress approves the maximum amount the Treasury Department can borrow under the law. But federal spending outstrips the amount collected in tax revenue, requiring lawmakers to periodically raise the borrowing limit.
In the new report, the White House economists lay out the potentially devastating economic consequences of failing to act.
If the United States fails to make its payment obligations, interest rates could spike as investors demand a higher premium on purchases of government debt. Higher interest rates would ripple throughout the economy, making mortgages, credit cards and other purchases more expensive for most Americans. Retirement accounts, consumer and business confidence, and consumption would all take a hit.
Because the United States is widely trusted to repay its debt obligations, the federal government can borrow at relatively cheap rates. But that could change if the debt ceiling is breached. The White House report cites an analysis by the Brookings Institution, a Washington-based think tank, finding that federal borrowing costs could surge by $750 billion over the next decade if the limit is breached.
Unlike a traditional recession, in which lawmakers approve new spending to counteract a private market contraction, Congress would have few tools to respond to the economic shocks caused by a debt ceiling breach, the administration report stresses.
“Unemployment increases 5 percentage points as consumers cut consumption, and businesses lay off workers,” the report states. “Unlike the Great Recession and the COVID recession, the government is unable to help consumers and businesses.”
The White House analysis also cautions that getting too close to the debt limit could itself harm the U.S. economy.
Even breaching the debt limit for a week could cost 500,000 jobs, the analysis found. “Brinksmanship” on the debt limit could cost 200,000, the analysis found.