Expert witness: House debt, default, cut bill could lead to recession as early as this fall
The House GOP proposal to slash domestic spending in exchange for raising the debt ceiling would cost the economy 790,000 jobs and $141 billion over the next year and a half, the Senate Budget Committee heard this week.
That prognosis came from Mark Zandi, Chief Economist for Moody’s Analytics. Zandi testified about the probable effects of either defaulting on the national debt or not defaulting on the debt, but passing severe cuts. His testimony came after the House last week passed the “Limit, Save, and Grow Act,” largely along a party-line vote.
Democrats wasted no time in coming up with their own name for the legislation, and this week they held a Senate Budget Committee hearing titled, “The Default on America Act: Blackmail, Brinkmanship, and Billionaire Backroom Deals.”
In his testimony, Zandi said the timing of the GOP measure is particularly worrisome because cuts would begin happening this fall, when the condition of the economy is expected to continue to be in peril.
“…[R]ecession risks are uncomfortably high, with a consensus of economists and many investors and business executives expecting a downturn late this year or early next,” he said. “The timing of the government spending cuts in the Limit, Save, and Grow Act is thus especially inopportune – it would meaningfully increase the likelihood of such a downturn.”
He said if the bill becomes law, “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 percent by the fourth quarter of 2024. Compared with the Clean Debt Limit scenario, by year-end 2024, employment is 790,000 jobs lower and the unemployment rate is 0.37 percentage point higher.”
The Senate committee heard from two other economists – one a conservative and one a centrist – who said that although the federal government is on a clearly unsustainable path when it comes to mounting debt and increased spending, the debt ceiling must be suspended or lifted, and it must happen on time.
“Today, I will make three points,” said Brian Riedl, Senior Fellow at the conservative Manhattan Institute. “First, that the current debt path is unsustainable and requires immediate attention. Second, that there is a long, bipartisan history of attaching deficit reforms to debt limit bills. Third, that ultimately the debt limit must be raised on time, no matter what.”
Riedl added that “hitting the debt limit would force an immediate 20 percent cut in federal spending, and possible 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.”
Jason J. Fichtner, Vice President and CEO of the Bipartisan Policy Center, added, “Congress must raise the debt ceiling. Period. Full stop.”
“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.”
Sen. Sheldon Whitehouse (D-R.I.), Chairman of the Senate Budget Committee, said the House GOP legislation “proposes a terrible choice: default on our financial obligations, cause widespread pain and wreck our economy. Or gut basic federal programs essential to our economic strength, cause widespread pain and wreck our economy.”
“Option One is the Republican default option,” Whitehouse continued. “What will that cost? Dr. Zandi estimates that a default of even just a few days would lead to a recession, cost close to a million jobs, and raise unemployment from 3.4 percent to 5 percent. A longer default would cost over 7 million jobs and push the unemployment rate over 8 percent. Interest rates on car loans, mortgages, and credit cards would rise – for decades.”
The second option, Whitehouse said, “is their Default on America Act, with its massive, backroom, devastating cuts to things like border security, law enforcement, education, affordable energy, opioid treatment, Meals on Wheels, elderly housing, administering Social Security benefits, and on and on – support vital to our economic growth and well-being.”
This was a hearing that laid out clearly that failure to raise the debt limit and adoption of the House-passed bill would both inflict severe blows to the economy. While it wasn’t the role of the hearing to spell out what would help, it seemed clear that if reduction of the deficit over the next decade is a good idea – something we don’t argue with – trying to do that solely through massive spending cuts will hurt millions of people and almost certainly trigger a recession. That means a long-term solution has got to include increased revenues from those who haven’t been paying their fair share: corporations and the wealthy. President Biden’s budget does that – it doesn’t cut; it invests in programs and increases revenues from the wealthy and corporations, and decreases the deficit by $3 trillion over a decade.