White House Warns of Recession as Debt Limit Battle Continues
WASHINGTON : White House economists on Wednesday warned of “serious damage” to the U.S. economy in the event of a default, warning that a prolonged default could lose 8.3 million jobs and send the stock market plunging 45%.
But the new report from the Council of Economic Advisers shows that even less severe scenarios would hamper the US economy, evidence that the political confrontation over the debt limit comes at a large financial cost. Without a deal between Congress and the White House, Treasury Secretary Janet Yellen warned that the federal government will not have the accounting tools to continue borrowing and may default as early as June 1.
The first and most dangerous scenario is a “prolonged default”. The second is a “brief default” where Congress acts quickly to allow the nation to borrow again after defaulting. The third is “brinkmanship,” where legislators claim the country’s full trust and credit, but avoid bankruptcy. All three would hurt the economy, the experts said.
President Joe Biden is meeting with congressional leaders on May 9 to try to find a way to resolve the impending crisis.
House Republicans are pushing for spending cuts as part of any plan to allow the country to resume borrowing. Biden says he will not allow the country to be “hostage” to such demands and will only negotiate spending with the GOP as part of the budget process. The president and Democratic legislators are pushing for a “clean” increase in the country’s $31.4 trillion. debt limit.
A spokesman for House Speaker Kevin McCarthy, R-Calif., sent an email Wednesday blaming Democrats for the stalemate.
“There is no good reason other than political malpractice for the US to default on its debt,” McCarthy spokesman Chad Gilmartin wrote. “Enough revenue is coming in to pay the interest on the debt.”
That statement views default as relating solely to federal loans, but state officials warn that missed payments to contractors, Social Security recipients, federal employees and others would also constitute a default.
The White House analysis warned that a prolonged default could cost more than 8 million jobs in the third quarter of 2023, raising the prospect of “an immediate, sharp recession on the order of the Great Recession.”
The report said that the government, unable to borrow money, would lack the traditional tools it uses to mitigate the impact of economic downturns, namely economic stimulus and social support.
“Because the administration would be unable to take countercyclical measures in a break-induced recession, there would be limited policy options to help cushion the impact on households and businesses,” the White House said. “The ability of households and businesses, especially small businesses, to borrow through the private sector to offset this economic pain would also be compromised.”
A brief absence would also cause damage with 500,000 fewer jobs. Even the “brinkmanship” approach, where lawmakers strike a deal at the eleventh hour, could cost about 200,000 jobs and shave 0.3% of annual gross domestic product, according to the analysis.
There are already signs of market stress from the showdown as US Treasury default insurance costs have risen. The US economy is also in a fragile state as the Federal Reserve’s efforts to lower inflation have fueled recession concerns.