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- The US could run out of money to pay its obligations as soon as June 1, as the debt ceiling looms.
- The White House is warning that a protracted default could be as bad as the Great Recession.
- However, unlike in previous recessions, the government couldn’t cushion the blow during a default.
The White House is sounding the alarm about what economic horrors the country might see without action on the debt ceiling.
An analysis from the White House Council of Economic Advisers probes what a default on the nation’s debt might look like. It would be an unprecedented economic catastrophe, and one that Treasury Secretary Janet Yellen warns could happen as soon as June 1.
If there’s a short default, the US would shed half a million jobs, and unemployment would increase by 0.3%, according to CEA’s analysis. And, in the worst case scenario — a protracted default — the country would lose 8.3 million jobs, and unemployment would rise by 5%.
That protracted default would trigger an “an immediate, sharp recession on the order of the Great Recession” of 2008-2009, according to CEA. The stock market would plunge by 45% in just the third quarter of 2023, making a dent on retirement accounts and leaving people spending less.
But there’d be a big difference from previous downturns: Unlike the Great Recession or the short but deep recession caused by the Covid pandemic, the government won’t be able to step in and throw money at the economic wounds. That’s because it wouldn’t have any.
To prevent a default within the next weeks or months, Congress will have to act within its limited number of working days to strike a deal — something that still looks far off as Republicans narrowly passed a bill full of spending cuts that Democrats pronounced dead on arrival.
“I think there is a path forward,” Mark Zandi, the chief economist at Moody’s Analytics, told Insider. “I think they should suspend the debt limit until the end of the fiscal year, and then pass legislation at that time to increase the debt limit, hopefully for at least a couple years.”
“I think people should understand that it is highly likely we will come to a deal. However, it’s worth being aware that if we do go over the debt limit cliff, the effects on families, corporations, the financial sector, and the economy could be potentially devastating,” Brian Riedl, a senior fellow and economist at the conservative-leaning Manhattan Institute, told Insider. “About roughly 20% of federal spending would have to be eliminated immediately. Federal contractors would not be paid, which could bring furloughs, layoffs, bankruptcies to tens of thousands of businesses.”
The clock is ticking
Zandi said that his most likely projected X-date — the deadline for when the government will no longer be able to pay its bills —is June 8, and the best-case scenario would be August 8.
Even though Speaker of the House Kevin McCarthy’s bill passed the House last week, it faces a highly likely rejection in the Democratic-controlled Senate and White House. Biden also vowed to veto the bill should it make it to his desk.
But that leaves the House with just 12 legislative days left to come to agree on a solution to raise the debt ceiling — and neither side is appearing to budge on their stances. Biden is meeting with McCarthy, Senate Majority Leader Chuck Schumer, Senate Minority Leader Mitch McConnell, and House Minority Leader Hakeem Jeffries on May 9, and a White House official previously indicated to Insider that Biden will stick with his belief that raising the debt ceiling should be bipartisan, without any spending cuts attached.
Democratic lawmakers have been sounding the alarm on the consequences of Republicans’ proposed spending cuts. Massachusetts Sen. Elizabeth Warren, for example, previously cited an estimate from Moody’s Analytics that found that even if the GOP bill to raise the debt ceiling managed to get signed into law, it would cost Americans 2.6 million jobs and trigger a recession in 2024.
“Republican-imposed austerity would mean the U.S. economy in 2033 would still be short nearly 1 million jobs and 3 percentage points of GDP growth – as if our economy stood completely still for a year,” Warren wrote in a letter to Biden. “In fact, the economic impact would be so great, that it would result in even more job losses than a short-lived debt ceiling breach, in both the short- and long-term.”
A trillion-dollar coin?
As Insider previously reported, there are some options on the table to avert a debt ceiling crisis while avoiding congressional drama. The Treasury could mint a $1 trillion platinum coin — a loophole that would allow Yellen to deposit the coin in the Federal Reserve and continue paying the government’s bills. Another option would be invoking a clause in the 14th amendment that would declare the debt ceiling unconstitutional.
But Yellen has previously dismissed both of those routes, and the Biden administration is not budging on a clean debt ceiling increase to stave off economic catastrophe in as soon as a month.
“We’re not going to entertain scenarios where Congress compromises the full credit — the full faith and credit of the United States,” White House Press Secretary Karine Jean-Pierre said during a Wednesday press briefing.
“We’ve been very clear from here, the President has been very clear that Congress must act. This is their constitutional duty to act,” she said. “And we must avoid catastrophic threats to our economy. That needs to happen.”