Default looming in the U.S.
It would appear that the Republican Party in the United States has a death wish. Otherwise, how can you explain their determination to stop any upward revision to the debt ceiling? (What is the debt ceiling? Essentially, it’s a limit on how much debt can be outstanding at any time.)
The constitution of the
Republic requires Congress to approve all borrowing by the government. Back in the early years of the 20th century, Congress approved setting an overall debt limit to avoid an endless parade of individual requests to borrow funds to pay for Congressionally approved expenditures.
That limit has subsequently been increased a number of times, the most recent being in 2021 by $2.5 trillion to over $31 trillion. On Jan. 13, the Secretary of the Treasury, Janet Yellen, stated in a letter to Congress she would begin employing “extraordinary measures” to continue paying the nation’s bills and avoid defaulting on the debt. These measures will likely be exhausted by early summer.
Default looms.
Default means that government would be unable to pay interest on the national debt as well as salaries of government employees, including the military and members of Congress and the congressional staff.
Even approaching such a possibility would have a serious impact on the economy. It would rattle investors, consumers and business owners.
During the most recent debt ceiling confrontation in 2021, the uncertainty around finding a solution saw stock prices plummet and they did not recover for half a year. The cost of corporate borrowing jumped dramatically, thereby discouraging new investment, and mortgage rates also rose discouraging home buyers. A solution was found but real costs were incurred.
An actual default – that is, not paying the bills for already approved expenditures – would be far worse. The interest costs to the federal government would jump substantially because the government’s credit rating would tank. The White House says that would cost the equivalent of 2.6 per cent of the total American economy over the next decade (something north of $6.1 trillion).
Moreover, because the U.S. dollar and U.S. government securities are the primary global financial reserve currency and safehaven investment, default would cause a worldwide disruption of trade and investment flows and generate political instability.
Domestically, by choosing not to pay some combination of Social Security benefits, federal workers’ salaries, bondholders or suppliers to the government would remove about 10% of America’s economic activity, as estimated by Goldman Sachs. It would also eliminate about 3 million jobs and add $130,000 to the cost of a 30-year mortgage while increasing the national debt by an estimated $850 billion.
President Joe Biden has said he will not accept strings being attached to an increase in the debt ceiling. If the Republicans in the House of Representatives refuse to act to increase the ceiling without the forwardlooking expenditure reductions they are demanding, fiscal Armageddon will be a certain outcome.
How likely is such an outcome? Undoubtedly the Republican-controlled House will pass legislation raising the ceiling but imposing cuts in expenditures. (The Party has stated it thinks entitlements, meaning Social Security and Medicare, are prime targets.) The Democrat-controlled Senate is likely to either defeat the House bill or never bring it to the floor for a vote. Or it may pass a bill raising the ceiling and send it to the House for action. In short, it will be a stalemate.
For Republicans to avoid severe punishment for this brinksmanship, they need to organize public opinion in favour of cutting expenditures while explaining why the size of the debt is a major problem and why increasing taxes is not an acceptable alternative. These are difficult arguments to make to people likely to suffer from cuts in entitlement programs.
If the American economy is held hostage by a group of far-right Republicans unwilling to raise taxes and determined to shred the social safety net, their prospects in the next presidential election scheduled for 2024 are dim. Republicans may not care that the rest of the world would be collateral damage but they should care about their political survival.