Debt default would cripple U.S. economy

WASHINGTON >> The U.S. economy could quickly shed 1 million jobs and fall into recession if lawmakers fail to raise the nation's borrowing limit before the federal government exhausts its ability to pay its bills on time, the chief economist of Moody's Analytics, Mark Zandi, warned a Senate panel Tuesday.

The damage could spiral to 7 million jobs lost and a 2008-style financial crisis in the event of a prolonged breach of the debt limit, in which House Republicans refuse for months to join Democrats in voting to raise the cap, Zandi and colleagues Cristian deRitis and Bernard Yaros wrote in an analysis prepared for the Senate Banking Committee's Subcommittee on Economic Policy.

Sen. Elizabeth Warren, D-Mass., held the subcommittee hearing on the debt limit, and its economic and financial consequences, at a moment of fiscal brinkmanship. House Republicans are demanding deep spending cuts from President Joe Biden in exchange for voting to raise the debt limit, which caps how much money the government can borrow.

That debate is likely to escalate when Biden releases his latest budget proposal Thursday. The president is expected to propose reducing America's reliance on borrowed money by raising taxes on high earners and corporations. But he almost certainly will not match the level of spending cuts that will satisfy Republican demands to balance the budget in a decade.

The report also warns of stark economic damage if Biden, in an attempt to avert a default, agrees to those demands. In that scenario, the “dramatic” spending cuts that would be needed to balance the budget would push the economy into recession in 2024, cost the economy 2.6 million jobs and effectively destroy a year's worth of economic growth over the next decade, Zandi and his colleagues wrote.

“The only real option,” Zandi said in an interview before his testimony, “is for lawmakers to come to terms and increase the debt limit in a timely way. Any other scenario results in significant economic damage.”

“The economy is very vulnerable,” he added.