WASHINGTON — A Senate subcommittee on the Banking, Housing and Urban Affairs Committee heard from witnesses on Tuesday about the implications of not raising the $31.4 trillion debt limit amid a standoff between Republican lawmakers and the White House over a bill that would would allow the federal government to proceed to service its debt obligations.
A new report from financial services firm Moody’s Analytics outlining alternatives to a debt-limit law was a key element of the Economic Policy Subcommittee hearing. Mark Zandi, chief economist at Moody’s, said an impending default would be “a catastrophic blow to an already fragile economy.”
“Global financial markets and the economy would be turned upside down, and even if resolved quickly, Americans would likely pay for this failure for generations to come, as global investors would be right to believe that federal government finances were politicized and that a There might come a time when they would not be paid what is owed to them when they owed it,” Zandi said in his opening statement released ahead of the hearing.
The Moody’s analyst also said a Republican budget proposal that includes large spending cuts with a goal of bringing fiscal spending down to 2022 levels over 10 years will trigger a recession next year and result in the loss of up to 2.6 million jobs would lead.
“With Republicans declaring that there will be no tax increases and that Social Security and Medicare benefits will remain unaffected, achieving budgetary balance would likely mean anything but the elimination of non-defense discretionary spending and the Medicaid program,” he said he. “Given the dramatic cut in government spending in this scenario and the already fragile economy, the economy is in recession in 2024.
Some Republican congressmen, led by House Speaker Kevin McCarthy, R-Calif., are sticking to a debt ceiling for negotiations with the White House over budget priorities, but the US Treasury will exhaust all temporary measures to delay the default in July and September, it unless lawmakers raise the debt ceiling, the Congressional Budget Office warned.
As time ticks down, a growing number of lawmakers are weighing the Treasury Department’s ability to avoid exceeding the debt limit by prioritizing payments to government bondholders, the report said. Analysts called the solution “grossly misguided”.
“It would be challenged in court,” Zandi said of the workaround. “Bond investors unsure how to resolve this legal uncertainty would demand a much higher rate of interest as compensation. Furthermore, it seems politically inconceivable that bond investors, including many foreign investors, would get their money before American seniors, military or even the federal government’s electricity bill for a long time.
Douglas Holtz-Eakin, president of the American Action Forum, a right-wing fiscal organization, told senators that the US will cede economic power to China if it defaults on its debt and threatens its international credit standing.
“The idea that we could give up Treasury credit and keep the world ready without finding another reserve currency misses the big point,” Holtz-Eakin said. “They would, and then we would pass this opportunity on to China. And at this point there is no reason to do that.”
In his opening remarks, Holtz-Eakin also said that bypassing the default would have “serious and adverse economic implications.”
“It would cause share prices to fall and reduce the wealth of many taxpayers. It would reduce economic confidence, which in turn could reduce consumer spending. It would raise interest rates and leave taxpayers on the hook for billions of dollars in interest payments. And it would increase the likelihood of an accidental default,” he said.
Sen. Elizabeth Warren, chair of the Economic Policy Subcommittee, likened Republican opposition to the debt limit decision to refusing to pay a credit card bill.
“House Republicans have decided to use the debt ceiling to hold our government and our economy hostage,” the Democratic Massachusetts senator said during the hearing.
“They’re demanding massive government spending cuts, investment in the American economy, investment in American workers, or they’re not going to allow the United States to pay the debt that they’ve already incurred, you know, kind of like a credit card bill and then explain that your new budget plan is: We’re not going to pay the bill on the credit card.”
“House Republicans don’t seem concerned about the upcoming debt ceiling deadline,” Warren said in her opening statement. “Instead, they seem downright excited to have the opportunity to use them as leverage to demand tax cuts for billionaires and giant corporations.”
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2023-03-08 00:36:46
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