Debt Ceiling Uncertainty Will Wreak Economic Havoc, Even Without Default


Republicans in the House of Representatives plan to hold the federal government’s purse string hostage to impose massive cuts to Social Security, Medicare, Medicaid and other programs. This irresponsible brinkmanship over allowing the federal government to pay the bills that Congress, including past Republican controlled ones, have already incurred will create massive uncertainty. Businesses and households will curtail their spending, while finding it more difficult to secure financing for future projects as the fiscal outlook for the coming months gets murkier. This will slow an already softening economy. Republicans do not have to push the U.S. government into default to wreak havoc on the economy. Their threat of default and/or unspecified cuts to government spending will already do substantial damage on its own.

The U.S. government reached the debt limit on January 19, 2023. This is an artificial and globally almost unique limit – only Denmark has one, too — on how much the government can borrow without Congress approving an increase to this limit. Secretary of the Treasury Janet Yellen said that her agency will use a variety of extraordinary measures to keep paying bills into the summer. At the same time, House Republicans, newly in the majority, have said that they will not approve an increase unless they can achieve significant yet unspecified cuts to key programs including Social Security and Medicare. To be clear, this debt has accumulated over decades. It includes, for example, trillions in money that the government borrowed to fund ineffective and regressive trickledown tax cuts during Presidents Reagan’s, George W. Bush’s and Trump’s time in office. But, if Congress does not approve an increase in how much the U.S. government can borrow by the time the Treasury Department runs out of extraordinary measures, the U.S. will default on its debt. The clock is ticking on a high stakes and wholly unnecessary fiscal policy standoff.

This creates massive economic policy uncertainty along at least two lines. There is first the question of “will they or won’t they?” – actually default on the U.S. government debt, that is. To put it mildly, a default would create a whirlwind of economic pain not just in the U.S. but around the globe. Stock markets would crash, the dollar’s value would plummet, inflation increase and the economy would enter a recession similar to the Great Recession. Even a short-term default would go along with a government shutdown since the government will no longer be able to pay for services. When the government shut down during the Trump administration, it cost workers, families, businesses and the economy dearly with an estimated cost of 0.13 percentage points less growth for each week of the shutdown. Second, even without the nightmare scenario of a full-fledged default happening, people and businesses are left wondering what Republicans will want to actually cut, when and by how much. They have said that they want to slash Social Security and Medicare. But, the specific cuts and their timing are unclear. Nor is it clear whether Republicans will stop at cutting at those much needed programs in an aging society or whether they will go after other spending, both defense and non-defense. After all, this is the party that steadfastly refused to lay out its policy priorities before voters went to the polls last fall, leaving everybody wondering what they actually want and will do.

This massive uncertainty will contribute to slower growth, even before the country reaches the final deadline for a possible U.S. government default in the summer. People rather not spend their money when they are facing an onslaught of the unknown, including a growing chance of layoffs. Households will curtail spending on non-durable goods such as clothes and food, but also on services such as housing, utilities, furniture and appliances. Spending on consumer goods has already been down slightly for much of 2022. New home sales were also down by 29.7 percent in the third quarter of 2022 compared to its recent peak in the first quarter of last year, before the Federal Reserve started to raise interest rates. The pall Republicans’ irresponsible policy casts over the economy will only accelerate this downturn and result in a slowing economy with the concomitant layoffs in manufacturing and construction, among other industries.

Similarly, businesses abhor uncertainty when it comes to committing their dollars to longer-term investments. The Republican-induced uncertainty over the country’s ability to make its payments will thus likely reduce investments. Business investment is recovering from its lows during the pandemic, but still below pre-pandemic levels relative to the size of the economy. In particular, spending on structures such as offices, manufacturing plants and mines continues to decline, while spending on equipment such as computers and trucks is barely above its 2019 levels. Only spending on software and other intellectual property such as patents is up. That is, spending on stuff that businesses can abandon rather quickly has recovered, while the things that take longer term commitments from businesses has not. The artificial fiscal crisis created by House Republicans will only continue this trend, again resulting in lagging job growth in manufacturing and construction.

The uncertainty over Republicans’ plans related to letting the U.S. honor its debt also leads to gyrations on the stock market and potential downward pressure on the value of the dollar. Investors are reassessing their outlook for economic growth amid these massive policy risks, leading to sharp down and up movements in stock markets. This already happened when Standard and Poor’s downgraded the vaunted credit rating for U.S. government debt in 2011, amid another fiscal standoff over the debt ceiling. They also will start to move money to overseas capital markets, where the debt standoff does not directly apply. In the process, the value of the dollar will continue to decline as people sell dollars to invest overseas since the U.S. government will be seen as a riskier financial bet. The dollar has already lost 5.8 percent of its inflation-adjusted value compared to the currencies of other advanced economies from October to December 2022. Moreover, investors will want to be compensated by the U.S. government for these greater risks by charging higher interest rates – a process that is already happening. These market movements will make it more difficult for businesses to get financing at reasonable interest rates as they increasingly have to compete for money on international markets and pay for the heightened risks in the U.S. economy with higher interest rates.

The U.S. economy is already facing headwinds from higher interest rates and the fallout of continued supply chain bottlenecks. Republicans’ fiscal recklessness only further endangers the recovery and people’s financial security alongside with it. The U.S. has experienced a historically quick recovery from the depths of the pandemic. Even at very low unemployment rates, many people struggle to make ends meet. Economic growth and a sustainably strong labor market recovery will need to continue to help people get financially ahead. Yet, the new Republican majority in the House of Representatives is putting its own political talking points ahead of the economy and people’s livelihoods by creating massive economic risks for no good reason.

You May Also Like

Your Quick Guide To Tax Refunds In 2023

In this photo illustration, silhouetted woman holds a smartphone with the IRS2Go…

Three Youth-Led African Agritech Businesses Receive Investment To Help Scale Up African Agriculture

Three African youth-led Agritech businesses— Kenya’s DigiCow, Botswana’s Brastorne Enterprises and Nigeria’s…

ThredUP Teams With Nava Rose To Help Users “Dump Fast Fashion”

TikTok influencer Nava Rose wearing one of the looks she styled for…

Sports Illustrated Publisher Taps AI

The Arena Group is using artificial intelligence to help produce articles and…

Roman Reigns, Cody Rhodes Reportedly Among ‘Hot’ WWE Merchandise Sellers

Roman Reigns remains at the top of WWE’s merchandise empire. (Credit: Alex…

NBA Announces Reserves For 2023 All-Star Game

PORTLAND, OREGON – OCTOBER 27: Ja Morant #12 of the Memphis Grizzlies…

FTSE 100 Break Out Preempts Bank Of England Surrender To Inflation

The U.K. financial system nearly broke this autumn when rising interest rates…

I Met Bill Gates and Steve Jobs. Here’s What They Taught Me.

Opinions expressed by Entrepreneur contributors are their own. I have built four…

Ford Posts $1.3 Billion Profit in Fourth Quarter, Misses Full-Year Profit Guidance

Supply-chain disruptions slowed production at the car maker and caused it to…

Where Is The Chinese Spy Balloon? Reports Say It Moved Over St. Louis Area

Topline A suspected Chinese spy balloon hovering over the U.S. appeared to…

Should You Invest In Artificial Liquid Intelligence? Exploring The Marriage Between NFTs And AI

Key takeaways With Microsoft’s surprisingly high investment of $10 billion into OpenAI…

FC Barcelona Could Sell Jordi Alba And Two More Catalan Defenders In 2023

Jordi Alba is one of three defenders that FC Barcelona could dispose…