- An analysis by Moody’s says GOP spending cuts could cost Americans 2.6 million jobs if the debt ceiling is raised.
- Senator Elizabeth Warren quoted the report in a letter to Biden and said Republicans risked a recession.
- Negotiations to raise the debt ceiling are not making much progress, with a default possibly in 4 months.
A recession – and the loss of millions of jobs – could loom if Congress fails to reach a clear agreement on raising the debt ceiling.
On Tuesday, Moody’s Analytics released an analysis of what could happen if Republicans don’t reach an agreement to raise the debt ceiling before the US runs out of money to pay its bills, which could happen as early as July. Republican lawmakers in the House of Representatives have announced their intention to negotiate a deal to raise the debt ceiling to secure spending cuts on Democratic priorities, but those negotiations appear to have stalled — and the country is headed for a catastrophic default.
The analysis suggests that even if a default is avoided, the spending cuts required by the GOP could still result in a major economic downturn. Moody’s economists Mark Zandi, Cristian deRitis and Bernard Yaros predicted that if Republicans achieve a “dramatic cut in government spending” while scrapping Medicare and Social Security as they have promised, there will be “a recession a year.” 2024, costing the economy 2.6 million jobs in the worst case of the downturn and pushing unemployment to a peak of almost 6%.”
Massachusetts Senator Elizabeth Warren quoted the analysis in a letter to President Joe Biden, urging him to “present a budget this week that rejects Republican calls for tax breaks for the wealthy and massive job losses for everyone else.”
“The Republican approach to the debt ceiling will result in either a catastrophic default and economic recession – or massive cuts to key government programs that destroy millions of jobs. You must reject both options,” Warren wrote.
“The austerity policies imposed by Republicans would mean that in 2033 the US economy would still be missing nearly 1 million jobs and 3 percentage points of GDP growth – as if our economy were at a complete standstill for a year,” she added. “In fact, the economic impact would be so great that it would result in even more job losses, both in the short and long term, than a short-lived breach of the debt ceiling.”
It’s hard to know exactly what would happen if the US defaulted on its debt because it has never happened before. It is clear that the economic picture will not be pretty. A default could mean an historic financial crisis that would also affect the rest of the world as the US Treasury market is a key aspect of global finance.
Should there be a default, Moody’s sees two scenarios. There could be a shorter outage that would quickly result in Congress passing a debt ceiling hike, sending the US into a mild recession by the end of the year as 1 million jobs are lost, or a longer injury resulting in loss of would result in 7 million jobs and household wealth falling by $10 trillion as stock prices plunge by nearly a fifth.
Warren holds a hearing Tuesday afternoon to discuss the “catastrophic implications” of a debt default, including testimony from Moody’s Analytics chief economist Mark Zandi.
“The economy is very fragile,” Zandi told the New York Times. “Even without the debt limit drama, recession risks are high. It doesn’t take a lot to push us in and that’s certainly a lot more than ‘a lot’.”
As Insider previously reported, Republican lawmakers have yet to specify exactly where they plan to cut spending for a debt-ceiling deal, but they’ve come up with some ideas. That includes cuts in student debt relief programs and social programs like SNAP, while promising to leave Medicare and Social Security untouched in those negotiations.
Still, Biden has insisted that the process to raise the debt ceiling be bipartisan and non-negotiable, and Federal Reserve Chair Jerome Powell reiterated the importance of Congress acting during a Senate Banking Committee hearing on Tuesday.
“At the end of the day, there’s only one solution to this problem, and that’s Congress — whatever happens will happen — but Congress really needs to raise the debt ceiling,” Powell said. “It’s the only way out that allows us to pay all our bills on time.”