#debt ceiling raise

[reasoningdaily]

Failure to raise the debt limit would be an entirely different kind of crisis.

Unable to continue borrowing, the federal government would have to rely only on incoming revenue to pay its bills — and there isn’t nearly enough money on most days. That means Social Security payments most likely would get delayed, a day or two at first and then longer if the standoff drags on.

The problem would be repeated with other government payments, sending a cascade of delays rippling across the economy.

“You’re dealing with the potential for an order of magnitude of greater economic consequences that are felt throughout the country,” Shai Akabas, director of economic policy at the centrist Bipartisan Policy Center think tank, said of the difference between a debt limit crisis and a shutdown.

Unlike with a government shutdown, the damage from a first-ever debt limit breach — which could happen as soon as June 1 — could be more severe and long lasting, experts said.

Just getting dangerously close to one in 2011 led Standard & Poor’s to downgrade the US government’s top-level AAA credit rating for the first time, causing higher government borrowing costs. Coming close again, or even failing outright to pay some government bills, could lead to downgrades from the other two credit ratings companies, Fitch Ratings and Moody’s Investor Services, that could sharply raise US government borrowing costs for years.

“A shutdown is an economic problem, but it’s not an existential problem,” said Mark Zandi, chief economist at Moody’s Analytics, an economics research and consulting firm that is separate from the credit rating company. “A debt limit breach is existential.”

There have been 20 government shutdowns since 1977 in which some or all Congressional appropriations expired. Most shutdowns have lasted just a few days and caused little economic damage. But longer ones, such as the 35-day partial shutdown from late 2018 to early 2019, had more serious consequences.

The Congressional Budget Office estimated the 2018-19 partial shutdown (some appropriation bills had already been approved) led to 300,000 government workers being furloughed and reduced the nation’s economic output by about $11 billion. Much of that output was made up after the government reopened, but about $3 billion of it was permanently lost, the CBO said.

Still, that wasn’t nearly enough to push the economy into a recession.

A debt limit breach that lasts for even just a few days would be much different because it would shake business and consumer confidence and rattle financial markets, Zandi said.

“We’re right on the precipice of a recession anyway,” he said. “This is going to throw us over the ledge.”

Moody’s Analytics estimated in March that a standoff that lasts a few weeks would cause economic damage similar to what occurred during the 2008 global financial crisis, including the loss of more than 7 million jobs, a nearly 20 percent decline in stock prices and mortgage rates and other borrowing costs spiking.

A report released Wednesday by the White House Council of Economic Advisors was similarly bleak, warning that “a protracted default would likely lead to severe damage to the economy, with job growth swinging from its current pace of robust gains to losses numbering in the millions.”

House Republicans say they want to avoid that economic damage and the solution is legislation they approved on April 26. The bill, which Senate Democratic leaders declared dead on arrival, would increase the nation’s $31.4 trillion debt limit by $1.5 trillion or suspend it until March 31 (whichever comes first) in exchange for reducing the deficit by about $4.8 trillion over the next decade.

President Biden and most Democrats argue those cuts are too severe and they shouldn’t be paired with an increase in the debt limit, which is required to pay for funding Congress already has authorized. Biden has invited congressional leaders of both partiesto the White House Tuesday, but the sides are nowhere close to a deal.

The nation technically hit the debt ceiling in January, but the Treasury Department has been conducting what it calls “extraordinary measures” that allow the government to stay within the limit while still paying all the nation’s bills on time. Treasury Secretary Janet Yellen warned congressional leaders last week that the latest estimate based on incoming revenue after April’s annual tax filings show the federal government might not be able to pay all its bills as soon as June 1.

Republicans have argued the Treasury could use incoming money to prioritize payments to government bondholders to avoid defaulting on US debt. And some lawmakers have proposed requiring Treasury also prioritize Social Security and Medicare payments, as well as military pay and veterans programs.

Treasury officials have rejected prioritizing payments, as well as other, less conventional ideas to avoid a default, such as minting a $1 trillion coin. Yellen told lawmakers that Treasury’s system — which made more than 1.4 billion payments in 2022 — is designed to pay all bills on time and that failure to pay any of them still would constitute a default.

A Treasury Inspector General’s report after the 2011 debt limit standoff said officials determined “the least harmful option” in the case of a breach was to suspend payments for a given day until there was enough money to pay them all. In such a scenario, delays “would have quickly worsened each day the debt limit remained at its limit,” the report said.

Treasury and Federal Reserve officials also developed a plan in 2011 to prioritize payment of principal and interest on US debt, according to Fed meeting transcripts released five years later. That is possible because debt payments are made using a separate Fed system. But it’s unclear if that prioritization plan would have worked, said William English, a professor at the Yale School of Management who was a Fed staffer at the time.

“The amount of manual intervention into various very complicated payment systems to make that happen is huge,” said English, who attended the 2011 Fed meeting where the plan was discussed. “And so you can decide to do that and still not successfully do that.”

And even if such a plan were feasible, it might not be enough to avoid a downgrade of the US credit rating.

“Prioritising debt payments to avoid an immediate default, if this were possible, might not be consistent with a ‘AAA’ rating,” London-based Fitch Ratings warned in a statement last month.

All this highlights the tremendous stakes, and unpredictability, of a debt limit breach.

“It’s really hard to foresee a world where the United States is not paying all of its bills because the whole economic system is based on the fact that we do,” said Akbas, an expert on the debt limit. “And once the card at the bottom of that tower is taken out, we don’t know where everything lands.”