The prospects of a slumping stock market, millions of job losses and a shock to the global financial system loom large as McCarthy (R-Calif.) tries to sell the GOP’s Wall Street on the risk. brinkmanship over the debt ceiling. Since gaining a majority in the House in January, Republicans have vowed to end the nation’s ability to borrow to pay its bills, seeking to force President Biden to accept higher spending cuts and other more policy concessions.
So far, the White House has refused to give up its opposition, and Republicans themselves have splintered at times over how to approach the fight. The standoff only raised the stakes for McCarthy, as the consequences of congressional inaction — the government’s first default — could be devastating. an economy already teetering on the economic brink.
“It’s going to be financial chaos,” Mark Zandi, chief economist at Moody’s Analytics, predicted when asked about a potential brush with default. “Our financial problems will get worse. … Our geopolitical situation in the world will deteriorate.”
McCarthy’s office did not respond to a request for comment.
At stake is the credit of the US government: Washington must borrow money to cover the costs incurred by both parties, but only up to the maximum allowed by federal law. Lawmakers must periodically suspend or raise that threshold, known as the debt ceiling, or the government can’t pay its bills, potentially including interest payments on its bonds, triggering default. .
The United States technically reached the debt limit — currently set at roughly $31 trillion — earlier this year. That prompted the Biden administration to begin enacting special budget measures in January so it could continue borrowing and avoid a fiscal crisis. But those measures are only temporary solutions meant to buy more time on Capitol Hill, where lawmakers may have as little as seven weeks to act.
Failure to do so could prove disastrous, according to the Treasury Department, which has called on Republicans in more urgent terms to raise the borrowing cap without conditions. Yet House Republicans have refused to lift the limit unless they first meet several demands opposed by the White House. GOP leaders aim to cut federal spending, roll back unused coronavirus aid, undo Biden’s student loan cancellation plan and adopt several other policies, including new ones. rule that forces Medicaid recipients to work longer hours in exchange for health insurance.
For his part, Biden refused to fight the debt ceiling, arguing that Republicans should not hold the nation’s faith and credit hostage. Andrew Bates, a White House spokesman, said in a statement that Republicans must “immediately take a default on our obligations — which would worsen the fiscal outlook — off the table. .”
“House Republicans must address the debt limit; that is their non-negotiable obligation under the Constitution,” said Bates.
Otherwise, Biden expressed an openness to meeting with McCarthy to discuss broader fiscal issues. However, the two men have not spoken for a long time since their first chat in February, as the president argued that the GOP would first issue a budget – and the Republicans, who failed to ending such a spending blueprint, continuing the issues separately.
“They haven’t put anything on the table, other than saying they want a clean debt ceiling, which, that’s not an option,” said Rep. Garret Graves (R-La.), who led discussions on the issue for McCarthy.
By taking his message Monday to Wall Street, McCarthy sought to appease jittery investors, rally his party and burnish his own political legacy, according to Republican lawmakers and conservative advisers. . Some likened it to Reagan’s tone to traders at the New York Stock Exchange in March 1985, when the president called for lower taxes and steep cuts in domestic spending. (His plan still added to the federal deficit.)
“Maybe he’s trying to reassure investors and Wall Street … that Congress can do something, and we’re going to do something,” said Rep. Steve Womack (R-Ark.), a top appropriator, who said that the execution of The unresolved issues of the debate served as a “test” for McCarthy.
But Womack and other Republicans acknowledged that the “real question” is whether their own party can support the 218 votes needed in the House to pass a bill. With tensions simmering between the GOP’s far-right and moderate ranks — and just four votes away from a narrow majority — Republicans say they need to show progress if they hope to put new pressure on the Democrats.
“I hope Wall Street gets the message and sends it right down Pennsylvania Avenue to the White House, because we’re trying to get that message across, and the president is refusing to engage in negotiations in good faith,” he said. Rep. Ben Cline (Va.), a conservative Republican who sits on spending and budget panels.
Yet McCarthy’s speech came against the backdrop of a troubled stock market, which has been rocked in recent months by a slew of corporate layoffs, a trend of high inflation, a recent string of bank failures and the looming fear of another recession. Federal Reserve economists increasingly believe such a decline is likely later this year, according to details of the March meeting released this month, a possibility that increases pressure on Washington to avoid making in matters more serious.
Some economists see a further boost to growth if Congress adopts the GOP’s progressive plan, which aims to cut federal spending on health, education, science and labor programs. $130 billion. Zandi predicted that real gross domestic product could fall by about 0.6 percent and reduce employment by 720,000 jobs in the fourth quarter of 2024.
If the economy enters a recession, however, the Republicans’ proposed cuts in federal spending could make the downturn “deeper, longer and more difficult for the economy to recover from.” will eventually recover,” he added. And Zandi – along with other economists – said a default could create other shock waves around the world three years after the coronavirus pandemic ravaged economies around the world.
But Republicans still maintain a belief that they must act quickly to address the national debt, which is expected to reach nearly $50 billion by 2033, according to projections released earlier this year from the nonpartisan Congressional Budget Office. Both parties have added significantly to that imbalance, from the tax cuts adopted by Republicans in 2017 to the most recent social spending packages enacted under Biden, though blamed GOP lawmakers are still Democrats.
“My view is that the crisis that is near is the debt; it’s not because we can’t pass the debt ceiling,” said Stephen Moore, a leading economist at the right-leaning Heritage Foundation. “It is so that we do not just stay on this path. There was a financial train wreck. “
Moore faulted the Biden administration for “running around the country and saying we can’t pay our debt,” saying US tax revenue would still help it pay bondholders and meet some of its obligations. . “We probably don’t have enough money for the Department of Education, and the Department of Energy and the Interior Department. … Would it be terrible if the Department of Education was shut down for three weeks?”
But even the renewed sense of fiscal brinkmanship threatens to create costly economic turmoil in the coming months.
In 2011, a similarly resurgent GOP fought against another Democrat, President Barack Obama, because conservative tea party lawmakers demanded the same spending cuts. The two sides ultimately avoided default after brokering a sweeping deal that cuts government programs and freezes spending at federal agencies for the next 10 years, alarming Democrats, who as the cuts hurt average Americans.
Yet the prospect of a fiscal doomsday still brought dire consequences, prompting a U.S. credit crunch that cost taxpayers $1.3 billion in 2011 by raising interest rates. of government bonds, according to a report issued a year later by the Government Accountability Office.
That summer, the Dow Jones industrial average also fell about 2,000 points. It fell sharply on August 8, 2011 — the first day of trading after Standard & Poor’s downgraded US sovereign debt — more than 630 points. At the time, the 5.6 percent collapse marked the sixth-largest drop in the index’s history, and it proved to be the worst trading day since the 2008 financial crisis, alarming policymakers. and investors.
More than a decade ago — as McCarthy prepared to speak after the opening bell at the nation’s trade hub — several Republicans admitted privately that they would be watching the markets closely for another reaction in the area. Yet some in Washington acknowledge that it may take a more severe economic collapse just to force a resolution to the nation’s fiscal standoff.
“You can’t stop that,” said Douglas Holtz-Eakin, president of the American Action Forum, a conservative advocacy group, as he echoed the need for strong action to reduce the federal debt. “Both sides are dug. They showed no signs of movement. Something needs to change in the landscape to motivate the White House and Congress to act. “
