Debt Default Would Cripple U.S. Economy, New Analysis Warns

WASHINGTON -- If Congress fails to increase the nation's borrowing limit, before the federal government exhausts their ability to pay its bills on schedule, the chief economist at Moody's Analytics Mark Zandi will warn a Senate panel.

The damage could spiral to seven million jobs lost and a 2008-style financial crisis in the event of a prolonged breach of the debt limit, in which House Republicans refuse for months to join Democrats in voting to raise the cap, Mr. Zandi and his colleagues Cristian deRitis and Bernard Yaros wrote in an analysis prepared for the Senate Banking Committee's Subcommittee on Economic Policy.

The warning comes at a moment of fiscal brinkmanship. House Republicans are demanding deep spending cuts from President Biden in exchange for voting to raise the debt limit, which caps how much money the government can borrow.

That debate is likely to escalate this week when Mr. Biden releases his latest budget proposal on Thursday. The president is expected to propose reducing America's reliance on borrowed money by raising taxes on high earners and corporations. But he almost certainly will not match the level of spending cuts that will satisfy Republican demands to balance the budget in a decade.

The report also warns of stark economic damage if Mr. Biden, in an attempt to avert a default, agrees to those demands. In that scenario, the 'dramatic' spending cuts that would be needed to balance the budget would push the economy into recession in 2024, cost the economy 2.6 million jobs and effectively destroy a year's worth of economic growth over the next decade, Mr. Zandi and his colleagues wrote.

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On Tuesday, Mr. Zandi will testify before the Economic Policy Subcommittee. Senator Elizabeth Warren (Democrat of Massachusetts) will host a hearing about the debt limit and its financial and economic consequences.

'The only real option,' Mr. Zandi said in an interview before his testimony, 'is for lawmakers to come to terms and increase the debt limit in a timely way. Any other scenario results in significant economic damage.'

'The economy is very vulnerable,' he added. 'Even without the debt-limit drama, the recession risks are high. It won't take much to push us in, and this is certainly a lot more than ‘much.''

Mr. Zandi's analyses are frequently cited by the Biden administration in support of its economic policy proposals. In this case, Ms. Warren is using the Moody's work to push Mr. Biden, in a letter sent to the White House this week, to resist Republican demands for spending cuts and instead continue insisting on a debt-limit increase that is not tied to any changes in fiscal policy.

'Everyone has been talking up to now about how dangerous it would be to default on the national debt, and that's right,' Ms. Warren said in an interview. 'But it would be even more dangerous to give in to the Republican cuts.'

'The president has stood strong,' she said, 'and I urge him to continue to do that.'

Mr. Zandi's projections join a growing list of warnings from forecasters on Wall Street and at Washington think tanks about the consequences of failing to increase the borrowing limit in a timely manner.

House Republicans have refused to raise the limit unless Mr. Biden agrees to deep but unspecified cuts in federal spending. They say the nation's current levels of debt, accumulated in bipartisan fashion over two decades of the federal government spending more money than it receives in tax revenue, pose a current and future threat to economic growth.

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Mr. Biden has said he welcomes a conversation about fiscal policy with Republican leaders but refuses to negotiate on the debt limit, which allows the government to borrow money to cover debts already approved by Congress.

More on the Debt Limit

A Federal Showdown: The United States government is engaged in a high-stakes political battle over paying its debts — again. How did we get here?
Risks for the Economy: If Congress fails to increase the government's borrowing limit in time, it could cause a shock to the economy and financial markets. Here are some of the possible ramifications.
A Fiscal Blame Game: As the Treasury Department takes 'extraordinary measures' to avoid a default, both Republicans and Democrats are intent on painting their opponents as culpable.
Joe Manchin's Role: The West Virginia Democrat, who faces re-election in 2024, has made it clear that he believes he can help forge a deal to raise the debt limit.

The government hit its statutory $31.4 trillion debt limit in January. The Treasury Department is employing what are essentially accounting maneuvers that allow it to continue to pay all its bills on time. But those maneuvers work only for a limited time.

Independent groups like the Bipartisan Policy Center in Washington and the Congressional Budget Office have estimated that sometime this summer or early this fall, the government will no longer be able to pay everyone — including bondholders, Social Security recipients and federal employees — on time. The Moody's team estimates that deadline, known as the X-date, will fall on Aug. 15.

The analysis considers several ways the impasse might be resolved in Washington. In one, Mr. Biden acts unilaterally to circumvent the debt limit without the help of Congress, inviting a constitutional challenge but potentially minimizing the harm to the economy. White House aides have said repeatedly that Mr. Biden will not pursue that route.

The scenario in which the Treasury Department was forced to miss certain required payments due to inaction by lawmakers, the analysis predicted that there would be a rapid backlash from the financial markets. This is similar to 2008's stock crash, when Congress first rejected a program to help Wall Street banks. The lingering effects of the debt limit being raised quickly by Congress, just as it did in 2008, would cause a mild recession, and almost one million job loss.

If lawmakers ignored the market warnings and went months without raising the limit, the analysis concluded, 'the blow to the economy would be cataclysmic.' Federal spending would plunge, a deep recession would set in and the unemployment rate would spike to more than 8 percent from 3.4 percent.

But if Mr. Biden were to accept Republicans' budget blueprint, the analysis found, the resulting drop in federal spending on health care, education and other domestic programs would lead to a recession and widespread job loss. Low-income Americans would most likely bear a disproportionate brunt of the economic pain, it concluded.

Mr. Zandi stated that he favors eliminating the statutory limit on debt to eliminate the economic dangers of a default. He stated, "I think you want that cycle to end once and for all, because it's very contraproductive."