U.S. President Joe Biden and Speaker of the House Kevin McCarthy (R-CA) (Photo by Drew Angerer/Getty ... [+]
The June 1 deadline for raising or suspending the United States government’s $31.4 trillion debt ceiling is fast approaching. A failure by Republicans and Democrats to reach a fiscal resolution—to impede the nation from a “protracted” default on its debt—could eradicate more than 8 million jobs from the U.S. economy, according to a May report by the White House Council of Economic Advisers (CEA).
“There is broad consensus amongst economists that such an event would generate an entirely-avoidable economic catastrophe,” the report states.
Analysis by the CEA compared the potential economic repercussions of a debt ceiling breach to the December 2007 to June 2009 financial crisis. During the Great Recession, 8.7 million American jobs were lost, and unemployment peaked at 10% in October 2009.
White House economists predict that a protracted default—lasting longer than three months—would cause the economy to contract by 6%. Forty-five percent of the stock market’s value would also be wiped out.
Unlike the Great Recession and Covid-19 economic recovery efforts, the report states, “Without the ability to spend on counter-cyclical measures, such as extended unemployment insurance, Federal and state governments would be hamstrung in responding to this turmoil and unable to buffer households from the impacts.”
At a campaign event in Valhalla, New York last week, President Joe Biden said, “We’re bringing jobs back all across America.” However, Biden warned about the potential impact of not raising or suspending the U.S. government’s borrowing limit on the job market and the nation’s eminence on the global stage, “There is no time to put all this at risk, to threaten a recession, to put at risk millions of jobs, to undermine America’s standing in the world.”
The Department of Treasury has said that it will run out of cash and be unable to pay its bills by early June if Congress does not raise or suspend the debt ceiling.
Treasury Secretary Janet Yellen has cautioned that failure to meet the government's obligations would cause irreparable harm and be an “economic catastrophe” for the U.S.
In a letter to lawmakers, Yellen advised, “We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers and negatively impact the credit rating of the United States.”
The Debt Ceiling Debate
The debt ceiling is the maximum amount of money the U.S. government can borrow. It is set by Congress and has been raised or suspended 78 times since 1960—49 times under a Republican presidency and 29 times under a Democratic president.
According to the CEA, there is no historical precedent for the U.S. government passing the deadline and breaching its debt ceiling without Congress raising or suspending the statutory limit on federal debt.
The debt ceiling debate is often contentious, as it pits those who want to reduce the federal deficit against those who wish to avoid a government shutdown. In recent years, the debt ceiling has become a political football, with both parties using it to score points against the other.
Congressional Republicans aim to reign in spending, while Democrats insist on a “clean” debt limit increase without any policy conditions.
As a sign of hope, House Speaker Kevin McCarthy (R-Calif.) told BBC News on Tuesday that the possibility of a default is “off the table,” and he hopes to reach a deal by the end of this week.
On Wednesday, Biden will depart for Hiroshima, Japan to attend the Group of Seven summit. However, due to urgent and ongoing national debt talks, he will cut short his foreign trip, canceling initially planned stops in Papua New Guinea and Australia.
McCarthy affirmed that a representative from Biden’s camp would negotiate directly with his staff, which he takes to signify that “the structure of how we negotiate has improved.”
