Playing Russian Roulette Over the Debt Ceiling

The first thing to understand about the fight over the debt ceiling is that the Republicans are engaged in extortion. Their threat to force the U.S. government to default on its debt is not part of the normal give-and-take of negotiations in Congress… or for that matter, in any healthy democracy. This is economic blackmail.

Second, Speaker Kevin McCarthy (R-CA) and other House Republicans are not really interested in reducing the deficit. They are pursuing their large donors’ typical agenda: keep taxes low, shred the safety net, and promote the use of fossil fuels.

Third, a default would be catastrophic. The U.S. would probably fall into a sharp recession, as government spending plummeted, the stock market crashed, and interest rates soared. Moody’s Analytics has estimated that a prolonged period default could cost eight million jobs.

Those are just the short-term effects. A failure by the U.S. to pay its debts would jeopardize the dollar’s status as the dominant global currency and accelerate the decline of American power. The Russians and the Chinese must be thrilled to watch the Republicans sabotage the U.S.’s position as the leader of the global economy.

Republican Brinkmanship

Newt Gingrich was the first Republican House Speaker to play hardball on the debt ceiling, demanding that President Bill Clinton agree to sharp spending cuts. When Clinton refused, Gingrich and his Republican colleagues forced the government to shut down for 21 days in 1995-6. However, public opinion turned against the Republicans, and they eventually backed down. Nonetheless, the shutdown left scars on the economy.

The Republicans used this tactic against President Barack Obama in 2011, too. Unfortunately, Obama eventually caved to the pressure and accepted large cuts in government programs. Those budget constraints caused a very slow recovery from the Great Recession, which led to unnecessarily high and prolonged unemployment.

Democrats do not resort to such scorched-earth tactics. Although Democrats have voted against increasing the debt ceiling in the past, those votes were symbolic. The Democrats knew each time that they did not have enough votes to prevent Congress from raising the debt ceiling. They have not subjected the nation to a real threat of a default. 

Draconian Default Scenarios

The Republicans are playing with fire. If the U.S. defaults on its debt, the stock market would plunge, and interest rates would jump. Consumers would pay higher interest rates on their mortgages, credit cards and car loans. Companies would have to pay more on their loans, so they would borrow less.

Moody’s Analytics has estimated two possible scenarios if the U.S. defaults. In each case a breach would damage the economy severely.

If the default lasts for one week:

• Unemployment jumps from 3.4% to 5%

• 1.5 million Americans lose their jobs

  If the default continues for several weeks:

• GDP falls 4.6%

• Unemployment soars to 8%

• 7.8 million jobs are eliminated

• Stocks fall 20%

Majority Leader Kevin McCarthy/photo credit: Getty Images

The Right Way to Reduce the Deficits

If the Republicans were serious about lowering the deficit, they would repeal the $1.7 trillion of tax cuts that Donald Trump pushed through. And they would not try to eliminate the $80 billion of funding for the IRS that Congress passed last year; that investment will increase the amount of taxes collected by the government.

Trump’s useless tax cuts are adding $200 billion a year to the deficit, according to the Congressional Budget Office (CBO). To put that in context, the projected deficit for the current fiscal year is about $900 billion. Repealing the Trump tax cuts would trim the deficit by about 20%.

But instead, Republicans want to make the Trump tax cuts permanent, rather than let them expire in two years.

Trump’s tax cuts did not boost the economy, nor they did provide any meaningful benefit to most Americans. They did help two powerful groups: corporations and the top 0.1% of taxpayers, who enjoyed substantial drops in their taxes. Both groups are key elements of the Republicans’ donor base.

Sabotaging the IRS

The CBO has estimated that the increased $80 billion of funding for the IRS over 10 years could increase tax revenues by $200 billion during that period. That is probably a very conservative estimate. The CBO has noted that the usual multiplier is 5 to 9 times; that is, $1 invested in the IRS generally produces additional tax revenues of $5 to $9.

But rather than supporting this desperately needed investment in the IRS, McCarthy and other Republicans are claiming, in quasi-hysterical tones, that the IRS will “come after” ordinary taxpayers. The IRS’ real targets, of course, are rich Americans who are too aggressive in avoiding taxes.

Committing Economic Hara-Kiri

Rather than consider new sources of revenue, the Republicans want to impose work requirements on Americans who receive food stamps or get other Federal benefits. This is a recurring Republican theme and a misguided, harsh approach.

For example, most adults who receive food stamps do work. Many recipients would find it very difficult to work for legitimate reasons, such as taking care of their children. And almost 15 million children, one in five, benefited from food stamps in 2017.

Furthermore, the Republicans have not learned the lessons of 2011. They are demanding that spending be frozen at the 2022 level for 10 years, which could lead to average cuts of 15-20% in discretionary government programs. That would cause a lot of pain for ordinary Americans, such as those who depend on Social Security to pay for necessities or Medicare to pay their doctor bills. A sharp reduction in government spending would also have a major, negative impact on economic growth.

Finally, the Republicans’ program is very backward-looking. Their so-called “deficit reduction act” would slash the incentives for green energy projects that Congress enacted last year in the Inflation Reduction Act (IRA). Companies have responded enthusiastically to those incentives and announced many alternative energy projects. This provides hope that the U.S. can meet its targets for reducing emissions.

Ironically, many companies in Republican-led states are positioned to benefit from the IRA’s incentives. Republicans would be committing economic hara-kiri if they succeeded in repealing or sharply curtailing Biden’s green energy program.

In any event, if we lose our chance to slow down climate change because of the Republicans’ shenanigans, government deficits will hardly be our biggest problem.

The Wall Street Democrat