Debt-Limit Debate ‘Probably’ Already Is Harming U.S. Economy

Its been often repeated that the impact to the U.S. economy would be catastrophic should Congress fail to raise the debt ceiling in the coming weeks. But even the possibility that lawmakers may fail to act on  the limit and throw the government into default may well already be causing economic pain, economic analysts say.

A sign that that may well be the case emerged Friday as the Labor Department reported deeply disappointing employment data for June. Payrolls rose by a meager 18,000 jobs in June, and the nation’s unemployment rate edged up to 9.2

“Most businesses don’t make big investments or ramp up hiring when they see a substantial risk of the economy tanking. They
don’t want to be on the hook for the costs if there aren’t going to be customers and revenue for what they produce. Right now the failure to increase the federal debt limit is creating such a risk and that may well be why the economy is starting to drag,” says Michael Ettlinger,
vice president for economic policy at American Progress, a Washington think tank.

The White House and congressional Republicans have been wrestling over whether to raise the debt limit for weeks in
high-stakes budget talks. Without an increase in the debt limit, the federal government is expected to become unable to pay its bills for the first time on August 2.

A variety of experts, even conservative ones not in Congress, have declared that such a default by the government would cause catastrophe for the struggling economy.

Congressional  Republicans are demanding trillions of dollars in federal budget cuts in domestic spending as a condition for raising the debt ceiling, in what has essentially become a huge game of chicken between the GOP lawmakers and the Democratic White House.

‘Address The Jobs Deficit’

“It is critically important for policymakers to raise the federal debt ceiling and put in place a program for long-term deficit reduction.  But
it is equally important for them to address the jobs deficit, and to eschew policies that make the plight of job-seekers worse,” says Chad
Stone, chief economist of the Center for Budget and Policy Priorities, reacting to the disappointing June employment report.

The sorts of deep budget cuts Republicans are advocating only will make the economy worse, Stone says.

“It makes no sense that in an economic recovery still struggling to gain momentum, policymakers are easing up on the gas and threatening to slam on the brakes.  But that is just what is happening,” he says.

As bad the economy could get if the government goes into default, it’s already likely feeling the effects of even that possibility coming to
pass, Ettlinger says.

“Businesses are, at some level, aware of this risk and are probably reacting to it,” he says in a recent analysis, released even before Friday’s anemic jobs report. “With Treasury Secretary [Timothy] Geithner sounding the alarm on not raising the debt ceiling, some Republican members of the bipartisan group working on the problem picking up their marbles and heading home, and each party’s “bottom line” so incompatible with the other’s, those who hire and invest have reason to be nervous. And if that’s true, it’s no wonder the economy is languishing.

“So while there has been much focus on what might happen if the debt limit is not raised—spiking interest rates, inflation, a permanent loss in the credibility of the United States as a borrower, a second recession, and other disasters—we may be seeing an impact already,” Ettlinger adds.

It’s more than coincidence that the slowing pace for job creation and the economy overall began when the attention in Washington, financial markets, and the media turned from the 2011 budget to the debt limit—and when Republicans in Congress and their conservative allies started most pointedly digging in their heels on a debt limit increase, attaching extreme conditions for their votes, Ettlinger says.

“That’s a situation that would give any rational business pause,” he adds.


Scott Nance is the editor and publisher of the news site The Washington Current. He has covered Congress and the federal government for more than a decade.

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