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White House warns of recession if debt defaults

A new report from the White House Council of Economic Advisers evaluated three potential scenarios as the Treasury Department said that without congressional action, it will run out of tools as soon as June 1 to avoid a default. The Associated Press has the story:

White House warns of recession if debt defaults

Newslooks- WASHINGTON (AP)

White House economists on Wednesday warned of “severe damage” to the U.S. economy in the event of a debt default and detailed potential job losses and stunted economic growth if lawmakers engage in “brinkmanship” before ultimately reaching a deal to meet the government’s financial obligations.

A new report from the Council of Economic Advisers evaluated three potential scenarios as the Treasury Department said that without congressional action, it will run out of tools as soon as June 1 to avoid a default.

The first is a “protracted default” that lasts for some time. The second is a “short default” where Congress acts swiftly to allow the nation to borrow again after defaulting. The third is “brinkmanship,” where lawmakers take the country’s full faith and credit to the wire, but avert default. All three would hurt the economy, the experts said.

President Joe Biden has a May 9 meeting with congressional leaders to try to find a way to resolve the approaching crisis.

The Capitol is seen in Washington, Wednesday, May 3, 2023, as lawmakers struggle to avoid a default on the nation’s debt. (AP Photo/J. Scott Applewhite)

House Republicans are insisting on spending cuts as part of any plan to allow the country to resume borrowing. Biden says he will not allow the country to be “taken hostage” by such demands and will only negotiate with the GOP on spending as part of the budgetary process.

The White House analysis warned that a protracted default could send the stock market plummeting by 45% and cost more than 8 million jobs in the third quarter of 2023, raising the prospect of “an immediate, sharp recession on the order of the Great Recession.”

The report said the government, unable to borrow money, would lack the traditional tools it uses to temper the impact of economic downturns, namely economic stimulus and social support.

“Because the government would be unable to enact counter-cyclical measures in a breach-induced recession, there would be limited policy options to help buffer the impact on households and businesses,” the White House said. “The ability of households and businesses, especially small businesses, to borrow through the private sector to offset this economic pain would also be compromised.”

Even the “brinkmanship” approach, where lawmakers reach a deal at the eleventh hour, could cost about 200,000 jobs and shave 0.3% off the annual gross domestic product growth, according to the analysis. It said there already are signs of market stress from the showdown.

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