The potential for brinkmanship in Congress over raising the debt ceiling is the most perilous immediate threat to the economy, eclipsing the short-term risks of going over the fiscal cliff, and should be addressed pronto, argued Robert Greenstein, the president of the left-leaning Center on Budget and Policy Priorities, on Thursday.
“The increasingly scary impact to the economy is over the possible showdown over the debt limit,” he said in a conference call with reporters on tax policy choices confronting lawmakers in the fiscal cliff debate.
The fight over addressing the debt ceiling last year led to a lack of confidence in the U.S. political system, sent the stock market spiraling, and resulted in the loss of the nation’s sterling AAA credit rating.
Greenstein warned that the environment on Capitol Hill is not looking much brighter and sees a big risk that if lawmakers do not move swiftly as they negotiate a deal to avoid the fiscal cliff, a temporary default could occur that would do more harm to the economy than falling off the cliff itself.
“If we have somewhat of a replay of 2011, of Republican leadership refusing to raise the limit unless they get what they want on the spending cut side, and the president very clearly saying he isn’t going to go through 2011 again, I think we have the potential for a much scarier showdown on the debt limit with potentially much larger damage to the economy, particularly if we have a default for a brief period, than from the fiscal cliff,” he said.
The Treasury Department has said it expects to hit the debt ceiling by the end of the year and, unless Congress raises the limit in time, it can only delay default until sometime early 2013 by using “extraordinary measures.”
To that end, Treasury is pushing a proposal from Secretary Timothy Geithner that would give the president blanket authority to raise the debt ceiling as needed to avoid repeated heated political battles over it.
But such a plan is considered dead on arrival in a Congress wary of ceding its authority to the executive branch.
Senate Minority Leader Mitch McConnell, R-Ky., called the idea a non-starter on Thursday.
“I assure you: it’s not going to happen,” he said in a speech on the Senate floor. “The American people want Washington to get spending under control. And the debt limit is the best tool we have to make the president take that demand seriously.”
He added that Republicans want to use control over the debt ceiling as a check on spending.
“The American people want us to fight to cut spending. It’s a fight they deserve. We’re happy to have it,” he said.
During the CBPP call, Greenstein argued that he believes Congress and the White House will ultimately cut some kind of deal to address the expiring Bush tax cuts and automatic spending cuts set to go into effect in 2013 that together could drag the economy back into recession. Whether the deal is reached at the end of the year, or in early January, Greenstein said there is no threat that a recession would kick in immediately.
However, Greenstein argued that the risk of defaulting on U.S. debt could bring immediate, more painful economic repercussions. Because of that threat, he said it is paramount for leaders to address the debt ceiling in any deal to resolve the fiscal situation.
“I’m increasingly thinking that one of the most important things for the next few weeks is that it is critical for whatever the deal is—hopefully by December 31st, maybe in January—on the fiscal cliff, it is really critical that the deal address the debt limit as well, otherwise I really worry about what could happen and the consequences for the economy in February or early March,” he said.