What a Debt-Limit Showdown in Congress Could Cost the U.S. Economy

Here's what's at stake if this year's debt-limit deliberations give us déjà vu

As of today, the Treasury Department expects to use special accounting measures to keep borrowing and pay the U.S. government's bills without exceeding the debt limit. The onus is on Congress to raise or suspend the cap before the stop-gap measures run out  in October or November. In the past, such agreements haven't come easy, and the nation flirted with default in October 2013 and August 2011. 

The debt debate will be "the largest D.C.-created risk to the markets this year," Chris Krueger, a senior policy analyst for Guggenheim Securities, wrote in a research note. While many expect a pre-default resolution, it probably won't be reached quickly. Republican Senate Majority Leader Mitch McConnell has already said on CBS that "the debt ceiling will be handled over a period of months.'' And if Congress pushes it to the brink again, history suggests the uncertainty will cost America.    

Delays make debt more expensive

Delays in raising the debt limit in 2011 caused the Treasury’s borrowing costs to increase by $1.3 billion, as uncertainty caused the yield demanded by investors to increase, according to a Government Accountability Office study.  And that's just for fiscal year 2011. There were also higher costs for Treasury securities that remained outstanding after that year, the report stated. 

Consumers will grow nervous

When Congress waits until the last minute to reach an agreement on the debt limit, consumer confidence takes a hit. The last two showdowns provide an example. When confidence suffers, consumers may hold off on making purchases, which in turn can weigh on gross domestic product. 

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It will cost Treasury working hours

If you want a countable cost of last-minute debt limit deals, look no further than Treasury Department pay stubs. The department reported that managing federal debt when delays in raising the limit took place in 2011 and January 2012 took about 5,750 hours of work, including more than 400 hours of overtime and compensatory time,  according to the GAO's report. 

And if Congress can't agree? 

2013 study by Macroeconomic Advisers found that the problems arising from a brief failure to raise the debt limit -- which include rising risk aversion and falling risk asset prices -- would have sent the economy back into recession that year. A standoff of two months could have cost 3 million jobs. The paper also found that fiscal policy uncertainty between 2010 and 2013 lowered U.S. growth by 0.3 percentage point per year and raised the unemployment rate in 2013 by 0.6 percentage point -- equal to 900,000 jobs. 


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