Economist warns that ‘heightened dysfunction’ in Congress raises risk of debt default

“There is a temptation to brush off the developing debt limit drama, thinking it will end the same way as the others over the years with lawmakers coming to terms and signing legislation just in time,” Mark Zandi, chief economist at Moody’s Analytics, said in prepared remarks. “That seems a mistake given the heightened dysfunction in Congress and the large political differences gripping the nation.”

Congress took three broadly bipartisan votes to suspend the debt limit during the Trump administration, but Republicans have rejected Democrats’ calls for bipartisanship on the debt limit during the Biden administration. 

Democrats moved a bill last December to raise the debt limit by $2.5 trillion, but the federal government reached that $31.4 trillion limit in mid-January. 

The Treasury Department has since used accounting maneuvers, called extraordinary measures, to continue paying all of the nation’s bills in full and on time, though those steps are expected to expire between late June and September. 

Economists told the U.S. Senate Committee on Banking, Housing, and Urban Affairs’ subcommittee on economic policy on Tuesday that Congress must act well before that summer deadline, if lawmakers want to avoid negative impacts to federal programs, the global economy and long-term financial prospects. 

Maryland Democratic Sen. Chris Van Hollen asked the panelists if they agreed with speculation from some GOP lawmakers that if the U.S. enters a default, the Treasury Department would be able to prioritize which payments it makes. 

Van Hollen read a quote from panelist Douglas Holtz-Eakin, president of American Action Forum, a center-right think tank, who told the senator’s office that “it won’t work and we will default, other than that it’s a spiffy idea.”

Zandi as well as Michael R. Strain, director of economic policy studies and Arthur F. Burns scholar in political economy at the American Enterprise Institute, a right-leaning policy research organization, both agreed with that assessment. 

Amy K. Matsui, senior counsel and director of income security at the National Women’s Law Center, also agreed. 

A key issue with the proposal from some that the Treasury Department could prioritize certain payments, Holtz-Eakin said, is that the federal government “can’t do it forever and it doesn’t solve any underlying problem.”

“It just kicks the problem down the road temporarily. And that’s putting aside I think they don’t have the legal authority… and I don’t think they can execute on it,” he said. “But even if they could and it was legal, it doesn’t solve the basic problem.”

Zandi told the panel that if Congress doesn’t take action on the debt limit and the United States were to default, it wouldn’t be possible to put the genie back in the bottle, in response to a question from New Jersey Democratic Sen. Bob Menendez.

“It’s not possible,” Zandi said. “Since the founding of the nation, this was a principle that we established. Alexander Hamilton, the first Treasury secretary, bought back the revolutionary war debt on pennies on the dollar to establish the credit of the United States — that we are money good, if you put your money with us, you’re good.”

“If we for one second go over the line and not pay in a timely way, we lose that forever,” Zandi added. “And it’s incalculable, the cost.” 

Louisiana Republican Sen. John Kennedy, the ranking member on the panel, pledged at the beginning of the hearing he would not vote for a default on the debt, though he didn’t explicitly say he would vote to raise or suspend the debt limit. 

Kennedy voted against the legislation that raised the debt limit in December, as did all other Senate Republicans and all but one House Republican.

“This United States senator will not vote to default on America’s debt,” Kennedy said. “We have a lot of it. But there’s a moral principle involved and a practical principle involved. And if you’re going to have a party you gotta pay the band and it’s time for us to pay the band and we’re going to do it.”

“However, I think you will see some of us — including, but not limited to the House Republicans — use this as an opportunity to talk about our rate of growth and spending and to talk about the rate of growth and our debt accumulation,” Kennedy added. “And that’s not unusual.”