Consequences Made Clear As GOP Continues to Walk Away from Agreement to Pay Bills, Reduce Deficit

Fiscal Responsibility

Today, two business leaders, US Chamber of Commerce President and CEO Thomas Donohue and Financial Services Forum President and CEO Robert Nichols, warned of the consequences of a default in a USA Today op-ed, putting pressure on Republicans to avoid the catastrophic consequences that would occur.

According to Donohue and Nicols, failing to ensure we pay America’s bills would mean:

Government operations halted: Failing to increase the debt limit would require the United States to immediately cease honoring 44% of its obligations during the month of August, according to an analysis by the Bipartisan Policy Center. The U.S. Treasury is expected to take in about $170 billion in tax revenue in August, but needs to pay $300 billion in expenses. The resulting $130 billion deficit would require the government to pick which programs — Medicare, Medicaid, food stamps, unemployment insurance — to pay for and which not to fund. And there would be little money left to pay our troops or to run the courts, the prison system, the FBI, or other essential operations.”

Our debt and deficit would get worse: The ‘full faith and credit’ of the U.S. government is regarded as iron-clad and virtually risk-free. As a result, the U.S. government enjoys the lowest borrowing costs in the world… It's been estimated that a one-notch downgrade in the nation's credit rating (the smallest reduction) would raise yields demanded by investors by a full percentage point. Higher borrowing costs mean wider deficits and higher debt levels. Even a one-half percentage point increase in rates would increase our annual deficit by $10 billion in the short run, and by $75 billion per year as outstanding debts roll over.”

Implications for the U.S. dollar: The dollar's role as the world's reserve currency facilitates capital formation, trade, cross-border investment, and economic growth, yielding enormous benefit to U.S. savers, investors, businesses and consumers. In recent years, however, the dollar's status as the reserve currency has been increasingly questioned. Other nations have openly called for an alternative to the dollar. A default and subsequent downgrade of U.S. government debt would likely cause a significant depreciation in the dollar and would accelerate calls for a new non-dollar global reserve currency — to the detriment of every American business, saver, investor and consumer.

Implications for U.S. economic growth and job creation: Higher borrowing costs and a falling dollar mean slower economic growth and job creation. According to an analysis by the Federal Reserve, a one-percentage point rise in Treasury yields would reduce economic growth by 0.8 percentage points. That number sounds small, but it is not. Economists tell us it would translate into hundreds of thousands of lost jobs every year. After last Friday's bleak unemployment report the last thing in the world we should do is needlessly trigger the loss of even more American jobs.”

And an article in today’s Washington Post points out the tough choices America would face if no agreement was made after August 3:

“As Obama decided what to pay, he would choose among Social Security checks, salaries for members of the military and veterans, unemployment benefits, student loans, and many other government programs, according to administration officials and an independent analysis by a former senior Treasury Department official in the George H.W. Bush administration.”

“To protect the nation’s creditworthiness, Obama would have to balance those priorities with the imperative of making payments to investors in U.S. government bonds — ranging from domestic pension funds to the Chinese government.”

“‘You can move the chess pieces around all you want,’ said Jay Powell, a visiting scholar at the Bipartisan Policy Center and an author of the analysis. ‘You’re going to lose.’”

“According to the center’s analysis, the government would have to cut 44 percent of spending immediately. Through August, the government could afford Social Security, Medicare, Medicaid, defense contracts, unemployment insurance and payments to bondholders.”

But then it would have to eliminate all other federal spending, including pay for veterans, members of the armed services and civil servants, as well as funding for Pell grants, special-education programs, the federal courts, law enforcement, national nuclear programs and housing assistance.”

“On Aug. 3, the Treasury is set to receive about $12 billion in tax revenue — mainly from people paying their taxes late — and is slated to spend $32 billion, including sending out more than 25 million Social Security and disability checks at a cost of $23 billion, according to Powell’s analysis.”

“Aug. 4 could prove even more difficult. The government is slated to spend $10 billion and raise only $4 billion in revenue.”

“Government officials and analysts say a spike in rates would dramatically increase the cost of funding the government and lead to far higher interest rates on mortgages, credit cards and other types of debt.”

It’s time for Republicans to take these warnings seriously, stop risking our economic security and work with Democrats on a balanced agreement to reduce our deficit and ensure we pay our bills.