The Greater Good. That’s the lesson of the debt ceiling deal if it passes, as expected, according to economists.
Both Senate Majority Leader Chuck Schumer and Minority Leader Mitch McConnell are optimistic of a quick passage before June 5, the day Treasury Secretary Janet Yellen said the country will run out of funds to pay all its obligations on time.
Yes, some senators are angry about defense spending, work requirements around the supplemental nutritional assistance program, IRS funding, student debt and easier energy permitting but, in the end, everyone wins with a debt ceiling increase. The alternative – a default and a ratings downgrade – would have been “catastrophic” for the economy, jobs and the stock market.
The deal’s “a win for both sides and a loss for both sides and is in the true spirit of compromise,” said Brian Marks, executive director of Entrepreneurship and Innovation Program at the University of New Haven’s business school. “One can argue they acted in the best interest of the nation. There’s no going off a cliff here.”
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What catastrophe will we avoid by agreeing to a compromise?
Failure to lift the debt ceiling would put more than 8 million Americans out of work, said U.S. Treasury Secretary Janet Yellen last month citing White House Council of Economic Advisers (CEA) estimates. Business and consumer confidence would fall precipitously, and the value of the stock market would be slashed by about 45%, “wiping out years of retirement and other household savings,” she said.
Moody’s Analytics estimated more than 7 million Americans would lose their jobs, causing the unemployment rate to surge to over 8% and $10 trillion in household wealth would get erased.
Gregory Daco, chief economist at EY-Parthenon, part of accounting firm Ernst & Young LLP, estimated 5% of economic growth would be lost due to severe government spending cuts and a financial crisis.
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What happens instead if the current deal is finalized?
Very close to nothing, and almost everything goes back to business as usual. That’s great news for the economy, jobs and the stock market. All of those perform better without surprises or shocks, Marks said.
The deal only curbs government spending by a small amount, which should keep the big economic picture largely unchanged.
Daco estimates the hit to economic growth will come next year, shaving off 0.3% of growth and then another 0.2% hit in 2025. About 250,000 jobs would be lost, marginally pushing up the unemployment rate toward 4.8% at the end of 2024 from 4.6%. The Federal Reserve predicted last month a 4.5% jobless rate at the end of this year and 4.6% next year.
The small fiscal belt-tightening should help the Fed fight inflation, too. Daco estimates the belt-tightening is equivalent to almost one small increase in the short-term benchmark fed funds rate, which stands between 5% and 5.25% now. The Fed has been aggressively raising interest rates to cool inflation by making borrowing more expensive to reduce demand for money and spending.
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Although the fate of student loan forgiveness remains in the hands of the Supreme Court, the sunsetting of pandemic-related student loan interest forbearance at the end of the summer could have a near-term impact on the economy.
The debt ceiling plan forbids anymore pauses on student loans, which means federal student loan repayments and interest accrual would likely restart around September 1. Even if the Supreme Court rules student loan forgiveness can proceed as planned, there are 25 million Americans who would still have balances.
“The end of that forbearance will reduce annual disposable personal income by $38 billion,” said JP Morgan economist Michael Feroli. “Since presumably the beneficiaries of that policy have higher marginal propensities to consume, it’s likely most of the reduction in income will be followed shortly thereafter by a similar reduction in spending.”
Though the Senate voted on Thursday to pass a bill to overturn President Joe Biden’s student-debt cancellation and throw borrowers back into repayment immediately, Biden said he will veto it, leaving the debt ceiling agreement at the forefront.
How will objectors in the Senate be satisfied?
While Schumer wants to fast-track the deal, he’ll need all 100 senators to agree and give their “unanimous consent” for the bill to bypass normally slow Senate procedures but that might prove tricky with at least three senators wanting to propose amendments. If those amendments pass, the entire deal must be returned to the House for another vote, jeopardizing the deadline.
McConnell’s strategy is to allow some amendments to get a vote, but maybe only the ones doomed to fail as not to hold up the deal, reports suggest. If amendments don’t pass, nothing in the proposal gets changed and the process moves on to get the deal passed. Most of the senators with objections have admitted they don’t have the votes to pass an amendment that would delay passage.
Another reason some suggested the Senate would bring this drama to an end by Friday: the Senate is off for a three-day weekend after Friday. Only the House is slated to be in session on Monday.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
