The White House and allied Democrats want Americans to be focused on how a default on US debt would affect the economy and markets as officials prepare for a highly anticipated meeting with House Speaker Kevin McCarthy (R-CA) next week.
The last 24 hours were emblematic as both sides of the debt-ceiling standoff appear to be waiting for the other to blink as a possible default as soon as June 1 gets closer.
First, President Biden’s ambassador to the business world warned Wednesday in an interview with Yahoo Finance that America’s CEOs are coming to her with worries about the debt ceiling “because the last thing that markets need and the economy needs is that kind of a disruption right now.”
Commerce Secretary Gina Raimondo added during Wednesday’s Yahoo Finance conversation that “when I talk to US CEOs, there's a lot of anxiety about the debt ceiling and a view that it's not time to play politics.”
Just a few hours later, a new analysis from Biden’s in-house economic think tank warned of “severe damage” to the economy if a default were to occur, including a worst case scenario that they say could see markets fall by 45%.
This message was reinforced Thursday during a Senate hearing where Senate Democrats pilloried the House GOP's debt ceiling plan that passed the House last week as one that would lead the economy into a recession.
"Attempting to extract partisan policy concessions with threats to intentionally drive the American economy off a cliff is very the definition of extremism," said Senate Budget Committee Chairman Sheldon Whitehouse (D-RI) as Thursday's hearing kicked off.
Republicans, meanwhile, continue to say the White House - which so far has refused to negotiate over anything beyond a debt ceiling increase with no preconditions - will be the one at fault for any economic troubles.
"President Biden has refused to do his job — threatening to bumble our nation into its first ever default — and the clock is ticking," said McCarthy in a statement earlier this week.
Worries of ‘an immediate, sharp recession’
Perhaps the starkest economic warning came from Biden’s Council of Economic Advisors who calculated the economic effect of three scenarios in a blog post Wednesday afternoon.
They write that a default would lead the economy to “quickly shift into reverse, with the depth of the losses a function of how long the breach lasted.”
Even a near-miss with negotiations running up to the last minute would have an effect, the analysts say, leading to significant disruptions in financial markets and costing 200,000 jobs.
There is a recent historical example that backs up fears of a narrowly averted default nonetheless having lasting effects.
In 2011, the markets tanked that summer as Washington engaged in a similar standoff before recovering some of the losses in the fall after a deal was struck. Nevertheless, the S&P 500 ended 2011 essentially where it had begun.
The brush with default also led the credit rating agency Standard & Poor's to downgrade the US credit rating for the first time in history.
The White House added that a worst case scenario is a default that is lengthy and lasts through the third quarter. In that scenario, they project, the U.S. economy would be looking at “an immediate, sharp recession on the order of the Great Recession” with the stock market tanking by 45% and unemployment increasing by 5 percentage points.
The White House cited research from Moody’s Analytics and chief economist Mark Zandi in Wednesday’s post. Zandi is an independent economist who has also projected some of the economic costs and discussed his finding as the lead witness in Thursday's Senate hearing.
"We need to end this drama as quickly as possible, if we don't we are going to go into recession and our fiscal challenges will be made even worse," Zandi told the assembled senators.
The focus on the economic costs comes as both sides continue to publicly harden their positions ahead of a highly anticipated meeting next Tuesday.
The White House sit down is scheduled for May 9 and is set to include Biden and McCarthy as well as House Minority Leader Hakeem Jeffries (D-NY), Senate Majority Leader Chuck Schumer (D-NY), and Senate Minority Leader Mitch McConnell (R-KY).
Ben Werschkul is Washington correspondent for Yahoo Finance.
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