Economists have warned that a debt default, as is possible if Congress can’t pass a bill in the next couple days, would have dramatic effects on the United States and global economies, and that all Americans would eventually feel its effects. Their most basic warning: If the United States can’t borrow enough money and doesn’t pay its bills, or if those payments go out late, investors will see America as a riskier investment and demand higher interest rates to compensate. Those higher interest rates would hit both businesses and consumers, damaging the economy.
“This has never happened before,” federal budget expert Stan Collender said. “The expectation is that there will be a huge negative market response, and interest rates will start to rise, which will hurt the economy.”
‘Cataclysmic economic scenario’
“With the U.S. economy continuing to underperform, the federal government needs to maintain its normal operations pending a successful outcome of broader budgetary reforms,” the letter said, appealing for Congress to prevent a government shutdown as well as a default. “We respectfully urge the Congress to raise the debt ceiling in a timely manner and remove any threat to the full faith and credit of the United States government.”
House GOP reaction is key
That’s why there’s so much riding on any potential debt limit deal that Congress could pass before Thursday.
Politico has details on Monday’s negotiations: Under the emerging Senate plan, the government re-opens and if funded through Jan. 15, the same day a second round of automatic, across-the-board spending cuts kick in, a deadline meant to force Democrats and Republicans to come together on some type of broader government spending scheme. The debt limit is increased through Feb. 7.
The proposal doesn’t do much to President Obama’s health care law, which a failed Republican-led effort to defund led to the government shutdown in the first place. The plan would ask the government to enforce income limits on those receiving health care subsidies, and Politico reports Democrats want to repeal one tax — the so-called “belly button tax” — in exchange.
Update 10:15 a.m.: Members of the House GOP conference responded Tuesday morning with a potential plan of their own, looking to do everything the Senate does, but replacing the “belly-button tax” provision with one delaying the health care law’s tax on medical device manufacturers for two years. Its plan would also end health care subsidies to lawmakers, but not their staffers. Here’s the GOP’s overview of their bill.