Congress seems to be on its way to reaching a debt limit deal, albeit a short-term one. If lawmakers fail to compromise on a plan before the Thursday deadline, it’s a “very dark scenario,” said Mark Zandi, chief economist for Moody’s Analytics. “Tomorrow, if the lawmakers have not gotten it together, nothing per se bad happens, although I would expect investors to become nervous,” Zandi told reporters Wednesday at a breakfast hosted by the moderate think tank Third Way.
If the deadline is breached, the Treasury Department will no longer have borrowing authority, but will still have some cash on hand to pay the nation’s bills. Zandi said the Treasury will run out of money by Nov. 1, and will not afford the $55 billion payment that is due for Social Security, Medicare and military payments.
“The best, most likely scenario is that they would pay the bills as they came in when they have the cash,” he said. This means that the Social Security payments could be paid eventually as more cash comes into the Treasury after Nov. 1.
Zandi predicted that a failure to make those payments would result in a sharp economic downturn: “There will be panic and consumers at that point will start reigning it in and businesses at that point will start laying off workers.”
An actual default, meaning the U.S. would not pay its bondholders, would not hit until Nov. 15, when a sizeable interest rate payment is due, Zandi said. That would be “catastrophic” and “a recipe for a financial crisis … and a recession at least as deep as the Great Recession,” he said.
NewsHour viewers have heard a similar message from Zandi before. Earlier this month, he spoke with Judy Woodruff and warned about an “immediate recession” in the event of a default. “This scenario is so dark that it’s hard for me to imagine that policymakers won’t come to terms before we actually hit this debt limit,” he said.
Zandi also addressed the costs of the automatic, across-the-board budget cuts known as sequestration, saying they way they are managed is “inefficient and harmful for the economy.” He also said that the Affordable Care Act seems to be “a wash” from a macroeconomic perspective, meaning that it does not seem to have any significant positive or negative effect on the economy.
The key to extending economic growth is for Washington to “do nothing,” Zandi said. He said evidence shows political brinkmanship is hurting economic growth by creating an uncertainty that discourages businesses from hiring or making risk investments in research and development.
“All Washington has to do is go away, and we will be fine,” he said.
But Zandi is no stranger to the politics of Washington. He served as an advisor to President Barack Obama and also advised Sen. John McCain’s 2008 presidential campaign. Though he is a registered Democrat, Zandi told The Washington Post in 2009 he would help any policymaker who asks, regardless of party.
Economist Mark Zandi discusses the government shutdown and the debt ceiling on PBS NewsHour. Video still by PBS NewsHour