There has been a lot written about what would happen if the government doesn’t end up raising the debt limit. My colleague Alex Altman perhaps puts it best in this Swampland post, where he says:
On one side, the Obama Administration, Capitol Hill Democrats, Wall Street whizzes and budget experts have been wearing out their thesauruses looking up new words for “catastrophe” as they try to explain to the public that failing to raise the $14.3 trillion federal debt limit by Aug. 2 would result in a radically different country on Aug. 3.
And over at Moneyland, Josh Sanburn digs a little deeper to explain what a debt default would feel like for the average American. The effects on the stock market might be temporary — a drop followed by a rebound when a deal is struck. Mortgage rates, though, would be likely to rise and stay there even after an eventual deal, which, all things being equal, is likely to keep housing prices depressed.
But what if President Obama and the Republicans in Congress make a deal that will allow the debt ceiling to be raised? Economic crisis averted? Crisis, probably yes. But a debt-ceiling deal wouldn’t be a non-economic event. And it wouldn’t be pleasant either, particularly for people who are out looking for a job. Here’s why:
It’s not clear how much budget cutting would be involved in a deal to raise the debt ceiling or if there will be one at all. What’s more, a number of Republicans, including presidential hopeful Michele Bachmann, have said that cutting government spending could boost the economy and create jobs. The problem is there seems to be little support from economists on that rosy scenario, at least in the next few years.
Douglas Elmendorf, director of the nonpartisan Congressional Budget Office, ran the numbers on what a deal that either cuts spending or raises taxes in order to reduce the deficit by $2 trillion would mean to the economy. Elmendorf estimates that the deal would likely slow the economy by as much as 0.6% in each of the next three years. Again, there is no science for translating GDP growth into jobs. But 0.1% of GDP growth usually means the economy will add about 5,000 jobs, and vice versa. So that means a debt-ceiling deal of the size Elmendorf is talking about could cost the economy as much as over a million jobs during the next three years.
(LIST: Top 25 Financial Blogs)
Elmendorf doesn’t specify whether he is talking about budget cuts or tax increases. And I suspect that most Republicans would agree that tax increases, even if they go toward reducing the deficit, would eliminate jobs. But since it seems clear that the deals that are on the table now include more spending cuts than tax increases, I think Elmendorf is mostly talking about the effect of cuts. John Makin, an economist at the right-leaning American Enterprise Institute, says the effect of budget cuts could be less than what Elmendorf expects, especially if the markets react positively to the idea of smaller budget deficits. “It’s a large enough problem that if we had some kind of plan to substantially bring down our debt-to-GDP ratio, then I think the long-term effect would be stimulative,” says Makin.
(TIME.COM: Can Twitter Beat the Market?)
Elmendorf does say there could be some positives from a debt deal. He thinks long-term interest rates would remain low at least for the next few years, as opposed to if there were no deficit-cutting deal. That would make it easier for people who have a job and can get a loan to buy a house. And yes, Elmendorf agrees with Makin that the economy could grow faster starting in 2015. Of course, that won’t do anything to help the 14 million people who are out of work now. But conveniently forgetting the problem of those currently unemployed seems to be the trend in Washington these days.