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How the coming debt-ceiling showdown could derail the recovery
Economists expect growth to pick up late this year... unless the government looks like it'll run out of money to pay its bills
House Speaker John Boehner and Rep. Paul Ryan are using the debt ceiling as negotiation bait.
House Speaker John Boehner and Rep. Paul Ryan are using the debt ceiling as negotiation bait. T.J. Kirkpatrick/Getty Images
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he federal government won't hit the $16.4 trillion debt ceiling until around October, but lawmakers are already fighting about it. Senate Tea Party conservatives are blocking the creation of a conference committee to reconcile the House and Senate budget proposals because they want assurances that the committee won't increase the borrowing limit as part of a broad budget deal. Why? Because that would prevent them from using the issue later as leverage to demand spending cuts and other fiscal reforms.

GOP leaders in the House, including Speaker John Boehner (Ohio) and Budget Committee Chairman Rep. Paul Ryan (Wisc.), said last week that they intend to keep the debt ceiling on the table during budget meetings as an incentive for Democrats to agree to Republican proposals for deficit reduction. Economists warn, however, that an extended battle linked to raising the debt ceiling could undermine the still shaky economic recovery.

At this stage, there's not much leaders in Washington can do to speed up the recovery, some analysts say. They've tried everything in their bag of fiscal-policy tricks. Simon Johnson at Bloomberg says there is, however, plenty they could do to mess things up. And suggesting that Congress might prevent the Treasury Department from borrowing the money it needs to pay all of the government's bills, he says, would certainly accomplish that:

Most economists are deeply skeptical that the U.S. would ever default on its debt or even mess around with the priority in which creditors are paid. The consequences would be highly disruptive to the economy and greatly undermine the borrowing capacity not just of the government but of the private sector, too. Public finances at every level of government would be in disarray...

Unfortunately, it isn't the opinion of experts that matters most, but rather how business people and consumers see the situation in Washington. In the summer of 2011, these observers witnessed a scary confrontation over the debt ceiling that greatly increased perceived uncertainty and undermined investment of all kinds.

If leading politicians say the federal government should default, uncertainty will increase. And Congress could make it difficult for the Treasury Department to make all its obligated payments on time. Even 10 minutes of default would be a disaster. [Bloomberg]

The irony here is that all of this could happen just as the recovery finally begins to gather strength. Economists say growth is being limited now by the $80 billion in tax hikes and across-the-board spending cuts that took effect this year, but, as Vicki Needham at The Hill points out, they believe the expansion will gain steam late this year after the nation pushes through those headwinds. In the fall, employers will be looking for signs of greater certainty before they take the plunge and increase hiring in 2014, Needham adds, and a fight over the debt ceiling could scare them enough to delay "a more robust recovery, especially if lawmakers hold off until the last minute, which some are expecting."

But lawmakers still have time to avert another debt-ceiling crisis. Rich Edson at Fox Business notes that House Republicans are just beginning to map out their strategy as the country climbs toward the borrowing limit. "Republican lawmakers have suggested coupling a debt-ceiling increase with tax and entitlement reform, approval of the Keystone Pipeline, domestic energy production, a long-term budget deal, spending cuts equal to the amount of the debt ceiling increase, curbs on federal regulations, or a delay in ObamaCare's implementation, according to lawmakers and senior aides." Ultimately, the fate of the economy hinges on how long the game of chicken lasts.

Harold Maass is a contributing editor at TheWeek.com. He has been writing for The Week since the 2001 launch of the U.S. print edition. Harold has worked for a variety of news outlets, including The Miami HeraldFox News, and ABC News.

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