Transcript: Dr. Mark Zandi’s testimony on the economic impact of debt ceiling brinksmanship before the Joint Economic Committee – Sept. 18, 2013

Dr. Mark Zandi, Chief Economist, Moody’s Analytics, on the economic impact of debt ceiling brinksmanship before the Joint Economic Committee on Sept. 18, 2013. SOURCE: Joint Economic Committee

Partial transcript of testimony of Dr. Mark Zandi, Chief Economist, Moody’s Analytics, on the economic impact of debt ceiling brinksmanship before the Joint Economic Committee on Sept. 18, 2013:

…I am an employee of the Moody’s Corp., but the views I express today are my own.

I’d like to make four points in my oral remarks.

First, the Treasury debt limit must be increased by the last two weeks of October.

By my calculation, the day the limit will be breached is probably Oct. 18th. That’s a day when Treasury has to make a payment to Medicare and Medicaid providers.

It’s of course very uncertain because of the timing and size of tax payments so I don’t know that for sure. I think the latest possible date that the limit has to be increased is Nov. 1st, that’s when Social Security payment has to be paid.

So in the last two weeks, it’s very important that you raise the debt limit by that point in time.

The second point. If you don’t raise the debt limit in time, you will be opening an economic pandora’s box. It will be devastating to the economy.

Now, let me first say, I wouldn’t take any solace in the fact that financial markets aren’t going to react up until the day you need to raise the limit. As Sen. [Amy] Klobuchar said, we’ve seen this show before, and each time the show ends with you signing on the dotted line just in time. And financial markets fully expect that you will do that this go around. So I don’t see much going on in financial markets up until the time that the limit is going to be breached.

If you don’t do it in time, confidence will evaporate. Consumer confidence will sharply decline. Investor confidence, business confidence. Businesses will stop hiring. Consumers will stop spending. The stock market will fall significantly in value. Borrowing costs for businesses and households will rise.

The other big hit to the economy of course is that the Treasury will have to eliminate its cash deficit, only spend what it is receiving in cash. By my calculation, in November, that’s about $130 billion. You annualize that, that’s 9% of GDP that comes right out of the economy. We’ll be in the middle of a very, very severe recession, and I don’t see how we get out of it. There’s no monetary policy response in the current context. We’re already at a 0% interest rate. I just don’t see what policymakers will do.

So point number two is you have to do something about the debt limit at D-Day.

Point number three. To address the debt limit, I would not add to the near-term fiscal austerity. We have significant amounts of austerity this year.

You add up the effect of the spending cuts and the tax increases, it’s about 1.5% of GDP. That’s the most fiscal drag this economy’s had to digest since just after World War II during the war drawdowns.

Just for context, if fiscal policy was just neutral with respect to the economy – zero – given that the economy is growing 2% with the drag, we’d be growing 3.5% right now. So that’s quite significant. That’s significant drag.

Now, the drag will fade under current law next year and the year after, but it is still quite significant. I would not add to it in your attempts and efforts to address the debt limit. So that’s point number three.

The follow-up point, point number four, is that it’s entirely appropriate and desirable for you to address our long-term fiscal problems. They are quite significant and daunting.

Under current law and under reasonable economic assumptions, we’re going to have a big problem a decade out…In the 2020s and 2030s, the deficit will rise sharply and the debt load will become unsustainable. So it’s very important for you to start focusing on that.

Now, that may be a bridge too far in the current context because again you have to raise the debt limit by the last two weeks of October.

So at the very least, I’d be focusing on reforms to the budget process in terms of adopting things that will create transparency with respect to budgeting longer run – things like adopting generational accounting, fiscal gap accounting. I’d extend the budget horizon past 10 years so that we can start doing some entitlement reform and really see what the impact will be in the longer run.

And finally, I would repeal the debt limit. It’s very counter-productive. If you can’t manage that, there are some reforms to the debt limit that can be implemented to make this much more effective and a lot less destructive.

Let me finally say, I think our economy is on the verge of some very strong growth. The only missing ingredient is a decision – a reasonable decision in a timely way on the budget and the debt limit. If you can do that, we’re going to be off and running.

Thank you.


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