For weeks now, Republicans have been claiming that they will refuse to raise the nation’s debt ceiling — thus forcing the U.S. to default on some of its obligations — unless Democrats agree to various policies on the conservative wish-list, including a balanced budget amendment, cuts to Social Security, or corporate tax reductions. To justify this blatant hostage-taking, Republicans have been claiming that having the U.S. default on some of its payments wouldn’t necessarily be a bad thing.
For instance, Sen. Pat Toomey (R-PA) said, “I don’t think it’s going to have an adverse impact on the economy for the days or weeks or perhaps even months that this would continue.” “The case has not been made that this is an absolute necessity,” said Rep. Bill Huizenga (R-MI). Rep. Devin Nunes (R-CA) even said that “by defaulting on the debt, in the short and long term, it could benefit us to go through a period of crisis that forces politicians to make decisions.”
This is, of course, nonsense, as failing to raise the debt ceiling would have several adverse consequences on both the U.S. and global economy. In fact, the spending cuts that would have to occur under such a scenario would wipe out all of the estimated 2011 economic growth in just 95 days. Bank of America analysts wrote that failing to raise the debt ceiling would likely tip the U.S. back into a recession. And as CAP’s Christian Weller noted, it would be terrible for the still-struggling housing market:
If Congress fails to raise that ceiling then the U.S. housing market would most likely experience a severe double-dip contraction marked by much lower home sales and depressed house prices. That in turn would spark a return of the economic pain of the past few years for many families as foreclosures would remain at or near record highs, and jobs in key sectors, such as construction, would disappear again.
Weller laid out several consequences for the housing sector if the ceiling isn’t raised, including:
— Mortgage interest rates will rise more than U.S. Treasury rates. An increase in the 10-year Treasury rate by half a percentage point — which is likely if the debt limit isn’t raised — could translate into a jump in the mortgage rate equal to 0.66 percentage points, increasing mortgage rates by close to 14 percent from their current levels to their highest levels since 2008.
— Mortgage rates will remain high for some time. Shocks to Treasury rates typically translate into mortgage rates rising and staying high. The housing market consequently would not get a reprieve once the federal government has to delay debt payments — even if the debt ceiling is eventually raised.
— New home sales could drop to new record lows. The relationship between mortgage rates and new home sales over the past decade suggests that between 27,300 and 31,600 fewer new homes will be sold in 2011 because of the increase in mortgage rates.
— The economy will suffer. Count on a repeat of the recent housing market-led downturn of the economy. The housing market’s decline during the Great Recession of 2007-2009 dragged down the economy for long afterwards. The economy would have been $222 billion larger (in 2011 dollars) than it was in March 2011without the decline in new home sales and home extensions alone from December 2007 to March 2011.
— Construction jobs would disappear again. Residential construction jobs fell by 1.1 million from December 2007 to December 2010, accounting for 13.9 percent of the job losses during this period. Residential construction employment has only started to level off in the spring of 2011, putting an end to more than three years of massive job losses.
House Republicans have already scheduled a vote to raise the debt ceiling for next week that is designed explicitly to fail.