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Failing To Raise Debt Ceiling Could Cause Bigger GDP Drop Than The 2008 Recession

By Pat Garofalo on June 3, 2011 at 4:22 pm

"Failing To Raise Debt Ceiling Could Cause Bigger GDP Drop Than The 2008 Recession"

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For months, Republicans have been playing games with the nation’s debt ceiling, threatening to not raise it unless they receive various items off of an ever-shifting list of demands, including cuts to Social Security or cockamamie Constitutional amendments. The GOP even held a sham-vote on increasing the debt limit this week, explicitly designing it to fail and then using that failure to up their calls for concessions on the part of Democrats.

As we’ve been documenting, failure to raise the debt ceiling could have several adverse consequences, including threatening the fragile housing market and wiping out economic growth (depending on the duration of the stalemate). On that note, CAP’s Michael Ettlinger and Michael Linden found that failing to raise the debt limit for two months could cause a bigger GDP drop than that experienced during the Great Recession of 2008:

To see just how much, imagine that this debt limit crisis happened last year. The budget deficit last August and September was $125 billion. If the government had been unable to finance that deficit, it would have been forced to cut $125 billion from its spending during those two months—which if translated into a decline of that magnitude in economic activity would have resulted in GDP dropping by 2.3 percent, in nominal terms, from the previous quarter.

To put that kind of drop in perspective, consider that the biggest quarter-to-quarter drop in nominal GDP since 1947, when official statistics began, was 2 percent from the third to fourth quarter of 2008—the middle of the Great Recession, when we lost nearly 2 million jobs. In other words, had the government been unable to borrow last summer, it could have resulted in an economic contraction worse than we experienced during the depths of the Great Recession.

The reason for this drop is simple. If the debt ceiling isn’t raised, “the federal government will be forced to immediately cut nearly 40 percent from its budget,” which would be a significant drag on the rest of the economy. The Wall Street Journal found that failing to raise the debt ceiling for 95 days would wipe out all of the expected 2011 economic growth.

Some Republicans have posited that such a shock to the economic system could actually be a good thing. “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” on major policies that affect the budget, said Rep. Devin Nunes (R-CA).

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