Small Business, The Debt Ceiling, and Congress' Inabilibily

Here we go again.

Just two weeks after Congress negotiated a last-minute deal to avert going over the fiscal cliff, economists say political squabbles over the nation’s borrowing limit could once again threaten to hurt the nation’s sluggish recovery.

“It’s probably the biggest headwind right now,” said Paul Ashworth, chief North America economist with Capital Economics.

President Barack Obama warned Monday that the nation could face serious consequences if Congress fails to authorize an increase of the nation’s debt ceiling.

“America cannot afford another debate with this Congress about whether or not they should pay the bills they’ve already racked up,” Obama said in a press conference Monday. 

In a separate speech later Monday, Federal Reserve Chairman Ben Bernanke echoed Obama's comments, arguing that Congress must raise the debt ceiling so the government can pay its bills.

Raising the borrowing limit was once seen as little more than a procedural matter, and, as Obama pointed out, an increased debt limit does not authorize Congress to spend more money. But over the past couple years it has become a focal point of Republicans’ efforts to control what they believe is runaway government spending by forcing a debate over spending cuts.

In the summer of 2011, the nation came perilously close to not paying its bills because Congress could not agree on the amount of borrowing it would authorize for the government. The debt ceiling fight roiled the stock markets. The growing political rifts also was one reason Standard and Poor’s cited when it lowered the nation’s debt rating from AAA to AA+, which threatened to raise borrowing costs for auto loans to mortgages.

This time, economists say the latest debt ceiling standoff also could be harmful because it’s yet another example of a political infighting bringing the nation to the brink of a fiscal crisis.

“It’s not so much the debt ceiling standoff itself,” Ashworth said. “It’s what the debt ceiling standoff tells you … about whether Congress is capable of dealing with the problems.”

Another protracted fight and potential crisis could cause other ratings agencies to reduce the nation’s credit rating, said Paul Edelstein, director of financial economics with IHS Global Insight.

“It’s less that these ratings agencies think the U.S. doesn’t have the resources to pay its bills the way a Greece or a Spain (does),” Edelstein said. “It’s just the uncertainty caused by the politics.”

Even if a last-minute deal is struck, economists said the ambiguity created by the fight also could hurt the economy because businesses may be cautious to hire new employees or spend money on projects while a deal was being hashed out.

“I think it’s one reason why the economy hasn’t kicked into a higher gear, and I suspect that businesses won’t take a lot of risk until this is nailed down sufficiently,” said Mark Zandi, chief economist with Moody’s Analytics. “It is a damper on growth.”

Still, Zandi and others say the really serious risk would only come if Congress actually can’t agree at all before the Treasury Department runs out of accounting tricks to keep funding going. That could mean the government wouldn’t be able to pay some of its bills, weakening the nation’s recovery and possibly even sending the country back into recession.

“If the debt ceiling actually becomes binding then the Treasury has no good options, and (it) will do a lot of damage to the economy,” Zandi said.

Republicans agree that failing to increase the debt ceiling would have serious consequences. But they also argue that government spending is a serious problem that needs a solution. House Speaker John Boehner, R-Ohio, and others have argued that the debt ceiling offers a good opportunity to find ways to cut spending.

Economists say there are concerns about the nation’s long-term economic health and it is important to think of ways to cut spending and raise revenue in years to come. But many argue that requires a serious discussion about what can be done to tweak big government programs like Social Security and Medicare over the next few decades.

Laurence Ball, an economics professor at Johns Hopkins University, noted that the old method of raising the debt ceiling with little formal discussion did not solve any debt problems. But he also questioned whether pushing the nation toward a possible fiscal crisis on a tight deadline is the best way to address these issues.

“To solve the problem you’d have to make some hard choices about cutting spending or raising taxes,” Ball said. “It’s very hard work to find reasonable solutions.”