Ottawa should be preparing now for a U.S. government in financial paralysis

The results of last week’s U.S. midterm elections were widely greeted with relief by Canada and America’s other allies.

But satisfaction with what appears to be little change to status quo is not entirely warranted.

It’s true that with Democrats still holding the White House and the Senate, having ceded control only of the House of Representatives in the Nov. 8 vote, Canada and the U.S. remain aligned on climate crisis, supporting Ukraine in its war with Russia, and other major issues.

But the Republicans’ success in retaking the House places a time bomb under global financial markets.

A peculiarity of the U.S. system of governance is that Congress must each year lift the ceiling on the country’s debt, setting a new maximum amount by which the U.S. can borrow to meet its existing debt obligations.

Last December, Congress voted to raise the debt limit by $2.5 trillion, the 78th time lawmakers have lifted the ceiling on total U.S. debt that amounts to $31.4 trillion.

But as early as next spring, hard-right House Republicans, urged on by Donald Trump and other fiscal conservatives, are expected to balk at raising the debt ceiling unless the Biden administration gives in to their demands for spending cuts.

Their targets for reduced spending include the bedrock entitlements Social Security and Medicare for seniors, and Biden’s signature climate bill passed this year.

Canadian businesses have hoped to tap into that bill’s provision of $369 billion to decarbonize the U.S. economy.

Neither the Democrats nor the hard-right GOP House members are likely to budge on those issues central to U.S. President Joe Biden’s agenda.

An earlier debt-ceiling standoff in 2011 resulted in a partial U.S.-government shutdown, a slump in global financial markets and a rise in borrowing costs. It put the U.S. at risk of defaulting on its debt.

Economists say a repeat of that impasse next year would drive America into a deeper recession than the mild economic slowdown forecast for both the U.S. and Canada in 2023.

A looming impasse on the U.S. debt ceiling that is even more disruptive than that of 2011 is not an alarmist scenario.

High inflation and interest rates were not factors in the 2011 crisis. Nor were the geopolitical risks posed by Russian expansionism and China’s zero-COVID-19 policies, which will continue to compromise global supply chains into 2023.

Republicans “believe economic chaos weakens President Biden,” Sen. Elizabeth Warren, Democrat of Massachusetts, wrote in a New York Times essay on Saturday.

Warren urged fellow Democrats to head off another 2011 debacle by “lifting the debt ceiling now to block Republicans from taking our economy hostage next year.”

Janet Yellen, the U.S. treasury secretary, also has implored the current Congress to raise the debt ceiling now. Other Democrats have proposed legislation that would set the ceiling at a fantastically high number, such as googolplex.

But there’s little time to mount such a pre-emptive strike. The current lame-duck Congressional session ends Jan. 3 when the new Republican-controlled House takes over.

Bloomberg economists Anna Wong and Andrew Husby forecast that a fierce 2023 fight over the debt ceiling could result in a 15-month-long recession.

They predict that it would cause a 1.8 per cent drop in GDP in next year’s second half compared with the 0.9 per cent decline Bloomberg expects in the absence of a Washington donnybrook on the debt ceiling.

Financial house Allianz warns in a recent client note that in another debt-level debacle “interest rates on Treasury securities could rise sharply, and U.S. and global financial markets could suffer very steep losses.”

But House Republicans believe that debt-ceiling threats are a legitimate governing device.

“The debt ceiling is an important tool for addressing debt and deficit,” Republican Congressman Adrian Smith, the front-runner to head the powerful House Committee on Ways and Means in the next Congress, told The Washington Post last month.

“After two years of irresponsible spending by Democrats driving historic inflation, American families can’t afford for us to not have a serious debate about government spending,” Smith said.

President Biden says brinkmanship over the debt ceiling threatens to “crash the economy.”

“There’s nothing — nothing — that will create more chaos, more inflation, more damage to the American economy than this,” Biden said last month in a speech to the Democratic National Committee.

The safest assumption, though, is to expect no reform in the debt-ceiling process prior to the next compulsory vote on enabling America to pay its bills.

And to assume that Republicans who have campaigned this year on promises to disrupt the U.S. government by means of the debt limit will follow through on their threats.

Which means Ottawa should be preparing now for a U.S. government in financial paralysis sooner than later, even if common sense rules against it happening.

SHARE: