When it comes to economic policy, President Trump and the Republican-controlled Congress have accomplished little.
The president has signed a blizzard of executive orders requiring this or that regulation to be rolled back. In a storm of tweets and high-profile meetings, he has cajoled and berated corporate CEOs to bring jobs back home. But none of this has moved the economic dial.
Whatever you think of the president, we all need to hope he quickly comes to terms with Congress and signs legislation to fund the federal government and raise the Treasury debt limit. Both must be done by the end of September, or economic chaos will ensue.
We’ve been here before. In fall 2013, President Barack Obama and the Republican-controlled Congress failed to pass a budget, and the government shut down. It was a couple of weeks before cooler heads prevailed, a budget was passed, and the government reopened.
The shutdown didn’t cause the economy to go into a tailspin, but it did significant damage. Growth slowed at a time when unemployment was still very high. If it had continued much longer, the fragile economy would have stalled out.
Failure to raise the debt limit poses an even more serious threat. The limit puts a ceiling on how much debt the federal government can have. Because the government runs a deficit – it spends more than it takes in – it needs to borrow money to fully fund its activities. That adds to our debt, and thus the debt ceiling needs to increase every so often.
This is one of those times. If lawmakers can’t get it together and increase the limit by the end of September, then the government will have no choice but to cut spending to match revenues. The spending cuts will be massive, equal to the nation’s current $600 billion budget deficit. Everyone will feel the effects, from Social Security recipients to military contractors.
We have never breached the debt limit, although we came close back in summer 2011. President Obama and another Republican-controlled Congress took it right down to the deadline.
Even though the limit was increased in the nick of time then, the brinkmanship did significant economic harm. One of the large rating agencies took away our AAA rating. Spooked investors demanded higher interest rates on our Treasury bonds to compensate for the possibility that they might not get paid in time.
Given that experience, you would think President Trump and Congress would be on high alert, and working hard to get legislation signed. That’s not what is happening. Congress is bogged down with the effort to repeal and replace Obamacare before members head out for their August recess. We’ll see them in September.
That doesn’t leave much time, especially for a president and Congress that can’t get anything done. Complicating matters, the president’s budget proposal has very little support, even among some Republican members of Congress. Reaching an agreement on complex tax and spending policy in just four weeks seems like a yeoman task.
Moreover, some Republican lawmakers believe that the threat of a government shutdown and a breach of the debt limit is an opportunity to force big, more fundamental changes to entitlement programs and to reduce the budget deficit.
They also argue that economic fallout from a shutdown or a breach of the debt limit would be small. They point to the record stock market: Wouldn’t investors be selling their stocks if this were a real problem?
It’s premature for that. Investors have seen this script before. They think it will end the same way, with an agreement before too much harm is done.
Even so, cracks in investor confidence are beginning to appear. A recent sale of three-month Treasury bills due in October went very poorly, with interest rates rising sharply. Investors are now attaching some probability that they might not get paid in full on time.
The cracks will turn into fissures if the president and Congress don’t quickly nail things down when they get back in September. And if they don’t get it together in time and the government shuts down, or especially if the debt limit is breached, then the fissures will turn into an economic earthquake.
So, regardless of whether you are a Trump supporter or a detractor, let’s hope he gets something done very soon.
Mark Zandi is chief economist at Moody’s Analytics.