The Broader Market

My colleague Michael Linden outlines why we need to increase the debt limit, why a short increase to the limit won’t work, and what will happen if we don’t raise the limit.

Enjoy!

by Michael Linden and Jordan Eizenga

(For a link to the original article, see here).

On August 2, if Congress fails to raise the debt limit, the United States will have its credit rating downgraded, interest rates will likely rise dramatically, and the federal government will be forced to immediately cut nearly 40 percent from its budget, which could plunge the American economy back into a deep recession. The damage will be enormous, and no sector of the economy will be immune—least of all, the states.

Each year the federal government funds hundreds of billions of dollars in state services. These include employment and training programs, emergency fire services for rural communities, hazardous waste removal, wildlife conservation, health care services, and even programs to provide bulletproof vests to local law enforcement, to name a few. In fact, state governments rely on the federal government for between 25 percent and 50 percent of their revenue. These services will find themselves on the chopping block if the debt ceiling is not raised.

We don’t know which state programs would be cut, but the Bipartisan Policy Center, or BPC, has outlined two scenarios for how the Treasury Department might prioritize payments for certain programs over others if the debt ceiling isn’t raised. In the first, Treasury prioritizes payments on big-ticket items such as Social Security, Medicare, Medicaid, and defense. In the second, Treasury still protects Social Security, Medicare, and Medicaid, but swaps out defense for important safety net programs such as food stamps and special education grants.

States stand to lose big under either scenario. We used Census data from 2009 on federal spending for state grants—the most recent year available—and monthly Treasury reports to estimate the amount of federal funding each state could lose under both BPC scenarios assuming the debt ceiling remains frozen throughout August and September. The results weren’t pretty. Altogether, states could lose up to $56 billion in funding just in those two months under the first scenario and $36 billion under the second.

The map above shows that no state would be spared by these cuts. Each stands to lose hundreds of millions of dollars in federal funding if the debt limit isn’t increased regardless of how Treasury decides to prioritize payments.

My colleague, Michael Linden, takes on Grover Norquist, the no-tax fanatic.

Enjoy.