GOP's Post-Midterm Plan Could Crash U.S. Economy, Budget Watchdog Says

Federal budget watchdogs say House Minority Leader Kevin McCarthy's playbook to reinvigorate a stagnating U.S. economy next Congress could have dire implications for the global economy and potentially exacerbate the same problems his hypothetical Republican majority seeks to fix.

In a multi-part interview with Punchbowl News earlier this month, McCarthy outlined an ambitious economic strategy should his party regain control of Congress this midterm cycle, including reversing a number of tax increases enacted under President Joe Biden's Inflation Reduction Act alongside potential reforms to federal entitlement programs like Social Security and Medicare long seen as anathema to Democrats.

To get there, McCarthy suggested Republican leadership was willing to use the federal debt ceiling—or a red line on the amount of debt the country can accrue before defaulting—as a bargaining chip to force Democrats to make a deal, harkening back to a similar style of brinkmanship with the federal budget not seen since the height of the Tea Party revolution of 2011.

"You can't just continue down the path to keep spending and adding to the debt," McCarthy told the outlet, adding he would not "predetermine" whether anything was off the table.

Others, however, have.

Earlier this month, the White House slammed House Minority Whip Steve Scalise for a Fox News appearance highlighting proposed reforms to Medicare and Social Security put forward by the Republican Study Committee—which Scalise and a majority of the Republican Caucus are part of—that included increases to the retirement age and policy changes they believe would result in a drastic reduction of funding for Medicare that Democrats have long opposed.

McCarthy has proposed employing threats to allow the country to default on its debt to force Democrats to come to the table and work to enact some of those policies. However, some say the threat of financial brinkmanship is not only bad for the U.S. economy—it's bad for the planet.

Potential Impact to the Global Economy

Earlier this week, Paul Van de Water—a former Congressional Budget Office analyst turned senior policy fellow for the left-leaning Center for Budget and Policy Priorities—wrote that defaulting on the federal debt could force the federal government to impose drastic cuts in spending to make ends meet, creating a ripple effect that would negatively impact the global economy.

"The government's inability to pay all its bills would shake financial markets around the world," Van de Water wrote on the Center's blog. "It would raise serious doubts about the nation's creditworthiness, sap the confidence of lenders, call into question the dollar's place as a reserve currency, and increase federal borrowing costs. Even going to the brink of default would seriously harm the economy."

History supports his claim. While brinkmanship with the federal debt has occasionally resulted in minor policy changes, several experts told Newsweek that the harm caused by efforts to change policy rarely results in lasting change, and that the harm caused outweighs the often short-term benefits secured by holding the federal budget hostage.

A 2015 analysis by the Government Accountability Office found even unfulfilled threats to default on the national debt disrupted the Treasury debt market, caused a decline in liquidity for certain securities and added to federal borrowing costs.

Beyond the tangible impacts, brinkmanship can also result in an unwillingness for either side to negotiate, leading to lower quality solutions to enduring problems with the federal budget.

"If legislators want to hold a gun to the head of the world economy to secure a policy preference, they are both unlikely to secure what they're asking," Laura Blessing, a senior fellow at the Government Affairs Institute at Georgetown University, told Newsweek. "If a major policy revision is what they seek, they are creating conditions for reform that are the least conducive to good policymaking: little time against a ticking clock."

The Future of Medicare and Social Security

Republicans are correct in the fact that Medicare and Social Security are both likely to face insolvency within the coming decades, due largely to an increasing number of beneficiaries and fewer dollars entering the system. Without substantial changes, both programs are anticipated to see significant reductions in service regardless of which party is in power.

However, reducing the capacity of either program to solve their fiscal problems is not only unpopular with a vast majority of Americans, according to polling—it's also bad economics.

Nationwide, families spend an estimated $1 trillion in Social Security benefits each year, according to figures from the National Committee to Support and Preserve Medicare, while economists with the left-leaning Economic Policy Institute have argued expanding social security benefits by raising taxes on the rich could have an even more pronounced economic impact.

Meanwhile, GOP-led spending reductions to Medicare in the wake of the 2011 debt limit showdown—according to estimates by the Federal Reserve Board of San Francisco at the time—showed only a marginal impact on reducing inflation while reducing staffing and resources across one of America's largest industries.

"Personally, I'd support approaches that rely much more heavily on raising taxes," Van de Water said in an interview. "Because the amount of additional revenues needed to stabilize the debt is feasible."

Republicans, however, have indicated they will look to revisit the tax increases on corporations and the wealthy that Democrats pushed—a reversion to a tax code that helped balloon the national debt under several U.S. presidents.

A lasting solution, experts say, will ultimately need both sides' involvement to secure a deal.

The Next Congress

On Wednesday, the bipartisan Committee for a Responsible Federal Budget rolled out a budget-balancing proposal that included myriad policy proposals from both parties to reduce the federal debt and ensure a continuity of service for Medicare and Social Security. Ideas included Democrat-supported proposals like increased payroll taxes to bolster Social Security alongside Republican proposals like an increased retirement age and incentives to encourage seniors to remain in the workforce for a longer period.

"We are now at the moment of we have not paid for any of our spending for years and decades. And now, all the choices we face are going to be hard," Maya MacGuineas, president of the CRFB, told Newsweek in an interview. "Some of them are going to be difficult for families, and some are going to be tough for the economy. That's the reality of having been fiscally irresponsible for so long. So nobody should pretend that there's still a window for lots of easy choices. That window has slammed shut, because our politicians did nothing for so long."

History—and candidates' own statements—have already suggested such a compromise is likely to be improbable in the next Congress, however. Particularly as the legacy of the 2011 debt showdown remains ingrained in Republican policies more than a decade later.

"Elections matter, and electoral promises matter," Blessing said. "The incoming Tea Party class of 2010 made campaign statements that noted that they were willing to vote against the debt ceiling. And not only did a Grand Bargain fail because of this party faction, but we came down to the wire on a possible default."

"We're seeing the same rhetoric with the GOP again as they are again poised to retake the House, while the hardliners who were outsiders in that election have had their views and tactics institutionalized in the party since then," she added. "We are setting up the potential to come the closest to default, or actually defaulting, in our history. This was never an effective tool for fiscal restraint (and we have others) and is too dangerous to remain available to policymakers who have already proven comfortable with misusing it."