Obama aide: Debt limit fight could be "catastrophic"

WASHINGTON Mon Jan 3, 2011 4:45am EST

White House Council of Economic Advisers Chairman Austan Goolsbee gestures as he addresses the 2010 meeting of the Wall Street Journal CEO Council in Washington, November 16, 2010. REUTERS/Jonathan Ernst

White House Council of Economic Advisers Chairman Austan Goolsbee gestures as he addresses the 2010 meeting of the Wall Street Journal CEO Council in Washington, November 16, 2010.

Credit: Reuters/Jonathan Ernst

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WASHINGTON (Reuters) - A fight over the budget loomed on Sunday as a top aide to President Barack Obama warned of catastrophic consequences if Republicans follow through on threats to reject an increase in the nation's borrowing limit.

Republicans, who will take control of the House of Representatives this week, are demanding spending cuts to curb the $1.3 trillion budget deficit and several have said they would oppose a higher debt ceiling if Obama does not agree to a range of painful cuts.

White House economic adviser Austan Goolsbee accused Republicans of "playing chicken" with the nation's financial credibility.

"This is not a game. You know, the debt ceiling ... is not something to toy with," Goolsbee told the ABC News program "This Week." "If we hit the debt ceiling, that's ... essentially defaulting on our obligations, which is totally unprecedented in American history."

"The impact on the economy would be catastrophic. I mean, that would be a worse financial economic crisis than anything we saw in 2008," he said.

Without a vote by Congress to raise the limit on government borrowing, the Treasury Department could bump up against the current $14.3 trillion debt limit. Treasury has estimated the limit could be reached during the first or second quarter of this year.

Republican Rep. Michele Bachmann of Minnesota told CBS' "Face the Nation" Republicans were not looking to shut the government down but they do want to cut spending so the debt limit does not have to be raised "continually."

"At this point, I am not in favor of raising the debt ceiling," Bachmann said. "Congress has had a big party the last two years. They couldn't spend enough money and now they're standing back, folding their arms ... taunting us about how are you going to go ahead and solve this big spending crisis?"

"To not raise the debt ceiling could be a default of the United States on bond and Treasury obligations," said Republican Senator Lindsey Graham of South Carolina. "That would be very bad for the position of the United States in the world at large," Graham said. "But this is an opportunity to make sure the government is changing its spending ways."

Graham, speaking on NBC's "Meet the Press," said he would not vote to raise the debt ceiling unless spending is cut back to 2008 levels.

"The last election was about change, change that really will make us something other than Greece," he said.

INVESTMENT FOR GROWTH

Goolsbee, chairman of the White House Council of Economic Advisers, said Obama is willing to make difficult choices on spending cuts when he unveils his budget next month but also said it was important not to "skimp" on investments like education.

"We are going to have to make, in the medium run, a series of tough choices, and the president's not afraid to do that, and I think you will see in his budget that he's willing to," Goolsbee said.

Obama plans to unveil his annual budget proposal in mid-February. After their triumphs in November congressional elections, Republicans have vowed to roll back federal spending to 2008 levels, with exceptions for the elderly, U.S. troops and veterans.

The debt ceiling vote gives them some leverage in the budget debate but Republicans run the risk of getting blamed if the issue stirs turmoil in world markets.

Acknowledging that risk, incoming House of Representatives speaker John Boehner has said it would be the responsibility of Congress to deal with the debt ceiling "as adults."

While signaling an openness to some budget cuts, Obama has also indicated he will defend what he sees as crucial priorities and has listed education and investment in research and development among those.

"If you're going to go skimp on important investments that we need to grow, you're making a mistake," Goolsbee said.

He said it was important not to "conflate" the short-term deterioration in the budget picture and long-term budget challenges. Goolsbee blamed the short-run fiscal problems on the economic crisis that Obama inherited when he took office.

"The reason the deficit is big this year is because we're coming out of the worst recession since 1929. That's the reason. The longer-run fiscal challenge facing the country is important," he said.

The White House economist said he saw some encouraging signs in the U.S. labor market, including a recent drop in claims for unemployment insurance.

The U.S. jobless rate, at 9.8 percent in November, was a key factor behind Democrats' mid-term election losses.

(Writing by Caren Bohan; additional reporting by Paul Eckert and Vicki Allen; Editing by Todd Eastham.)

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Comments (34)
crbob wrote:
Goolsby is another of Obama’s stooges, the question is do we tighten our belt, accept cuts in programs that never should have been initiated and try to solve out debt problem, or do we continue raising the debt ceiling untill it is so enormous we must default. Common sense dictates that we start now with cuts in programs that don’t belong such as the health care monstrosity Obama forced through congress, agriculture programs, and scores of others, then take all of those savings and pump back into the economy………

Jan 03, 2011 6:09am EST  --  Report as abuse
MattBkk wrote:
T’is the season for the Americans themselves to restore order to USA’s financial house . . .

Jan 03, 2011 6:26am EST  --  Report as abuse
wigglwagon wrote:
“The White House economist said he saw some encouraging signs in the U.S. labor market, including a recent drop in claims for unemployment insurance.”

It must be bliss to be simple minded enough to think we can survive without our factories. We will never be able to cut spending enough to balance the check book for an economy that no longer turns raw materials into finished goods.

Jan 03, 2011 6:28am EST  --  Report as abuse
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