Hours after taking control of the U.S. House, Republican lawmakers were already rolling back pledges to slash spending — a rollback that may actually be the best thing they can do for the economy.
One giant-but-remote risk remains that the newly empowered Republicans, channeling voter angst over debt, will make good on threats to block the Treasury Department from issuing any more bonds once it hits a debt ceiling this spring.
Treasury Secretary Timothy Geithner said Thursday if Congress refused to lift the $14.3 trillion debt limit, it would be akin to default and "catastrophic" for the economy.
But so far, in their first few hours of power, Republicans have eased concerns that their attempts to shrink the government — and a $1.3 trillion deficit — will inadvertently derail a still-vulnerable economic recovery.
One House Republican aide said Wednesday the proposed spending cuts could be "considerably less" than $50 billion.
Douglas Holtz-Eakin, a former director of the Congressional Budget Office and adviser to 2008 Republican presidential candidate John McCain, said Congress rarely, if ever, makes good on promises to cut spending and he does not expect anything different this time.
"I'm generally bemused by all this chatter about Congress cutting spending so much that it endangers the U.S. economy because no Congress has ever cut spending," he said. "I live to have that concern."
Holtz-Eakin said his best guess is that Republicans and Democrats will compromise on cuts in the tens of billions, not hundreds. "Last I checked it was a $14 trillion economy so I just don't see that as a huge threat."
U.S. economic prospects appear to have brightened in recent weeks, with many indicators of business activity and consumer spending picking up steam. Even the battered labor market is showing some signs of life, with the number of Americans filing new jobless benefits claims falling steadily.
Brian Bethune, chief U.S. financial economist at IHS Global Insight, said his firm had already built expectations of at least some fiscal pullback into its economic forecasts, and they still looked brighter. Earlier this week, the Lexington, Massachusetts, company raised its 2011 growth forecast to 3.2 percent from 2.4 percent.
"To some extent, there's already some momentum behind some of these reductions," Bethune said. "We don't see (them) as being a game changer."
CRASHING THROUGH THE CEILING
Still, with the unemployment rate hovering near 10 percent and economic growth — running at 2.6 percent on an annualized basis at latest blush — too weak to boost hiring significantly, plenty of risks remain.
Housing is a major roadblock to a healthy expansion, not to mention a lingering blow to consumer confidence. A recent spike in mortgage rates and a backlog of foreclosures have raised fears of yet another drop in home prices.
Mortgage rates might climb even higher if Congress refuses to lift the debt ceiling, which Geithner said could be reached by March 31.
Normally, raising the debt ceiling is little more than a formality. But many Republicans see it a symbol of Washington excess and believe voters have given them a mandate to cage the spending beast.
If they refuse to lift the limit, Treasury would be barred from issuing more debt. This is where Geithner's default warning comes in. Not only would that shut down the government, but it would also imperil debt service payments.
The risk of getting to that point is very remote. Goldman Sachs economist Alec Phillips said even if Congress refuses to raise the debt limit, the Treasury has some wiggle room.
It could draw down a $200 billion Supplemental Financing Program held at the Federal Reserve, suspend issuance of a debt series for state and local governments, or stop government employees' investments in Treasury securities.
"Ideally, Congress would raise the limit before any of these steps prove necessary," Phillips said. "But in the event that it does not, the Treasury can probably get by for at least a couple of months using the SFP along with its other traditional strategies."
Treasury officials said Thursday that eight weeks would be their outside guess.
Holtz-Eakin, the former CBO director, said a government shut-down is unlikely because Republican leaders, including House Speaker John Boehner, remember how badly the party was punished at the polls after a similar move under former Speaker Newt Gingrich in 1995.
"That clever little move cost them dearly," Holtz-Eakin said.
As for younger Republicans who don't share those painful memories, the Republican leadership has time to set them straight, he said.
"There's lots of time between now and the debt limit vote," Holtz-Eakin said. "Whatever young, inexperienced Republicans might think this is a good idea have lots of time to be educated."
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