On The Money — Why a debt limit showdown is so dangerous

Congress and the White House have six months to avoid an economic crisis driven by politics. We’ll also look at a slump in retail sales and falling wholesale inflation. 

But first, find out why George Santos has been accused of stealing money meant for a veteran’s dog. 

Welcome to On The Money, your nightly guide to everything affecting your bills, bank account and bottom line. For The Hill, we’re Sylvan Lane, Aris Folley and Karl Evers-Hillstrom. Someone forward you this newsletter?

Five ways a debt limit crisis could derail the economy

The biggest threat the U.S. economy faces this year could be the fight over the federal debt limit. 

Congress and the White House have roughly six months to avoid an unprecedented and potentially catastrophic default on the federal debt. But there is no clear path to keeping the U.S. solvent, with House Republicans fiercely opposed to any debt ceiling increase unaccompanied by serious spending cuts. 

If lawmakers fail to strike a deal to avoid default, experts say the shock could plunge the world into recession and a financial crisis. Even a prolonged showdown over the debt ceiling could rattle markets and derail a global economy already weakened by inflation, rising interest rates and the lingering scars of the COVID-19 pandemic. 

“There are a number of economic challenges that exist aside from the fact that debt limit negotiations are needed,” said Rachel Snyderman, senior associate director at the Bipartisan Policy Center (BPC), in a Tuesday interview. 

• Rising recession risks: An economic slowdown could shorten the window for raising the debt ceiling by depriving the federal government of sorely needed tax revenue. Congress could also find itself struggling to find the money to stave off a steeper recession if its hands are tied by debt ceiling negotiations or an inability to borrow money to fund stimulus. 
  
• Global financial crisis: Both the U.S. dollar and Treasury bonds are considered to be among the safest assets in the world. But a default on the national debt would show the world that the U.S. dollar and Treasury bonds can not be trusted, triggering a crisis of confidence that could tank the global financial system. 
  
• Americans could lose crucial federal benefits: A default on the national debt would block the federal government from spending hundreds of billions of dollars on programs millions of Americans depend on for food, medical care and basic necessities. 

Sylvan and Aris have more here. 

SEE ALSO:What extraordinary measures can Treasury take to prevent US from default? 

LEADING THE DAY

Retail sales slumped in December as Americans braced for slower economy 

Americans pulled back their spending at stores and restaurants in December amid the mounting toll of high inflation and concerns about the future of the economy, according to data released Wednesday by the Census Bureau. 

U.S. retailers and restaurants made $677.1 billion in sales in December, down 1.1 percent from a revised November sales total of $685 billion, according to the Census Bureau. It was the second consecutive monthly decline in retail sales, which are adjusted for seasonal shifts but not inflation. 

• Falling sales may force retailers and restaurants to cut or stabilize prices, which will help take a bite out of inflation and keep price growth slowing down. 
   
• But a prolonged drop in consumer spending — which drives roughly two-thirds of the U.S. economy — could be a sign of a looming slowdown or recession. 

“The final retail sales report of 2022 was the weakest of the year,” Kayla Brunn, an economic analyst at Morning Consult, wrote in a Wednesday analysis. 

Sylvan breaks it down here. 

HOW LOW CAN YOU GO?

Wholesale inflation falls 0.5 percent in December, beating expectations 

Wholesale prices fell 0.5 in December, outpacing an expected decline of 0.1 percent, as inflation continues its six-month downward slide. 

On an annual basis, wholesale prices dropped to 6.2 percent in December from 7.3 percent in November, the largest month-to-month drop since prices started falling in June, according to producer price index (PPI) data released Wednesday. 

• The sharpest monthly price declines for individual goods were seen in a 9.4 percent drop in fresh and dry vegetables, a 13.4 percent drop in gasoline, a 27 percent drop in No. 2 diesel fuel and a 5.9 percent drop in grains. Those are seasonally adjusted single month percent changes.
   
• On the flip side, wholesale prices of fresh eggs have still been soaring, up 25 percent from November to December. Iron and steel scrap metal are also higher, seeing an 8.3 percent monthly increase. 

The Hill’s Tobias Burns has the details here. 

TAKING CARE OF BUSINESS

Corporate tax rates fall globally as governments consider austerity measures 

Falling corporate tax rates in the U.S. are part of a global trend that has governments charging big business less in tax while looking to make spending cuts across a wide range of social programs.  

Reports from nonprofit Oxfam, the U.S. Government Accountability Office (GAO) and other organizations are showing that as governments weigh austerity measures in the wake of the pandemic, corporations with surging profits are being asked to foot less of the bill. 

• Corporate income taxes have dropped from a global average of 47.5 percent in 1980 to 24.9 percent today, according to international anti-poverty group Oxfam, which timed the release of its findings with the meeting of the World Economic Forum in Davos, Switzerland, where financiers and government officials gather annually to discuss policy issues. 
  
• Among richer countries, corporate income tax has fallen from 47.5 percent down to 9.6 percent over the same 40-year period, Oxfam found. Those numbers mirror more recent trends in the U.S., where effective corporate tax rates, which account for deductions and other write-offs and give a more accurate picture of how much companies owe in tax, have also been on the decline. 

There’s more here from The Hill’s Tobias Burns. 

Good to Know

Treasury Secretary Janet Yellen is planning a trip to China “in the near future,” the Treasury Department announced Wednesday, following a meeting between Yellen and a top Chinese official in Switzerland. 

The secretary “looks forward to traveling to China and to welcoming her counterparts to the United States in the near future,” Treasury said in a readout of the meeting in Zurich between Yellen and Chinese Vice Premier Liu He. 

Other items we’re keeping an eye on: 

• Sen. Ron Wyden (D-Ore.) on Wednesday called for the Department of Justice inspector general to investigate federal law enforcement agencies’ use of a nonprofit database that has amassed millions of records on money transfers between the U.S. and more than 20 countries. 
  
• An international group of law enforcement agencies seized a Hong Kong-registered cryptocurrency website and arrested its founder for allegedly operating a haven for criminals to launder funds. 
  
• The retail chain Party City filed for Chapter 11 bankruptcy protections in an attempt to reduce its massive debt. 

That’s it for today. Thanks for reading and check out The Hill’s Finance page for the latest news and coverage. We’ll see you tomorrow.