If Congress and the White House cannot reach a deal on raising the debt ceiling and if the president doesn’t choose another way to avoid default, the economy will head into uncharted, but almost certainly painful territory.
Many veterans would not get benefits. Social Security recipients would not be paid. Doctors and nurses wouldn’t be compensated for treating Medicare patients. And defense contractors would see their payments cut or cut off.
Interest rates would rise, the value of the dollar would fall and unemployment would climb.
“It’s not apocalyptic, but it’s really bad,” said economist Jason Delaney of Georgia Gwinnett College. “It would instantly cause a recession. There is just no upside to this. It’s bad for everybody.”
Congress often authorizes the federal government to spend more than it has coming in revenue, which lends itself to deficit spending. The national debt is the accrual of those deficits over the years; wars, tax cuts and policies implemented during the COVID-19 pandemic have all contributed to the national debt.
The debt ceiling, created in 1917, sets a limit on how much debt the federal government can incur. It has been raised nearly 100 times, but only recently under Democratic presidents has it become a partisan weapon used by Republicans to demand cuts in future spending.
This year, GOP lawmakers have conditioned approval of a higher debt ceiling on cuts in future spending for social programs like food assistance and Medicaid. The White House has been negotiating toward a deal even though President Joe Biden initially declared he would only sign a standalone increase of the debt limit.
A majority of Americans hold negative views of how both sides have handled the issue, according to a poll by Monmouth University. Half of Americans polled said the issue should be dealt with “cleanly,” meaning they’d rather see lawmakers raise the debt ceiling and negotiate spending cuts separately. Only 25% of those polled wanted to combine the issue of a ceiling hike and cuts to spending.
Democrats have blasted Republicans for holding the national and global economies hostage.
“You’re talking about food insecurity, you’re talking about health care, you’re talking about teacher pay, you’re talking about all the things that are just vital, foundational kinds of funding and security for people around the country,” U.S. Rep. Lucy McBath, a Marietta Democrat, said recently.
But Republicans have countered that they have a plan to both raise the debt ceiling and fund the government responsibility by passing legislation that would roll back federal spending to 2022 levels. U.S. Rep. Andrew Clyde, R-Athens, said he expects Biden to eventually sign onto that plan, and he isn’t concerned about a default in the meantime.
On Friday, Treasury Secretary Janet Yellen moved her estimate of when the government would be unable to pay its bills from June 1 to June 5.
“I don’t really think that June 1 is going to be the X-date, if you want to call it that,” Clyde said recently. “I think Janet Yellen will probably push it a week or two because think about June 15. June 15 is one of the biggest tax revenue days of the year.”
The White House is expected to continue talks with House Republicans through the Memorial Day weekend, but even if an agreement is reached it would take several days for a bill to pass both chambers and be sent to Biden’s desk to be signed into law.
Default on the nation’s debts was long considered unthinkable. Now, with the nation likely to hit the ceiling in early June if Congress doesn’t act, experts and business people agree that the government is flirting with disaster.
Analysis by Moody’s Analytics showed even a short default — less than a week in duration — would mean a recession with about 1.5 million lost jobs nationally. But if the default lasts weeks, the nation would suffer a downturn like that in the 2007-09 recession, losing nearly 8 million jobs.
Georgia, which saw unemployment soar in the Great Recession and in the early months of the COVID-19 pandemic, will not be shielded from the damage of a default, said economist Caroline Fohlin of Emory University.
“Georgia has a highly diversified economy that kind of protects the overall economy when there’s a problem in one sector,” she said. “But it doesn’t protect us in this case because we are going to get hit on all fronts.”
Nearly one-third of the state budget comes from the federal government: $17.9 billion in funding, more than half of which is for Medicaid, the health care program for the poor and disabled that also pays for most nursing home stays in Georgia.
The federal government also helps pay for highway funding, food stamps, low-income energy assistance and meals for low-income school children.
A default’s direct impact comes when the brakes get slammed on federal spending, which accounts for nearly one-quarter of the nation’s economy. The biggest items are Social Security, Medicare, Medicaid, veterans benefits and defense.
Hitting the ceiling would force the government to pick and choose among its many obligations, so many people and companies would not get paid and many other expenses would be cut.
The Washington Post reported Wednesday that if a default occurs June 1, the government risks being unable to make certain Social Security, Medicaid, Medicare and a cohort of government pension payments to the oldest recipients — those over the age of 88 — and those with disabilities. About $98 billion in such payments are scheduled to be paid in the first two days of June.
A default might hurt poor retirees and veterans most, but the effect would be widespread and it would ripple through the economy.
About 2.2 million people have jobs with the federal government, but many others work for contractors. Moreover, people who suddenly lose benefits will be spending less, which hurts local businesses, while many companies will pull back on hiring out of fear, Fohlin said.
“There would be massive unemployment directly as a consequence of people not getting paid,” she said.
The stock market
The indirect effects of a default are equally damaging.
The stock market is, in essence, a collection of predictions about the prospects of companies for higher profits. Falling demand, layoffs and uncertainty are a formula nearly certain to trigger a severe drop in share prices — if not a full-out crash.
That hurts the ability of companies to raise money by selling stock, but it’s also bad for millions of individuals, Fohlin said.
“A lot of people have savings in the stock market,” she said. “Retirement savings are going to get hit.”
Bonds and interest rates
The bond market too will be hurt. Bonds are, in effect, loans to the government in exchange for interest. U.S. Treasurys have long been considered one of the safest possible investments, but Wall Street has been implementing doomsday plans in case principle and interest payments grind to a halt.
Investors who think there is a risk they won’t be paid back on time will demand a higher rate of return. And that will push up rates on virtually all other loans, making it increasingly costly to borrow money.
That’s a burden on consumers who will see higher rates on mortgages, which means more trouble for an already challenged housing market. Credit card companies will also likely lift rates, which could squeeze many households, and if they pull back on spending, that will further undercut economic growth.
Higher rates are also a problem for businesses.
“Our customers are looking at interest rates, because they are not necessarily paying cash,” said Lisa Winton, chief executive of Winton Machine Co. in Suwanee, a 40-person company making equipment that other firms use to make tubes and cables.
Just the worry about default is a problem, she said. “Uncertainty is always the most difficult thing for manufacturers. We like consistency.”
Default would also shake the status of the U.S. dollar, used for many transactions across the globe because it is widely considered the world’s most dependable currency. The U.S. has always paid its debts.
If the dollar falls, that might actually help exporters by making U.S. products cheaper internationally.
But the United States imports much more than it exports, and a falling dollar makes everything brought from overseas more costly — including industrial parts and consumer goods.
“Default would be like choosing to have a financial crisis,” said economist Delaney. “Staring at the face of it, you start to see how bad it would be.”
The credit ratings agency Fitch issued a warning Wednesday that the U.S.’s top-ranked “AAA” credit rating was in jeopardy as deadlock over lifting the debt limit continued. Fitch, in an action known as “rating watch negative,” said that it may downgrade the debt rating.
A different agency, Standard & Poor’s, downgraded its rating of U.S. debt in 2011 after a similar debate over the debt ceiling went to the 11th hour to avoid a default. At the time, S&P criticized the partisan brinksmanship between Democratic President Barack Obama and House Republicans.
Air travel is nearing a full recovery more than three years after passenger volumes plummeted early on in the COVID-19 pandemic — and a default would threaten that progress.
“It’s difficult to even fathom some of the implications,” U.S. Transportation Secretary Pete Buttigieg said. “The biggest thing that I would be worried about is the severe economic damage.”
Credit: John Spink
Credit: John Spink
Buttigieg said travel demand has bounced back faster than predicted.
“A default puts us in the opposite scenario,” he said. “You would be seeing the kinds of economic harms that that we just lived through, only worse and less temporary.”
But, “This is not a shutdown,” Buttigieg said. “It’s a very different scenario than shutdown. In fact, technically it does not entail a shutdown, but it entails disruptions.”
U.S. Department of Transportation operations would continue, he said.
“In the long term, the macroeconomic effects could have any number of second order consequences for our ability to do our work,” Buttigieg said.
Delta Air Lines CEO Ed Bastian also emphasized the importance of avoiding a default.
“We need our leaders that we elected to come into office to continue to run the country with the right level of discipline, but also common-sense negotiation to get us to where we need to be,” Bastian said on CBS Mornings this month.
To raise the debt ceiling requires a bill that passes both the House of Representatives and the Senate and is then signed by the president.
Still, even without a deal that can pass Congressional muster, there are some options for avoiding default — some of them also unprecedented and therefore untested.
- Congress could pass a short-term increase or suspension of the debt ceiling, and we could just go through the whole exercise in a few months.
- The Treasury Department could mint a $1 trillion platinum coin and use it to avoid a default. That has never been done, but the law allows minting coins of any denomination.
- The president could also cite the 14th Amendment, which says that the “validity of the public debt of the United States, authorized by law … shall not be questioned.” Although it would almost certainly be challenged in court, he could say he’s Constitutionally obligated to ignore the debt ceiling and just keep paying the bills.
- The federal government can continue cost-cutting measures in hopes of buying more time for Congress to act. That includes suspending investments in government retirement funds or delaying payments to government suppliers.
- The federal government could temporarily raid the Social Security Trust fund to cover payments to recipients, which is a main driver of spending, and replenish it after a spending deal is reached.
- All 213 House Democrats have signed a discharge petition that would force a vote on a “clean” debt limit increase. But they need five Republicans to sign on to get the requisite number of signatures needed to bring the bill to the floor.