What would a debt ceiling failure mean for Americans?
Lawmakers are bracing for what could shape up to be a dramatic few weeks for both parties, as they brace for a high-stakes battle over the nation’s borrowing limit.
The Treasury Department said this week that the nation could have until as soon as the start of June before it exhausts the “extraordinary measures” implemented in January to keep the nation from defaulting on its debt.
Leaders have warned a default is possible if either side doesn’t budge from their positions as Republicans and Democrats ramp up pressure.
However, members on both sides have expressed confidence Congress will strike a deal in time to raise the debt limit, which caps how much money the Treasury can owe to cover the country’s bills.
But here’s what could happen if they fail.
Social Security, other benefits and pay could be delayed
Experts warn a default could mean trouble for individuals relying on a check from the government, whether you’re a Social Security recipient or a federal employee.
In a recent report, Wendy Edelberg and Louise Sheiner — both senior fellows at the Brookings Institution — said Social Security beneficiaries, agencies and contractors could see their payments delayed in such a scenario.
While both note in the report that federal agencies would still possess “legal authority, provided by Congress, to obligate funds,” they warn federal workers could also have to worry about delayed paychecks.
“We’ve passed a law saying federal agencies have to do this, that and the other. We’ve appropriated funds for that,” Edelberg, director of The Hamilton Project, told The Hill on Wednesday.
“But at the same time, we have a law on the books that says we’re not giving Treasury the resources to pay the bills for that,” she said. “So it just has two contradictory laws.”
While the Treasury would still be obligated to pay those workers in what lawmakers say is the unlikely event the federal government defaults, Edelberg said “they would just do it with, presumably, what could end up being a very large delay.”
Borrowing costs could go up
Experts say the nation could see an increase in interest rates if the nation were to default.
That in turn could have an impact on mortgage rates, credit card rates and more.
“If the U.S. government becomes even a slightly less reliable borrower, it will raise the interest rates they get and it could raise the interest rates throughout the United States for everybody,” Keith Hall, who led the Congressional Budget Office from 2015 to 2019, told The Hill on Wednesday.
John Buhl, a researcher at the Urban Institute, also described the “special status” the nation enjoys in the global market that allows the country to borrow funds at lower rates than other nations.
“It’s estimated that the perception of U.S. Treasuries as a safe asset keeps rates 0.25 percentage points lower than those of other sovereign nations, which equates to tens of billions of dollars in annual savings for the federal government,” he said.
“A default would eliminate that premium and could massively increase federal borrowing costs. Of course, that risk is even higher because of the debt the federal government has taken on in the last decade or so,” Buhl added.
Financial markets would take a hit
On top of those effects, researchers see an even greater risk in what a possible default would mean for the financial markets here and abroad.
While some forecasts expect the nation will see a recession later this year, experts say a default would likely speed up that timeline.
That’s just the tip of the iceberg.
If the nation were to default, Edelberg said the stock market could go into a freefall, with firms “laying off workers en masse because now they are worried about what the economy is going to look like over the next few years.”
“Even the brinkmanship we saw in 2011 imposed costs on the economy. During that crisis, consumer confidence and the stock market plummeted. It also harmed the international reputation of the US,” Buhl said. “A repeat of that, let alone an actual default, would make the Fed’s attempt at a ‘soft landing’ a lot more difficult.”
Banking crisis could extend or get worse
The banking crisis has also shown the sector has some fragility in some areas in recent months, as the sector recovers from three of the four biggest bank failures the country has ever seen.
Concerns are also rising over the impact the Federal Reserve’s continued rate hikes will have on the ongoing crisis.
“What we’re seeing in the banking market is a huge crisis of confidence in the context of the safety and soundness of particularly the regional banks, but also, more broadly, of the banking system as a whole,” Vanderbilt Law School professor Yesha Yadav said.
Buhl also pointed to actions taken by the government to blunt the fallout and added that a default scenario would likely be even more difficult to handle, leaving “a much larger scar on the economy.”
What’s keeping lawmakers from a deal?
Just less than a month separates Congress and the Treasury’s new June 1 deadline for when the nation risks default.
Lawmakers on both sides say the debt ceiling must be raised.
But there is a deep divide in Washington over how to address the nation’s borrowing limit.
Republicans insist any increase be paired with significant fiscal reforms and cuts to domestic funding, but Democrats have pushed for a “clean” bill to lift the ceiling, instead calling for budget talks to be handled separately form debt limit talks.
In remarks on Wednesday, Federal Reserve Chairman Jerome Powell wouldn’t offer advice to either side but said “it’s very important that this be done.”
“A failure to do that would be unprecedented. We’d be in uncharted territory and the consequences to the U.S. economy would be highly uncertain and could be quite averse,” Powell said.
He also added that “no one should assume that the Fed can protect the economy from the potential, you know, short- and long-term effects of a failure to pay our bills on time.”
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