How bad could a government default be?

With less than a week until the US runs out of cash, economists and policymakers are using words like “cataclysmic event” and “calamity” to describe what will happen if Congress does not increase the debt limit.

looks bad Economists predict that if the government can’t pay its bills, it could cripple much of the global financial system. But ordinary people will also be affected. So who would be hurt first by the lack of a debt limit increase, and who would be hurt the most?

You can think of the impact of the default as a sinkhole, sucking in the people closest to the epicenter first but spreading to more and more people until (depending on how long it lasts) it finally engulfs the US economy. The first people likely to be affected are those who get money directly from the government, including government employees and recipients of direct government payments, such as retirees, veterans, and disabled Americans who rely on Social Security income. Soon, however, the government’s inability to pay its bills could affect the health care providers who are reimbursed by Medicare and Medicaid. Homebuyers could also be hit by higher interest rates, making it even more difficult for them to buy homes in an already competitive market. All of this is on top of a possible economic slowdown that could cause a severe recession if the crisis drags on.

People and organizations paid by the government.

The looming crisis is simple: if the Treasury were to hit the debt limit, it would no longer be able to borrow money, even to pay down debts. Congress has already incurred. That means it wouldn’t generate enough money to meet all of its obligations, forcing the government to make decisions about where the available cash should go. If a default occurs, the government is likely to prioritize monthly Treasury interest payments that preserve its ability to borrow in the future and minimize chaos in financial markets, according to a Moody’s Analytics report posted earlier this month. By making concessions about which of your financial obligations to meet, direct payments to people and institutions that depend on government money could be affected. (An additional complication is that prioritizing some payments about others it may not be legalso the government could face a series of lawsuits).

Many people trust the government to pay their bills on time. There is almost 2 million Federal government employees whose direct income may be affected. That doesn’t include the roughly 1.3 million active duty military, as of last countand an additional 3.9 million veterans receiving disability support. He the government could suspend or fire workers in an effort to save money during a debt ceiling crisis, leaving many of these people with no income. These offsets could start happening immediately, as one of the first bills due is $12 billion in veteran benefits promised June 1, and an additional $5 billion in federal wages and insurance to be paid June 9. . according to an analysis by the Bipartisan Policy Center.

Also, almost 66 million Americans received some type of social security benefit, such as retirement or disability income, by the end of 2022. That number includes 7.6 million disabled workers who receive Social Security Disability Insurance. Federal policy already limits recipients’ ability to save, due to asset limits and the amount of additional income allowed, so going without a single check could present a serious hardship, said Kimberly Knackstedt, director of the Justice Team. Handicap Economy on the left. -Inclined The Century Foundation. “That kind of insecurity of, ‘Is this check that is no longer enough for housing and food going to arrive this month, or not?’ is causing great concern for us and for people across the country,” he said. Knackstedt.

Almost 6 million people are receiving unemployment payments, too. While states administer unemployment insurance, it depends on federal money that could also be affected, according to Bernard Yaros, an economist at Moody’s Analytics who focuses on federal fiscal policy. The government has scheduled multiple Social Security payments throughout the month of June, according to the BPC analysis, which could be delayed.

And it’s not just people who depend on government payments. Industries that have contracts with the federal government, such as aerospace and defense contractors, are vulnerable, according to Moody’s. health institutions could also suffer, especially small and rural hospitals, because they depend on Medicaid and Medicare payments for much of their income. States that are highly dependent on these industries, such as Virginia, could see impacts to their local economy that could be greater than the impact on the country as a whole.

homebuyers

Homebuyers would also be hit hard. the housing market, hit by dramatic ups and downs during the COVID-19 pandemic, is just reaching a tenuous stability. Mortgage interest rates stay highwhich has kept some buyers out of the market, but there are enough buyers and sellers to see some activity. All that could change with a crash, which is what could happen if large numbers of people are suddenly driven out of the market by higher rates. Jeff Tucker, a senior economist at Zillow real estate, estimated that rates could rise by an additional 2 percentage points. If that happened, he said, “the housing market would be pushed down another 23 percent from … the pace we expected this summer.”

In addition, home buying remains an important wealth creation tooland it has already been a market where those seeking affordable options have struggled to gain a foothold. A longer default could mean rates stay high for a while, making it even more difficult for non-rich people to buy. “I think the long-term impact will increase inequality from a wealth creation perspective,” Tucker said. White adults are already much more likely to be able to afford a home, and the median age of first-time homebuyers is rising. A debt default crisis would make that problem worse just as a diverse generation of millennials enters their prime home-buying years, she said.

the whole economy

Then there is the threat to the economy in general, which is not as direct, but it is still very serious. Think of it this way: In addition to the turmoil that is likely to occur in the financial markets, if everyone who relies on the government for payments suddenly has a hard time, those effects will spill over into the economy, because they and the other recipients of Government payments will not buy goods and services to the same extent. That’s part of the reason economists warn that a debt default could create a recession, even if the crisis is brief. A prolonged crisis could have serious consequences, especially since the economy is already fragile.

Moody’s calculated the result of a brief breach of the debt ceiling as a 0.7 percent decline in real GDP, 1.5 million jobs lost and an unemployment rate close to 5 percent. But a debt ceiling default that lasts until July would cause “economic carnage.” Moody’s report forecasts that real GDP will fall 4.6 percent in the second half of this year, and the unemployment rate rising to 8 percent. The recession could have lasting effects in the form of higher interest rates and reduced growth over the next decade.

In general, however, the financial credibility of the US government itself could be seriously damaged, which could also have long-term economic impacts on ordinary people. In 2011, a similar fight over the debt ceiling led to S&P will downgrade the US credit rating., and something like that could happen again, costing taxpayers money. (In fact, Fitch, a major credit rating agency, has already issued a warning.) Once you default on your debts, even for a short time, you will already have sent a message about the faith the world can have in the US political and financial systems. “You would be forgiven if you looked at all the data right now and say, ‘Oh, the consumer is resilient. The economy is resilient. We can, you can resist this risky policy,’” Yaros said. But inflation is still high and the risk of a recession is just below the surface, which means that the economy could already be heading towards a recession in the next year. “The debt limit would just speed that up, or just spew kerosene,” he said.