The terrible, horrible, no good, very bad consequences of debt default and shutdown

Cartoon from the Great Depression (January 1931, Chester Garde)

October 17 looms every closer. It’s the day that, according to the Treasury Department, the U.S. government won’t be able to meet its financial obligations.

It’s still possible that the debt ceiling will not be raised and the U.S. will default. That would have very serious consequences. And it would be even worse if it happened while the government was still shut down.

A default would harm lots of Americans, both directly and indirectly.

Federal funds now going into the U.S. economy would stop suddenly, hurting individuals and businesses, with horrific broader economic consequences.

According to an analysis by the Bipartisan Policy Center:

[A]s soon as Friday [October 18], payments to Medicare and Medicaid providers, unemployment benefits, Social Security checks and tax refunds would be postponed for one to four days.

Food stamps due to be distributed Oct. 25 could be held until Oct. 30. The same would happen to payments to defense contractors.

With huge payments due in early November, the situation would become grimmer. Nearly $60 billion in Social Security checks, veterans benefits and pay for active-duty troops is due Nov. 1. Those could be delayed nearly two weeks, according to the Bipartisan Policy Center’s analysis.

“Right now, grandma is getting a Social Security check. In a few weeks, unless we solve this, she won’t,” said Steve Bell, a former top Republican Senate staff member and senior vice president at the policy center.[source]

And all Americans will be hurt by a broader economic crash.

 Goldman Sachs economists predicted that missed federal payments could knock as much as 4.2 percentage points off gross domestic product, leading to “a rapid downturn in economic activity.” [source]

A 4.2 point GDP decline would plunge the U.S. back into recession.

World economic leaders are sounding an alarm.

World Bank President Jim Yong Kim stressed the urgency for Washington policymakers to reach agreement on raising the debt ceiling before the Thursday deadline.

Kim said if the debt ceiling is not increased, the economic fallout could include increased interest rates, slower global economic growth and falling business confidence.

Mario Draghi, head of the European Central Bank, said Saturday that he found it “unthinkable that an agreement won’t be found.” [source]

A default that injures the world economy would make a U.S. recovery harder.

Ultimately, this would be very, very bad for the nation’s finances. The federal government would pay higher interest rates, making borrowing money more expensive. And a recession means tax revenues would plunge, further worsening the deficit and debt.

A default during a shutdown would be the perfect tsunami

The consequences for a credit default during a shutdown would be incredibly harmful to Americans and the economy.

Like the initial years after the 1929 Stock Market Crash, the U.S. would have few tools to counteract the sudden economic contraction.

Let’s all hope this gets resolved quickly — and that our political leadership can get it together to avoid a similar situation in the future.

President Obama has been holding firm to try to stop another round of crisis politics.

To all of us who want good governance, avoiding a debt default and opening the government would be a good start.

Amy Fried

About Amy Fried

Amy Fried loves Maine's sense of community and the wonderful mix of culture and outdoor recreation. She loves politics in three ways: as an analytical political scientist, a devoted political junkie and a citizen who believes politics matters for people's lives.