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Economists Warn of Perils of Debt Ceiling Default

S.J. Steinhardt
Published Date:
Mar 8, 2023

Congress’s failure to raise the country’s debt ceiling, which could cause the government to default on its obligations, “would be a catastrophic blow to the already fragile economy,” Moody’s Analytics Chief Economist Mark Zandi told the U.S. Senate Committee on Banking, Housing, and Urban Affairs’ Subcommittee on Economic Policy in written testimony.

“Global financial markets and the economy would be upended, and even if resolved quickly, Americans would likely pay for this default for generations, as global investors would rightly believe that the federal government’s finances have been politicized and that a time may come when they would not be paid what they are owed when owed it,” he continued.

Zandi also told the subcommittee that the economy could tip into recession without a resolution to the standoff. He compared this moment to the financial crisis of 2008, when Congress initially failed to pass the Troubled Assts Relief Program (TARP), writing that “the stock market and other financial markets cratered,” and warning that a “similar crisis, characterized by spiking interest rates and plunging equity prices, would be ignited. Short-term funding markets, which are essential to the flow of credit that helps finance the economy’s day-to-day activities, likely would shut down as well.”

“It is unimaginable that lawmakers would allow things to get to this point, but as the TARP experience highlights, they have done the unimaginable before,” he wrote.

Douglas Holtz-Eakin, president of the American Action Forum and a former chief economist at the Council of Economic Advisors, made three points in his written testimony: Congress should pass, and the president should sign, legislation to raise or suspend the debt limit as soon as possible; failure to do so will inevitably lead to default on Treasury securities, generating global financial fallout, recession risks, and higher U.S. borrowing costs; and the federal budget is on an unsustainable trajectory, driven in large part by entitlement spending. Congress and the president should also address this looming economic risk.

Saying that “default and near-default are dangerous,” Michael R. Strain, director of economic policy studies and Arthur F. Burns scholar in political economy at the American Enterprise Institute, wrote in his testimony that “[r]aising the debt ceiling should be thought of as a routine function of government.”

“Brushing up against default would have serious and adverse economic effects,” he wrote. “It would lead to reductions in stock prices, reducing the wealth of many taxpayers. It would reduce economic confidence, which in turn could reduce consumer spending. It would increase interest rates, leaving taxpayers on the hook for billions of dollars of interest payments. And it would increase the odds of an accidental default.”

An actual default, he wrote, would cause the Dow to “plunge by thousands of points per day, and the credibility of the United States—its trustworthiness as a country that pays its debts on time—would be substantially eroded.” Furthermore, “[t]he message Congress and the President would be sending to global markets would be that the U.S. government is unable to meet its spending obligations due to political dysfunction. Among global debt and equity investors, this would shake confidence in the U.S. in a very fundamental way.”

In her testimony, Amy K. Matsui, director of income security and senior counsel at the National Women’s Law Center, warned of the social policy implications of a default. In such an event, “[h]ouseholds across the country would feel direct impacts ranging from unemployment to delayed receipt of critical federal benefits like Social Security, Supplemental Nutrition Assistance Program benefits, and housing assistance, to increased interest rates on consumer debt and mortgages,” she wrote.  

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