Everyone Loses If We Broach The Debt Ceiling

President Joe Biden and House Republicans are locked in a high stakes game of brinkmanship

over the debt ceiling, and it’s not an understatement to say that the economy hangs in the balance. With the deadline to reach a deal quickly approaching, the two sides need to compromise to prevent the government from even approaching a default on the country’s debt.

Back in January the US Treasury hit the statutory borrowing limit – the amount of debt that the US is allowed to take on to pay its bills. Since then the Treasury has been using what it terms as “extraordinary measures” to avert a default, but these are only a short-term salve that could be exhausted as soon as June 1, according to the Treasury. After that, Congress and the White House will need to agree to raise the debt ceiling to avert a government default – a scenario that has never occurred in our nation’s 247-year history.

Even a remote possibility of a government default would send shockwaves throughout the U.S. economy and the first consequence would be an increase in interest rates. Even coming close to a default could lead to a national credit downgrade, warned Fitch Ratings in a recent report. Interest rates would rise because buyers of U.S. debt would start to question our ability—or intent—to repay it in a timely manner in the future. One outcome of such a development would be an increase in federal borrowing costs, which is already the fastest growing component of the federal budget. Such a scenario would make it even more difficult for future generations to arrest the federal government’s ever-growing debt.

Higher interest rates on Treasury bonds would impact other types of debt as well. Long-term mortgages, which historically have been closely correlated to 10-year Treasury bond rates, would increase as well, which would make it even more difficult for prospective home buyers to enter the market. Higher interest rates on small business loans would make it tougher for entrepreneurs to start new businesses or expand existing ones.

In addition, a government default would inject even more volatility into U.S. security and stock markets. Publicly-traded companies that see their stock prices fall as a result of an impasse would find it harder to raise capital, and anyone with a 401(k) or pension could see their savings diminish.

If we were to broach the debt ceiling the treasury would need to delay some government payments. Social security recipients, federal salaries, and treasury bondholders could see their payments stalled during a default, and some of these might be forced to cut back on their short-term spending to make up for those delays. Businesses reliant on government contracts could experience delayed payments until the federal government gets its fiscal situation in order.

While many Americans are struggling to maintain their standard of living in an economy with inflation over five percent and economic growth slowing dramatically so far in 2023, Congress and the White House should be prioritizing continued economic growth first and foremost. One big part of that entails averting a fiscal crisis.

Our elected leaders have a duty to be responsible stewards of the country’s finances. House Republicans passed a reasonable proposal in April, and President Biden should engage in a good-faith negotiation to reach a solution that both sides can live with and not play a game of chicken by putting off real negotiations until the drop-dead date of early June is nearly upon us.

No one benefits from a government default: Finding a responsible solution to raise the debt ceiling while enacting reasonable fiscal reforms to slow the growth of government debt is the right thing to do, and lawmakers on both sides should be eager to achieve such a step.

For many Washingtonians, it is easy to view the debt limit as a form of Kabuki theater, where the major players assume their perennial roles and stick to an age—old script. But breaching the debt limit could have significant economic consequences, and both sides should take pains to ensure such a thing does not happen.

The message to President Biden and Congress should be simple: Now is not the time for political games.