Experts Ponder Economic Consequences of Default

WASHINGTON — Republicans are pointing to the Democrats, Democrats are blaming Republicans, but one thing all agree on: If the U.S. defaults on its debt, the results could be catastrophic.

The Center for American Progress, a liberal public policy research and advocacy organization, held a panel discussion Wednesday on the “Economic Consequences of Default” with panelists Wendy Edelberg, director, The Hamilton Project, and senior fellow, Economic Studies, The Brookings Institution; Ben Harris, former assistant secretary for Economic Policy, U.S. Dept. of the Treasury; and Mark Zandi, chief economist, Moody’s Analytics.

In his introductory remarks, Patrick Gaspard, president and CEO of CAP, said default would be, “A disaster for the world’s financial system and, cruelly, a disaster for the basic well-being of our families. A default would cause retirement portfolios to plummet. interest rate hikes to spike, home-buying costs to skyrocket.

“It’s more than just a ball in some political game.”

Moderator Emily Gee, senior vice president, Inclusive Growth at CAP, began the discussion saying, “I, like the rest of the public … have a lot of questions about the default crisis and exactly what would happen if our nation were to literally stop paying its bills.

“It’s no hyperbole to say intentionally defaulting would be unprecedented.”

While actual default would be a first, the government has come to the brink at least twice in recent years.

In 2011, the Republicans, in control of the House of Representatives, demanded then-President Obama negotiate over deficit reduction in exchange for an increase in the debt ceiling.

On July 31 of that year, two days before the Treasury estimated the borrowing authority of the United States would be exhausted, Republicans agreed to raise the debt ceiling in exchange for future spending cuts.

In January 2013, Republicans again argued that the debt ceiling should not be raised unless spending was cut by an amount equal to or greater than the debt ceiling increase. 

After months of negotiations, on Oct. 16, 2013, the Senate passed the Continuing Appropriations Act, a continuing resolution funding the government until Jan. 15, 2014, and suspending the debt ceiling until Feb. 7, 2014, thus ending the 2013 United States federal government shutdown and debt-ceiling crisis.

The consensus among the panelists Wednesday was, the situation shouldn’t happen in the first place.

“We’ve raised the debt ceiling almost 80 times since 1960,” said Harris.

Gee pointed out that, “among the many unknowns is what would the Treasury actually do day-to-day? … What happens to the federal workforce? … or Social Security recipients who are waiting for checks in the mail?”

Edelberg answered, “We don’t really know what Treasury would do.

“The only effective solution to avoiding this crisis is to increase the debt ceiling without delay, or, better yet, abolish it.

“The short story here is that U.S. taxpayers owe people money because of legislation enacted in the past.

“We owe interest to those who have lent to the U.S. by purchasing Treasury securities.

“We owe doctors and hospitals who have treated Medicare and Medicaid patients

“Four million disabled veterans whose payments are scheduled for June 1, … [those checks] are now uncertain.”

She went on to explain the consequences are dependent on “how long the situation lasts and how it is handled.

“But even if the crisis only lasts a few days, the damage could be lasting, and, at the very least, my guess is that investors would anticipate short-term interruptions in federal payments each time the debt limit nears, which would just be a massive escalation compared to their current expectations for negotiations to run right up to the last minute.”

Turning to Zandi next, Gee said, “Could you please walk us through what your research says about how default might affect the economy, but with a focus on what that, means for families … individuals across America?”

Zandi said, “My sense is if there’s no agreement by this time next week … I think at that point we’ll start to see the impacts on financial markets, the equity market.”

He agreed with Edelberg that much depended on the length of the default.

One scenario would be “what I call a short breach for a few days. … And, you know, within a few days, a week, lawmakers would figure out a way to increase the limit and [put an] end [to] that the part of the crisis.”

He then went on to look at what would happen if there was a prolonged crisis, saying, “Over a few weeks, that would mean a very severe economic downturn. … Once you go down that path it puts such pressure on the financial system and the economy.

“Things break that we are not even anticipating.”

Moving from the economic to the political ramifications of default, Gee asked the panel to “speak a little bit more about the implications for our systems of governing if every time the nation nears the debt limit, the party that’s not in control of the executive branch gets to hold … the executive branch hostage, essentially to achieve policy outcomes that would not be otherwise possible.”

“Well, I suppose the naive hope is that this episode serves as a wake-up call to policymakers. … The next time one party is in control of both the House and the Senate and the presidency, they just abolish the debt ceiling,” stated Edelberg.

“I mean, at the end of the day … the thinking is well, we can use the debt limit drama to make some fundamental changes, put our long-term fiscal situation on a more sustainable basis. … And by the way, it’s not sustainable. We do need to make changes,” Zandi concluded.

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Correction: The organizational definition of the Center for American Progress has been updated to: a liberal public policy research and advocacy organization.