What Defaulting On Our Debt Would Actually Look Like

The threat that Republicans have been teasing since before the 2022 midterms looms all the larger on this side of the debt ceiling, as the Treasury Department shuffles money around to keep paying our bills.

Exactly what the Republican conference wants in exchange for its hostage remains unclear, even to its members. Some GOP legislators muse about cuts to Medicare and Social Security. Others, still wary of messing with what was long the “third rail” of American politics, demand vaguer government spending cuts. Many members of the caucus apparently don’t even understand what they’re threatening, leaving Republican leadership with the task of instructing the rank-and-file on the difference between debt default and a much-less-disastrous government shutdown. 

Democrats maintain that they won’t negotiate budgetary policy with an economic gun to their heads. 

House Republicans may kick the can down the road — reporting suggests that they may be open to a clean bill to push the “x date,” or the day that the Treasury runs out of accounting trickery to cobble together the payments, from early June to the end of September. 

But the risk of default persists. Bank of America told clients that a default this summer or fall is “likely,” and a Goldman Sachs economist wrote a note that the bank sees a “greater risk than at any time since 1995 or 2011.”

What We’d Lose 

The exact fallout that the U.S. — and the world — would see from a default is uncertain, since we’ve never meaningfully experienced one before. But analysts have tried to game it out. A 2021 Moody’s Analytics report projected that a prolonged default would mean nearly 6 million lost jobs and an unemployment rate of 9 percent. A 2021 report from the The White House Council of Economic Advisers (CEA) found that the increased unemployment levels could persist for two to four years. 

“The fear is that there would be an economic contagion effect,” Rachel Snyderman, senior associate director of business and economic policy for the Bipartisan Policy Center, told TPM. “We’d see borrowing costs increase, then impacts to the stock market, which therefore impacts individual savings accounts — and we have economic contraction.” 

And the economic pain would likely not be confined to the United States. 

Republicans are “raising political chaos that may reverberate into the markets and economy, that would dislodge America’s position as the standard bearer of financial security,” said Kathleen Day, a Johns Hopkins Business School lecturer who specializes in financial crises.

Experts told TPM that there would likely be many unforeseen consequences, downstream effects of the more predictable elements of the crisis. But Americans would feel the impact quickly. 

The government would be unable to make payments that some Americans craft their lives around, including to beneficiaries of Social Security, Medicare and veterans’ programs. It would not be able to pay federal workers or active members of the military. Those categories alone encompass many tens of millions of people.  

We know from 2011, one of the recent times House Republicans threatened to force a default that the world took very seriously, that even the possibility of default increases borrowing costs. Elevated rates for consumer loans, including credit cards and mortgages, persisted for months after the debt limit standoff in 2011 — and we didn’t even default. 

Actually defaulting would be worse, and things would get more dire the longer the debt impasse stretches. 

“If it goes on for a couple of days and there’s a big stock market reaction, we probably see a big reaction in interest rates and the Federal Reserve tries to step in to keep things from getting too haywire,” Wendy Edelberg, a senior fellow in Economic Studies at the Brookings Institution, told TPM. “If Congress does not seem to be being disciplined by this reaction — if that’s not enough to unclog things — then I think things go south pretty fast.”

“Keeping in mind that this is all probably coming at a time when the economy is moving sideways and already slightly contracting, it wouldn’t surprise me that then it’s enough to push the economy from a very, very mild recession to a deep recession,” she added. 

What We’d Do 

Conversations about how the government would mitigate the damage in the case of a prolonged impasse after extraordinary measures have run out bubble up every time congressional Republicans bare their teeth. 

“Operationally, legally, economically — we would be in an untested situation,” Snyderman said. Republicans have repeatedly raised the claim that the Treasury Department could simply make debt-related payments while shutting down other aspects of government spending. “There have certainly been conversations that Treasury would be able to technologically make interest payments on time,” Snyderman said. 

This supposed mitigation technique is known as “prioritization.” At this stage, it’s still completely unproven. 

“It does give people a little bit of nonchalance that even if Congress is dysfunctional, Treasury will figure out how to solve this,” Edelberg said. “To those people, I offer a word of caution: I don’t think Treasury taking any of these workarounds that people are gaming out prevents the chaos.”

In theory, the Treasury Department, using only the daily revenues the federal government brings in, would pay some of its bills and not others. But there are massive, blinking question marks surrounding whether the government has the technological ability to prioritize, say, Medicare payments over Social Security ones. At least one former Treasury Secretary has said it can’t be done, that the systems which have made payments uninterrupted for years can’t be switched on and off like that. 

In recent days, GOP leaders have theorized that the government may be able to make principal and interest payments on the debt while putting off its other bills, an attempt to calm bondholders and maintain the reality, upon which our economy and the global one rests, that investing in U.S. Treasury securities continues to be one of the safest investments that can be made.

It’s what Rep. Jodey Arrington (R-TX), chair of the House Budget Committee, told Punchbowl News they’d do in the case of an impasse, assuring them that the country would not default. 

But such a choice would undoubtedly raise immediate legal challenges as to the government’s ability to make some payments and not others. That litigation could detract from whatever soothing effect making the interest payments would have, as a judge could stop the government from making them at any time.

It would also be intensely politically fraught. 

“Why do debt holders have priority over Social Security recipients? Over hospitals who are scheduled to be paid for serving Medicaid and Medicare patients?” Edelberg asked. 

Or as Synderman put it: “Bondholders or voters?” 

If the government did manage the prioritization scheme, paying the interest on the debt using daily revenues, it could theoretically use the “delay” method on everything else: waiting to make a day’s worth of payments of all its various bills until it collects enough revenue. That would, of course, have very real drawbacks for the beneficiaries of those payments, some of whom depend on them to live. If they don’t get their checks, and can’t use them to pay rent or for groceries, the economic pain ripples outwards. 

In other words: None of the “solutions” are guaranteed to work. None would go unchallenged, and none would mitigate intensive damage that would be hard, if not impossible, to recover from. 

If enough House Republicans get on board with the plan to suspend the debt limit, financial Armageddon might be pushed into the fall. But if they insist on using the default as a cudgel for legislative changes they otherwise wouldn’t manage to pass, we’ll be staring down a disaster shrouded in uncertainty, where none of the outcomes are good and some could be calamitous. 

“The 2011 game of chicken disrupted the market,” Day said. “We swerved from the car crash at the last moment — but now people are not so sure. All bets are off and the world is watching.”