Debt Ceiling: 6 Million Jobs, 7% Unemployment Rate Are on the Line If Government Defaults

Michael Brochstein / SOPA Images
Michael Brochstein / SOPA Images
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On January 19, the U.S. government reached its debt ceiling limit of $31.4 trillion, provoking U.S. Treasury Secretary Janet Yellen to tell Congress “extraordinary measures” would start to roll out in order to prevent a national financial emergency. Now, details are coming to light indicating just how catastrophic it will likely be if the government defaults on its debts.

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On Jan. 23, Moody’s Analytics released a report claiming that the country would lose 6 million jobs, see the unemployment rate skyrocket to 7% (double the December rate of 3.5%) and be stripped of $12 trillion in household wealth if Congress fails to act ahead of the June deadline to raise the debt ceiling. These figures were the result of a Moody’s simulation, chief economist Mark Zandi stated, and the simulation also suggested that the country would lose 4% of the gross domestic product (GDP) if nothing is done.

Currently, both sides of the political aisle seem to be at a standoff on how to move forward.

“The U.S. economy could suffer an economic hit comparable to the 2007-08 financial crisis and recession if the federal government defaulted on its debt,” The Hill’s Sylvan Lane wrote in analyzing Moody’s report. Zandi also noted that the default itself could trigger a significant recession, but beyond that, any continuing congressional stalemate will be catastrophic.

“If policymakers actually do fail to increase or suspend the limit before the Treasury runs out of cash and defaults on its obligations, interest rates will spike, and stock prices will crater with enormous costs to taxpayers and the economy,” he stated in the Moody’s report.

Yellen has enacted two such “extraordinary measures” as put forth in a Jan. 19 letter to Speaker Kevin McCarthy — largely related to the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. Now that the government has met its spending cap, law forbids it from borrowing more until debts are proactively paid, or the debt ceiling is raised. If there is no action, government spending will be “frozen,” possibly affecting millions of federal workers, halting or reducing benefit payouts to Social Security and SNAP recipients as well as reducing access to federal services. Volatility will almost certainly roil financial markets as a result of any default.

As GOBankingRates previously reported, Congress has reworked the debt limit 78 times since 1960 — whether raising, extending or redefining the provision. It was last adjusted in December 2021 with a $2.5 trillion increase that was expected to last until July 2023, though the U.S. hit the $31.4 billion limit this month.

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While Democrats are moving to raise the debt ceiling, Republicans have signaled a demand for negotiations on the matter, likely desiring cuts to discretionary spending. The White House has declined any such offer of negotiations, with President Joe Biden and McCarthy set to meet to discuss the matter at an as-yet unset date.

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This article originally appeared on GOBankingRates.com: Debt Ceiling: 6 Million Jobs, 7% Unemployment Rate Are on the Line If Government Defaults