‘Economic catastrophe’: Debt default would harm Kansas City federal workers, retirees

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More than 27,000 people across the Kansas City metro go to work every day for the federal government, a job that comes with a reliable paycheck and for many the promise of a pension when they retire.

They may soon be working for a deadbeat employer.

The United States stands on the brink of defaulting on its debt for the first time ever, as Democratic President Joe Biden and Republican House Speaker Kevin McCarthy have so far been unable to reach a compromise to raise the debt ceiling, even as lawmakers voice confidence they will eventually reach a deal.

The debt ceiling is the maximum amount of money the U.S. Treasury Department is authorized to borrow in order to pay for already-approved spending. It has been raised repeatedly since it was first instituted during World War I.

But if the federal government fails to meet its financial obligations, even for a short time, the fallout could be cataclysmic for the country.

The stock market could tank, erasing investors’ wealth and denting retirement savings accounts. Federal funding for schools, Medicaid reimbursements to health care providers, payments to government contractors – all of it could be delayed or not made at all. The federal government could enter a quasi-shutdown if cash to fund operations dries up.

In Kansas City, the most immediate effects would likely be felt by the thousands who work locally for the Internal Revenue Service, U.S. Department of Agriculture, the Veterans Administration and other agencies as money runs out to issue paychecks. Veterans who receive VA benefits, retirees on Social Security and others who receive government aid would also quickly be impacted.

“Economists across the political spectrum, they all agree that if the U.S. defaults on their debt, it would have a huge, negative ripple effect all across every aspect of the economy,” said Matt Biggs, the president of the International Federation of Professional and Technical Engineers.

“Not only here in the United States, but across the world.”

Biggs’ union represents workers in Kansas and Missouri, from employees at Boeing and Spirit Aerospace in Wichita to immigration judges and administrative law judges in Kansas City. He outlined a litany of consequences from a default – from layoffs and furloughs within the federal government to longer wait times to see an immigration judge.

Even a short default of a few days could push the country toward recession. An extended default could cause a deep recession, prompting employers to shed jobs and consumers to pull back on spending. Tax revenues would drop, leading state and local governments to cut spending on services like road maintenance, child welfare and schools.

Rep. Emanuel Cleaver, a Missouri Democrat, Monday evening offered a gloomy analogy to describe a potential default.

“If a flock of birds were to take flight into a jet engine to slow a plane, it would end catastrophically for all parties involved,” Cleaver said in a statement. “If extremists run headlong into a default to slow our economy, they will crash and burn as well.”

Default consequences could ‘snowball’

The United States reached its statutory debt limit of $31.4 trillion in January. Since then, the Treasury has been deploying “extraordinary measures” to prevent default.

Treasury Secretary Janet Yellen has told Congress the government will likely default around June 1 unless the limit is raised. McCarthy and other Republicans are insisting on spending cuts and other conservative policies, such as stricter work requirements for food assistance, in exchange for voting to raise the limit.

McCarthy and Biden met at the White House on Monday evening in the face of a looming deadline – it takes several days for a bill to clear the Senate, which is not in session this week, and the House, which goes on a break next week. Both House and Senate leaders have said they are willing to call members back if a deal gets made.

Ed Douglas, a financial planner and the presiding commissioner of Livingston County northeast of Kansas City, estimated a default would send stocks dropping by about 20% and cause unemployment to rise to about 8%. The national average is currently 3.4%.

Douglas was previously the chairman and CEO of Citizens Bank in Chillicothe and in an interview Monday noted a few potential opportunities in a default. For instance, individuals on fixed incomes might be able to lock in certificates of deposit at higher interest rates before the Federal Reserve would pause and potentially reverse interest rate hikes amid a recession.

But broadly speaking, Douglas was clear a default is full of danger, in large part from the uncertainty over what comes next. After all, it’s never happened before.

“You might say, well, maybe they’ll get it resolved a couple weeks after we default. But it might be too late at that point,” Douglas said. “Things can snowball and that’s what’s really scary.”

If people lose confidence, he said, “even if it’s irrational, and they start drawing out money right and left and putting it in their mattress, bad things can happen.”

Confidence in the economy could be tested if federal workers, retirees and other government beneficiaries suffer missed, delayed or reduced payments. In addition to missing benefits, federal agencies may experience work stoppages if employees aren’t paid, said Nathan Mauck, an associate professor of finance at the University of Missouri-Kansas City.

“I think that’s most likely where you would see the impact locally,” Mauck said.

When the U.S. came close to defaulting on its debt in 2011, the Treasury developed a plan that would have focused on paying securities first. In doing so, they would attempt to maintain the strength of the dollar, but would likely have a limited effect.

Once the Treasury starts prioritizing payments, it will likely be hit with lawsuits from a number of stakeholders who are looking to get payments. Biggs said the IFPTE Union would likely be among those headed to court.

“Payments to Boeing, they would be at the bottom of the food chain in terms of prioritizing payment,” Biggs said.

Lawmakers still hope for deal

Lawmakers in Washington appear confident a deal will be reached, but offer sharply dueling narratives of who is to blame for the current impasse.

Rep. Jake LaTurner, a Kansas Republican, insisted Monday that a House-passed GOP bill to raise the debt limit was “very reasonable,” even though it was certain to fail in the Democratic-controlled Senate.

Along with freezing spending at last year’s levels and imposing work requirements for some federal programs, it would have repealed some of the Biden administration’s top policy priorities from the past two years, including sections of a climate law Democrats have lauded.

LaTurner pinned the blame for increased spending on the Democrats – though the national debt also increased by $7.9 trillion under former President Donald Trump, about half of which came as the federal government was attempting to address the early days of the COVID-19 pandemic.

LaTurner said he views the national debt as a “moral issue” and that the federal government needed to reduce spending. But when cuts to Social Security, Medicare and defense spending are taken off the table – which they have been – lawmakers are left with difficult choices that often don’t do much to decrease the country’s $31 trillion deficit.

“There are a lot of government programs out there that are important to folks, and I’m not trying to diminish any of them,” LaTurner said. “What I’m saying is that we have a responsibility to focus on the big picture. $32 trillion in debt.”

Rep. Sharice Davids, a Democrat representing much of the Kansas side of the Kansas City metro, said bluntly the country faces an “economic catastrophe” if Congress doesn’t act by June.

“Kansans would lose jobs and retirement savings, Social Security and Medicare would be in serious jeopardy—yet some folks in Washington continue to play games and try to force their political agenda through,” Davids said in a Monday statement.

“I’m hopeful that the negotiations are getting closer to a bipartisan solution that avoids default because my main priority right now is averting that disastrous outcome and protecting Kansans’ livelihoods.”

Even with less than two weeks before an anticipated default, the debt ceiling crisis has yet to lead to widespread panic within the stock market or the public at large. Courtney Lewis, a spokesperson with the Greater Kansas City Chamber of Commerce, said Monday its members hadn’t brought a possible default to the organization as a concern.

In a mid-May poll from the Associated Press and the NORC Center for Public Affairs Research, two in 10 U.S. adults said they are following negotiations over raising the debt limit extremely or very closely, and about four in 10 are following somewhat closely. Similarly, about two in 10 said they understand the situation very well and about 4 in 10 say they understand it somewhat well.

Still, 63% said they think the negotiations should be coupled with terms to reduce the budget deficit. Nineteen percent said the debt limit should be raised without conditions and 16% said it should not be raised at all.

Experts say the current calm comes after past rounds of Washington brinksmanship over the debt ceiling. In the end, Congress has always raised the limit in time.

“They love playing chicken with this debt ceiling thing,” said Mauck, the finance professor.

The Associated Press contributed reporting