Notre Dame professor: Failure to raise nation's debt ceiling could be 'catastrophic'

Savannah Kuchar, USA TODAY
·6 min read
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The United States reached its "debt ceiling" limit Thursday.

As a result, Treasury Secretary Janet Yellen has implemented "extraordinary" measures to keep the government from defaulting by reallocating federal funding to continue paying the government’s debts while Congress debates raising the limit.

In a Jan. 13 letter to congressional leaders, Yellen urged Congress to raise the limit and said that "it is unlikely that cash and extraordinary measures will be exhausted before early June."

Congress can avert economic disaster by increasing or suspending the limit, as it has done numerous times in the past. But House conservatives are threatening to delay the process by demanding deepspending cuts a Democratic Senate and White House have already signaled they won't accept.

Economic experts, such as University of Notre Dame finance professor Jason Reed, say failure to raise the ceiling would have national and worldwide economic consequences. South Bend area residents and the rest of the country would feel the impact in numerous ways, he said.

Reed said that if the debt ceiling is not raised, forcing the government to default on debts it has already committed to pay back, the results would be "catastrophic."

"Defaulting on the debt is such a linchpin to the entire financial system," Reed said. "You would almost surely … see U.S. financial markets more in turmoil."

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What is the debt ceiling and why does it matter?

  • Definition: The debt ceiling is the maximum amount the U.S. government can spend on its existing obligations, including Social Security and military salaries.

  • What it is not: It is not a vote to spend more money. Without a higher ceiling, the government would have to default on bills already incurred that it has already committed to pay.

  • The latest: The government hit the debt ceiling limit Thursday, Despite that, the Treasury Department can take "extraordinary measures" to keep paying its debt for several more months, Yellin said.

  • Consequences: If the federal government defaults on payments, ramifications could include a stock market crash, a recession and a rise in unemployment,experts say.

What happens if the limit is not raised?

If Congress fails to raise the debt ceiling, the government would automaticallydefault on its payments. In the more than 100 years since the limit was enacted, that has never happened.

"Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability," Yellen wrote in her letter to leaders of both parties in both chambers.

Even the threat of default could cause an economic downturn, as happened in 2011, when the country's credit rating dropped as a result of the drawn-out debt ceiling debate.

What would a default mean for you?

If the government were to default on its debt, Reed said, Republicans would likely propose defunding programs such as Social Security, Medicare and Medicaid. Social Security recipients may see reduced payouts, and Medicare and Medicaid recipients would likely see a downgrade in the quality of care they receive, he added.

These effects might not be immediate, Reed said, but they would likely affect the "next wave" of retirees.

"It would force them, potentially, to work longer to secure benefits for a longer period of time," he said.

Reed also said that if the government defaulted on its debt, causing those interest rates to rise, all interest rates would rise. Increased interest rates would negatively affect businesses, the stock market and economic growth in general.

"If it cost businesses more to invest in things, and if they don't think they're going to be able to make that money back, then they're not going to invest in the things that they need," Reed explained. "As a result, that works its way through the economy. If businesses aren't buying goods and services to create more goods and services, then the overall output of the economy is going to go down."

Reed said this would cause valuations of companies to go down, suppressing stock market performance and potentially causing a recession.

What are the solutions on the table?

Although the country reached the limit Thursday, Yellen said in her letter that Treasury's "extraordinary measures" are expected to tide the government over until at least early June.

In the meantime, Congress will continue negotiations. House Republicans, led by Speaker Kevin McCarthy, are expected to use the debate as leverage to push for spending cuts.

"We've got a Republican House, a Democratic Senate. You've got the president there," McCarthy told Capitol Hill reporters Tuesday. "I think it's arrogance to say: 'Oh, we're not going to negotiate about anything,' especially when it comes to funding. If anyone had a child and their credit card kept hitting the limit, you'd want to change the behavior."

One contingency plan by Republicans, not made public but reported by The Washington Post, would have the government making payments based on a list of priorities. Under this plan, crucial expenses such as debt interest and Medicare would be paid off while leaving out other obligations, including Medicaid and border control.

Democrats have said such a proposal would be a nonstarter, though. White House press secretary Karine Jean-Pierre said in a briefing Monday that the administration would not be open to negotiations and that Congress needs to solve the problem "without conditions."

"This is not a plan. It is a recipe for economic catastrophe," Jean-Pierre said. "This is the duty of Congress. This is something that is their basic duty to deal with the debt ceiling, … It should not be used as a political football."

This is not the first time the GOP has proposed the strategy. But experts then and now have warned against it, saying the approach would not stave off economic downfall.

What have lawmakers had to say?

After the House passed a rules package that makes raising the limit more difficult, Majority Leader Steve Scalise, R-La., said a priority for Republicans is ending what they see as a cycle of overspending.

"Shouldn't we have an honest conversation about how to start living within our means, how to make sure we're not spending money that we don't have, before that comes up?" Scalise said.

Democrats such as House Minority Leader Hakeem Jeffries and Senate Majority Leader Chuck Schumer say they "want to move quickly" to avoid a possible recession.

"The debt limit was increased in a bipartisan way three times when Donald Trump was President, twice when Republicans had majorities in the House and Senate. This time should be no different," Jeffries and Schumer wrote in a statement.

Go deeper:

Tribune reporter Claire Reid contributed to this report.

This article originally appeared on USA TODAY: What is the debt ceiling? Here's what happens when we hit debt limit