Local expert says economic impact could be significant if deal is not reached by June 1
While President Joe Biden says that he is confident he can reach a deal with Republicans over the debt ceiling, Treasury Secretary Janet Yellen is warning of “economic chaos” should that not come to fruition.
Virginia Tech economist Jadrian Wooten says if a deal is not reached by June 1, the impact on the U.S. and globally would be significant.
“We’re potentially facing significant declines in Gross Domestic Product and the potential for millions to be out of work,” says Wooten. “The long-term issue is a reduction in investor confidence in government securities.”
Wooten explains that a reduction in investor confidence would raise the cost of borrowing for the U.S., which trickles down through the banking system. “Higher borrowing costs resulting from a default or increased risk perception could further increase interest rates, making it more expensive for businesses and individuals to borrow and invest. This can dampen investment, hamper economic growth, and potentially lead to job losses.”
There are a number of obligations that the U.S. government wouldn’t be able to fully pay, like Social Security, Medicare, SNAP recipients, and interest on federal debt. “By refusing to raise the debt ceiling, we’re essentially refusing to pay what we owe people,” says Wooten.
In addition, Wooten explains the U.S. dollar is the world’s primary reserve currency and any disruption in its stability and credibility could have far-reaching consequences. “Investors worldwide hold U.S. Treasury bonds as safe assets, and a default or downgrade of U.S. debt could lead to a loss of confidence in global financial markets.”
Wooten says the U.S. is able to borrow cheaply because the U.S. dollar is in such high demand around the world but breaking that confidence could trigger international investors to seek other currencies. This in turn would raise the cost of borrowing for the U.S., making a recovery more difficult.
“It’s essential to balance the need for responsible budgeting with the requirement to meet the government’s financial obligations and ensure stability in the economy,” says Wooten. “If politicians are seriously concerned about our debt limits, those need to be addressed before the US commits to paying these obligations and not after the bill has come.”
Jadrian Wooten is collegiate associate professor at Virginia Tech within the Department of Economics and is the author of Parks and Recreation and Economics. Read more about Wooten’s economic perspective on the debt ceiling debate for subscribers in his Monday Morning Economist newsletter.
Margaret Ashburn for Virginia Tech