Allan Macneill, a professor of political economy at Webster, said if the U.S. does not raise the debt ceiling and cannot pay its debts, there could be an economic disaster.
The U.S. Congress has until Oct. 18 to raise the debt ceiling. If not, the U.S. could run out of money to pay its debts.
According to Webster professor of political economy Allan MacNeill, this could lead to an economic disaster. Moody’s Analytics, a financial services company, asserts failing to raise the debt ceiling could push the U.S. economy into an immediate recession and cost the U.S. 6 million jobs.
On Aug. 1, the debt limit reset to the current ceiling of roughly $22 trillion. The debt is currently at $28 trillion. The U.S. spends more than it receives through taxes, raising the debt. Without legislative action authorizing raising the debt ceiling, the U.S. cannot take on more debt and meet its financial obligations. These obligations range from the Social Security program to the salaries of federal workers.
“It is very complicated politically in how this has come about and how it can be addressed [in terms of legislation],” MacNeill said.
Two weeks ago, Senate Minority Leader Mitch McConnell said Republicans would “not support legislation that raises the debt limit.” On Oct. 4, McConnell urged Democrats to handle the debt ceiling crisis in a partisan manner.
“I respectfully submit that it is time for you to engage directly with congressional Democrats on this matter,” McConnell said. He said Democrats can raise the debt ceiling through the reconciliation process.
Both Senate Majority Leader Chuck Schumer and President Joe Biden have insisted Republicans were at fault.
“Not only are Republicans refusing to do their job, but they’re threatening to use their power to prevent us from doing our job – saving the economy from a catastrophic event,” Biden said to PBS NewsHour.
In 2006, zero Democrats voted to raise the debt ceiling under a Republican senate and presidency. However, Republicans were able to pass legislation with 52 votes in the Senate, something Democrats would need to do in the Senate, as well. The House of Representatives has voted to suspend the debt limit until Dec. 2022. Still, this must pass the Senate.
“They are playing a dangerous game,” MacNeill said. “There is a lot of uncertainty politically.”
The U.S. government’s obligations include federal workers’ salaries, Medicare, the Social Security Program and interest payments on bonds issued by the U.S. Treasury. According to Treasury Secretary Jennet Yellen, the U.S. will be unable to cover these obligations by Oct. 18. If the debt-ceiling hasn’t been raised by then, it could cause a recession.
“If they don’t extend the debt limit, then the U.S. government will not have enough money to pay its obligations,” MacNeill said. “So, the treasury would have to make a decision on what obligations they have to pay.”
The U.S. government has obligations such as the salaries of federal workers, Medicare and the Social Security Program, but it also includes interest payments on bonds issued from the U.S. Treasury.
“This is where it gets scary,” MacNeill said. “Do we pay bondholders [instead of other entitlements]?”
While it may seem that benefits workers paid into such as Social Security would be the priority, MacNeill said U.S. Treasury bonds are crucial to the U.S. and global economies.
“The way global financing works, U.S. Treasury bonds are almost crucial to everything in the economy. If there is a default on that … the ramifications are unknown, but could be quite severe,” MacNeill said.
Further, MacNeill said this may deter investors from trusting the U.S. Treasury bonds. He also noted that much of the world’s savings are wrapped up in these bonds.
“All sorts of international transactions are backed up by central banks and financial firms that have a lot of their assets in Treasury bonds. If they lose a lot of their assets, there could be panic,” he said.
MacNeill believes it could be as severe as the 2008 recession if the U.S. were to default on its debts. According to Moody’s Analytics, a debt default could cause the unemployment rate to rise to 9%. That’s close to the 10% unemployment rate experienced during the Great Recession.
“A century of having a debt limit, it has never come to [a debt default],” MacNeill said. “They have always passed a new debt limit.”
According to MacNeill, most people would never expect this to happen due to the longstanding precedent of raising the debt ceiling. The debt ceiling has been raised 94 times since 1940.
“It’s self-inflicted. It’s irrational. It would be a financial crisis caused by political hubris,” MacNeill said. “That’s why people are thinking this cannot happen. That politicians could be so reckless.”