Social Security checks paused. Soaring interest rates. Financial crisis and recession.
Those are some of the potential consequences that experts say could engulf the U.S. economy if Congress and the White House fail to raise the nation’s legal borrowing limit of $31.4 trillion and avert an unprecedented national default.
And the ripple effects of a U.S. default would likely be felt across the globe, including in Bartholomew County, experts say.
While President Joe Biden and House Speaker Kevin McCarthy have said they don’t think the U.S. will default, they are staring down a deadline to raise the borrowing limit by June 1, which is when the Treasury Department has said the U.S. could begin defaulting on its debts for the first time in its history, The Associated Press reported.
“It’s more than just, ‘Oh well, (the federal government) is not going to send a check now,’” said Steve Mohler, an assistant professor of management at IUPUC.
“We’ve not done this before, and it’s new territory,” Mohler added.
What is the debt limit?
The debt limit is a cap that Congress placed on the U.S. government’s ability to borrow money to pay for spending that Congress and presidents of both parties had approved in the past, according to the Treasury Department.
Those obligations include Social Security and Medicare benefits, military salaries, funding for social safety net programs, interest on the national debt, among other payments.
Raising the debt limit does not authorize new spending but rather allows the federal government to pay its bills. Because the government spends more than it takes in through taxes and other revenue, it has to borrow money to pay these obligations.
Congress has raised, extended or lifted the debt limit 78 times since 1960, including three times during the Trump administration, according to the Treasury Department.
But in recent years, the borrowing limit has been the subject of deepening partisan standoffs, with lawmakers from both parties using debt ceiling votes as leverage for other priorities.
While time is running out to reach an agreement, many analysts believe the chance of a U.S. default remains low. Moody’s Analytics estimated earlier this month that there is 10% chance of a U.S. default.
”If there is a breach, it is much more likely to be a short one than a prolonged one,” Moody’s Analytics said in an update on the debt limit earlier this month. “But even a lengthy standoff no longer has a zero probability. What once seemed unimaginable now seems a real threat.”
Locally, people living in poverty and those who rely on government benefits and services would likely face the biggest hardships due to a U.S. default, Mohler said.
Thousands of households in Bartholomew County rely on benefits that could go unpaid and services that could be disrupted, or halted altogether, if the government can’t pay its bills for an extended period.
Those benefits and services include, among other things, Social Security checks for seniors, benefits for veterans and funding for programs that help the poor.
An estimated 10,068 households in Bartholomew County — nearly 1 in 3 households in the county — received some form of Social Security payments in 2021, according to the most recent estimates from the U.S. Census Bureau.
Nearly 17% of Bartholomew County’s population is ages 65 and up, though it is hard to say how many of those people are drawing retirement benefits or how big of a chuck of their income those payments represent. For some people, it is upwards of 90% of their income, Mohler said.
There also were an estimated 3,340 veterans in the county in 2021 — including 665 with a disability and 195 who were living in poverty — who may be receiving some sort of veterans benefits from the federal government that may be delayed or paused in the event of a default.
The Medicare and Medicaid programs also could be impacted. Columbus Regional Health and Schneck Medical Center in Seymour have said in the past that the majority of their patients are Medicare and Medicaid recipients.
Overall, about 8% of Bartholomew County residents live in poverty. In surrounding counties, the poverty rate is considerably higher, with 14% of Jackson County residents and nearly 13% of Jennings County residents living in poverty.
“Programs that are helping people at (low) income levels that need support definitely could be impacted (by a default),” Mohler said.
Interest rates, inflation
Bartholomew County residents also would likely feel the impact of a U.S. default in other ways, Mohler said.
A default would impact consumers as interest rates for credit cards and mortgages would go up. The U.S. dollar could weaken, making it more expensive to import goods.
Funding for local governments and higher education could be impacted.
“Interest rates go up, you can’t buy things,” Mohler said.
“Anything that goes through the bond market would become more expensive, and that would definitely have a further depressing effect on consumers and even businesses,” Mohler added. “…What may be worse is, globally, (people) may lose trust in the U.S. dollar, and so all of a sudden, the dollar would become depressed. I think it would cause further issues with inflation.”
Moody’s Analytics also estimates that unemployment in Indiana could spike in the event of a prolonged default, reaching 5.2% by the fall and peaking at 8.3% at some point within the next two years. A shorter breach is projected to increase unemployment in Indiana to 4% by the fall and peak at 4.9% by 2025.
Unemployment in Indiana stood at 3.1% in March.
Mohler, however, said he doesn’t anticipate a lot of layoffs in Bartholomew County immediately after a default, though it’s possible that a default “moves the recession up a few months,” which could impact automotive manufacturing, which forms the backbone of Bartholomew County’s economy.
Currently, negotiators from the White House and McCarthy’s emissaries are hoping for a breakthrough as soon as this weekend on their talks on raising the debt limit
Republicans want spending cuts in exchange for raising the debt ceiling, saying the current pace of spending is unsustainable, according to wire reports. Biden and congressional Democrats want the debt limit raised without conditions, arguing that the two issues should not be linked.
Biden had said he would not negotiate over the debt limit, but that he would have a separate conversation with McCarthy about the federal budget.
Biden dared McCarthy to produce a budget plan, and House Republicans responded by narrowly approving a bill to reduce deficits by $4.8 trillion over 10 years, according to wire reports. It would do so by cutting discretionary spending to 2022 levels and placing an annual 1% cap on future increases. The bill would also reclaim billions of unspent COVID-19 funding, eliminate clean energy tax credits Biden signed into law last year and reverse his student debt forgiveness and repayment plan.
Rep. Greg Pence, R-Indiana, voted in favor of the budget plan. “it is time to limit reckless government spending” in reference to the proposal. The third-term congressman from Columbus also appeared on the Fox Business show “Mornings with Maria” last week to discuss McCarthy’s debt ceiling plan.
“I was a ‘no’ until I sat down with Kevin (McCarthy) and talked to him about that,” Pence said during his appearance on Fox Business. “I’m very supportive of his efforts. He has worked very, very hard to move this ball forward and bring people to the table.”
“I’m in agreement that this offer should bring everybody to the table, and we should talk more about this,” Pence added later in the interview. “…Let’s talk about, as adults, about real solutions to these long-term problems. This is a great start. This is an opportunity for everybody to come to the table and present what their ideas and solutions are.”
In 2019, Pence was one of 65 House Republicans who voted to suspend the debt limit when President Donald Trump was in the White House, congressional records show.
It’s unclear how Democrats can get the debt ceiling increased without support from House Republicans, according to the AP. But Democrats say the GOP bill’s unspecified budget cuts would harm individuals — and the economy — as domestic spending would likely be cut. Moody’s Analytics estimates the Republican bill would cause the loss of 780,000 jobs next year alone.
Congressional leaders will also need time to take the temperature of rank-and-file lawmakers on any agreement, and it’s not at all clear that the emerging contours go far enough to satisfy McCarthy’s hard-right faction in the House or would be acceptable to a sizable number of Democrats whose votes would almost certainly be needed to secure any final deal.
In the meantime, the clock keeps ticking.
“There’s no simple solution, especially with politics in D.C.,” Mohler said. “(Both parties) want to see who’s going to blink first. The consequences aren’t for the people in the Beltway. It’s for the people outside the Beltway.”