By Travis Gillmore
With the debt limit debate raging in Washington, D.C., some experts are projecting significant impacts on regional economies if no deal is reached before the June 1 deadline, with more workers in California expected to lose their job than in any other state if the breach is prolonged, according to a recently released report from Moody’s Analytics.
“The timing could not be worse for the economy; even without the specter of a debt limit breach many CEOs and economists believe a recession is dead ahead,” the authors wrote.
Based on a summary report released by the White House on May 3 detailing various debt ceiling scenarios, the Biden administration agrees with the dim assessment.
“An actual breach of the U.S. debt ceiling would likely cause severe damage to the U.S. economy,” the report declared.
If default occurs, and the debt breach cannot be resolved within a week, analysts expect California to be the hardest hit of all states by number of jobs lost totaling more than 840,000, with Texas’s 562,000 a distant second.
Analysts project the economic downturn—which would follow a lengthy delay in resolving the debt crisis—would be like the turmoil experienced during the financial crisis of 2008. Unemployment rates could more than double to 8 percent nationally, and $10 trillion of household wealth could be lost, according to Moody’s.
“The blow to the economy would be cataclysmic,” the report said. “The federal government would have no option but to slash its outlays … As these cuts work through the economy, the hit to growth would be overwhelming.”
If the deadline passes, a quick resolution could help mitigate the losses, but peripheral damage will already have been done, with the Golden State losing more than 130,000 jobs, according to Moody’s.
A debt limit was created by Congress in 1917 setting a cap on the maximum amount of debt the federal government can incur, and the amount has been raised 78 times since 1960, with the limit suspended seven times over the last 10 years.
While the threat of default is not unprecedented—the government was in a similar crisis in 2011—the risk to financial markets is concerning, according to economists.
“We’ve had these moments flirting with disaster before,” Robert Eyler, professor of economics at Sonoma State University, told The Epoch Times. “This is not necessarily brand-new territory. We just don’t like to be here.”
Some federal jobs would become furloughed in the event of a default, in what Eyler described as an “initial shock,” and when overall spending is subsequently reduced with less cash flow in the economy, it has a ripple effect on local business.
Economists agree the severity of the impact will depend on the duration of the impasse, with all eyes on lawmakers and the president.
“If this issue lasts for months, there will be large, additional problems on the financial side of the economy,” Eyler said. “My biggest concern is we have significant volatility in the financial markets.”
Such have remained relatively stable throughout the negotiations, but economists—including Eyler—believe that as the June 1 deadline approaches, sentiment could change abruptly, and if the deadline passes without a resolution, managing public perception will be crucial to calming market volatility.
“The most important thing is not to panic,” Eyler told The Epoch Times. “It’s going to be harder for some people not to do this.”
With less than two weeks before the deadline, tempers are running short in Washington, with both sides taking barbs at the other over varying approaches to managing the debt.
Before cutting his trip short and flying back to the White House from a trip to Japan, President Joe Biden criticized Republicans with remarks to reporters when questioned about the lingering crisis.
“I can’t guarantee that they will not force a default by doing something outrageous,” Biden said at the press conference in Hiroshima.
Republican leaders refuse to raise taxes and are suggesting budget cuts to non-defense spending.
Democrats are opposed to their plan and resistant to reductions, with counteroffers reportedly including a temporary spending freeze.
After meeting with Biden at the White House on May 22, House Speaker Kevin McCarthy (R-Calif.) told reporters a freeze is not enough: reductions are necessary.
“It’s very important that we spend less next year than this year,” McCarthy said during the nearly 22-minute impromptu press conference following his meeting with the president. “We owe more than our entire economy is.”
The meeting was described as “productive, but not progress,” and when pressed about the possibility of raising the debt ceiling to address the problem, the Speaker was adamant that it was not an option.
“No, we’re never putting a clean debt ceiling on the floor,” McCarthy said. “It’s like giving a credit card to a child.”
A warning letter sent on May 22 from Janet Yellen, U.S. Secretary of the Treasury, to members of Congress advised lawmakers that if the issue is not resolved soon, the government risks default as early as June 1.
“It is highly likely that [the] Treasury will no longer be able to satisfy all of the government’s obligations if Congress has not acted to raise or suspend the debt limit,” Yellen wrote in the letter. “We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm.”
Consumer confidence and a reluctance for businesses to invest in volatile climates are exacerbated by the increased cost of borrowing when the U.S. credit rating is impacted, according to Yellen.
While the nation has never surpassed its self-appointed debt ceiling, it has been precariously close on several occasions, the last being in 2011 when the prospect of default led leading credit agency Standard & Poor’s to downgrade the U.S. debt rating—the first such occurrence in the country’s history.
The treasury department leader is warning of the dangers a debt default would pose on the national economy, families, and the security of the nation with a pointed statement demanding the debt limit be raised.
“If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests,” Yellen wrote to legislators.
Following McCarthy’s Monday meeting with the president, Rep. Patrick McHenry (R-N.C.), who is involved in the negotiations, described what he said was a “lack of urgency from the White House.”
“I don’t want brinkmanship,” he told reporters. “It’s not in America’s interest.”
But McCarthy worked to alleviate concerns and noted that deliberations will continue on a daily basis.
“I actually believe at the end of the day we can come to an agreement,” he said. “We’re getting closer. Don’t give up on us.”