How a default on the debt ceiling would affect the average American

Transcript

AYESHA RASCOE, HOST:

On Friday, the Congressional Budget Office said there was a significant risk that the government will run out of cash at the beginning of next month. And negotiators met for three days straight last week to try to come up with a deal on raising the borrowing cap. But what does it all really mean for you, a couple trying to pay off a mortgage, a soldier serving in the military or someone on food stamps? To help us make sense of it, we turn to Samantha Sanders. She's the director of government affairs and advocacy at the Economic Policy Institute. Welcome to the show.

SAMANTHA SANDERS: Thanks so much for having me.

RASCOE: So if the government does not raise the debt ceiling, it means it defaults on its bills, runs out of money, can't borrow anymore. And Treasury Secretary Janet Yellen said it would lead to an economic catastrophe. But who would feel the effects of a default right away?

SANDERS: Economic catastrophe is a great way to put it. The people who are hit first and foremost by this is anybody who is receiving some type of payment from the federal government or some type of program that is funded by the federal government. So you're talking seniors or people with disabilities who get Social Security payments, military personnel and veterans benefits, federal employees, people who are getting support from programs funded by federal money like SNAP for food stamps, housing assistance. And then that has a big ripple effect on the economy from there.

RASCOE: Yeah, because I've read that Goldman Sachs economists said that close to one-tenth of all economic activity would stop. So it would seem to be there would be a huge ripple effect on the whole economy, right?

SANDERS: Yeah, for sure because, you know, the first kind of layer is, you know, those people can't pay their bills if many of them are in low- and medium-income ranges. Especially, they will cut back on their spending, which impacts their economies. And then there's the bigger-picture impact, also, on financial markets because if Treasury has to delay its payments, you have a lot of chaos in financial markets. If the market plunges, that will also wipe out a lot of household wealth. There's the risk that the credit of the U.S. Treasury could be downgraded depending on how long the government isn't able to pay off the bonds. You know, and you're basically looking at a economic recession.

RASCOE: So should people worry for their jobs?

SANDERS: Unfortunately, in the scenarios that are happening right now, people should absolutely be worried about their jobs, the state of the economy, the impact this could have on kind of our economic growth. And they should also be worried about that in the case of the debt ceiling deal that Speaker McCarthy and House Republicans recently passed, which would also have an impact on jobs and on restraining growth.

RASCOE: This has never happened before. And it's not really a comparable situation, necessarily. But, like, OK, when there's a government shutdown, there are these workarounds that will happen where the government will figure out how to get people their checks so that it doesn't hurt people who get Social Security. Or they make sure the military is paid. Is there a way to work around this?

SANDERS: It's different from other situations, right? And typically, in, like, a normal recession, there would even be still some ability from the government to help people weather the crisis - things like we saw earlier in the COVID pandemic with passing emergency fiscal relief. But if we're in a default, you know, the federal government won't even be able to step in and do that.

RASCOE: So the government won't be able to pay anything?

SANDERS: Essentially, yes. I mean, there have been some conversations about certain workarounds, but most of those just don't seem really feasible, I think. This kind of raises the question, like, why is this happening? Why would anyone risk breaching the debt limit? And unfortunately, I think what we're seeing is congressional Republicans in particular are essentially forcing a hostage-taking of the US economy here.

RASCOE: Clearly, this could affect people's jobs. What about interest rates and things like that if you're trying to get credit, pay off your credit cards or, you know, buy a home?

SANDERS: Yeah - because if you're going to see the interest rates for Treasury go up, other interest rates are likely to do so, as well. So the typical person, you know, like you or me is seeing higher mortgage rates, credit card interest rates, you know, on loans, etc. So, you know, people would also have to cut back on spending and prepare for impacts there.

RASCOE: How can the average American prepare for what would happen if there is a default? Is there anything they can do?

SANDERS: This is going to sound a little bit depressing, but honestly, there's very little an ordinary person can do to prepare for a financial crisis at that scale. Of course, it's always a good idea to keep an eye on your savings and make sure you have a backup plan, you know, for what to do if unemployment spikes or if you're impacted by the stock market. But I honestly don't think that's really a fair ask to make of the American people. I really think that the best thing people can do now is call their members of Congress, call your senator and tell them that they want to see the debt ceiling raised in a clean deal and get back to figuring out how the federal government should spend its money through the normal democratic process.

RASCOE: Samantha Sanders is the director of government affairs and advocacy at the Economic Policy Institute. Thank you so much for joining us.

SANDERS: Thanks for having me. Transcript provided by NPR, Copyright NPR.