White House warns of job losses and economic damage if US defaults on debt.

White House Warns of Severe Economic Damage if U.S. Debt Ceiling is Breached

The White House has issued a stark warning that a continued breach of the U.S. debt ceiling could result in “significant disruptions” to financial markets and “severe damage” to the economy, including more than 8 million job losses. The White House Council of Economic Advisers has stressed that a historic U.S. default on its debt obligations, referred to as the “X-date,” is fast approaching, and such a move would see the economy “quickly shift into reverse.”

Three Possible Scenarios

White House economists have warned of three possible scenarios that would likely happen if negotiations between Republicans and Democrats regarding the debt limit are further prolonged: brinksmanship, a short default, and a protracted default.

• Under the first scenario, in which the limit is approached but a default is avoided, 200,000 jobs could be wiped out and 0.3 percentage points would be knocked off the annual GDP, and the unemployment rate would rise by 0.1 percentage points, according to the Biden administration.
• In a short default, in which Congress acts swiftly to allow the nation to borrow again after defaulting, roughly half a million jobs would be lost, 0.6 percentage points would be knocked off the annual GDP, and the unemployment rate would rise by 0.3 percentage points.
• Under a protracted default, the most dangerous scenario in which the U.S. fails to raise its borrowing levels for more than three months, roughly 8.3 million jobs would be wiped out, unemployment would increase 5 percentage points as consumers cut consumption and businesses lay off workers, and GDP would plunge by 6.1 percentage points.

“On Par With the Great Recession”

The result would be an “immediate, sharp recession” on par with the Great Recession while the stock market would also fall by an estimated 45 percent, economists found. “A protracted default would likely lead to severe damage to the economy, with job growth swinging from its current pace of robust gains to losses numbering in the millions,” economists wrote. “Unlike the Great Recession and the COVID recession, the government is unable to help consumers and businesses. As the breach continues, the economy heals slowly, and unemployment is still 3 percentage points higher at the end of 2023.”

The White House projections are similar to a recent Moody’s Analytics report which used a different model of the macroeconomy but arrived at a similar conclusion, noting that the economic downturn that would ensue would be “comparable to that suffered during the global financial crisis.”

Biden and Republicans Deadlocked

Biden and Republicans have been in a deadlock over the debt limit and government spending, with the administration refusing to make spending cuts until the debt limit is raised. Last week, GOP lawmakers narrowly passed a bill authorizing a $1.5 trillion increase in the debt ceiling, but it is unlikely to pass in the Senate.

The consequences of a U.S. default on its debt obligations would be catastrophic, and it is essential that Congress takes action to raise the nation’s debt ceiling before it’s too late.