5 Disastrous Consequences Of a Debt Ceiling Meltdown
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According to the conventional wisdom, the stakes around a default* are so great that after a brief game of brinksmanship, lawmakers will eventually come to their senses and raise the debt ceiling as the deadline nears.
That view, based on past precedent, will likely prove correct. But this is an exceptional moment in our political history. At this point, neither Senate Minority Leader Mitch McConnell, R-Kentucky, nor Speaker John Boehner, R-Ohio, can truly claim to speak for their caucuses. Many within the Tea Party caucus refuse to vote for a debt ceiling increase under any circumstance, and Boehner needs a good number of Dems to pass it. But the Dems have offered most of what the GOP wants, only to see them walk away from the table, insisting that all tax loopholes are sacrosanct.
Obama wants a big, grand bargain – possibly to include cuts to Medicare and Social Security – while the Democratic rank-and-file wants to run on protecting those programs next fall. So, improbable as a protracted period of default might be, with all these political divides deepening it's no longer out of the question.
Most Americans are unsure what a default actually means, and with good reason – it's virtually ( but not entirely) unprecedented. So what might happen if the worst-case scenario should come to pass? We run down some possibilities below.
1. Around August 3, Some People the Federal Government Owes Money To Will Stop Getting Paid
The Treasury is now shuffling money around using a series of “extraordinary measures” to make payments. That process will be exhausted at some point between August 2 and August 12 – it's currently projected that August 2 will be the drop-dead date.
At that point, the government will be able to send out only what it collects in taxes. But the reason we have a deficit – the only reason – is that Congress authorized more spending than it's raising in taxes. According to the Bipartisan Policy Center (BPC), the federal government will take in a little more than $172 billion between the drop-date date and the end of August. But the government's commitments – to everyone from investors in U.S. bonds to the elderly, children in need of food stamps and everyone else – adds up to a bit less than $307 billion during that same period.
That means choices will have to be made. And, as the BPC notes, “Inflows and outflows do not match up well and are quite 'lumpy,'” meaning that it's not really possible to pay everyone 60 percent of what they're owed.
President Obama said he “couldn't guarantee” that Social Security checks would go out on time. $23 billion worth of checks are scheduled to be cut on August 3, but only $12 billion in tax revenues is projected to come in that day. Also scheduled for August 3 are the following:
- $1.4b defense vendors
- $1.8b Dep. of Education
- $500m Federal salaries/benefits
- $2.2b Medicare/Medicaid
- $1.4b Food/HUD/Welfare/Unemp
- $100m Veterans Affairs programs
- $100m IRS refunds to businesses
- $1.5b other spending
Looking at the entire period of August 3-31, we could pay the interest on federal bonds, Social Security, Medicare and Medicaid payments, veterans' benefits and unemployment benefits.
If we did so, we couldn't pay the salaries of military personnel and federal workers and we would have to stiff low-income people receiving housing assistance, food stamps and other benefits. We'd have to close down the federal courts and federal law enforcement agencies, stop paying for the Department of Education (think Pell grants, among other things), the Highway Administration and the EPA. Health and Human Services (the “principal agency for protecting the health of all Americans and providing essential human services, especially for those who are least able to help themselves”) would be shut down. Private contractors would be stiffed. IRS refunds would stop going out. In addition, the Department of Energy, Small Business Administration, Department of Labor and $52 billion in smaller programs would no longer be funded.