Defaulting on Our Debt Would Cause the Next Great Recession
May 19, 2023
By Mike Konczal
Defaulting on the United States debt would be a catastrophic disaster. Most acknowledge this, but many conservatives do not, and many in particular are flirting with serious economic harm in order to force political priorities that have nothing to do with any long-term budgetary issues. This is irresponsible, counterproductive to addressing any problem our country could face, and puts far too much at risk.
A default is bad at any time, but it is particularly unforced with the economy doing so well. Having finally recovered to a period of steady, strong growth in the aftermath of the COVID pandemic, we’ve experienced a very strong labor market and declining inflation. The unemployment rate has declined to a 50-year low overall, and the lowest on record for Black Americans. Millions have returned to the labor force; the prime-age (25-54) employment-to-population ratio—a good and consistent measure across time—is above pre-pandemic rates. Many thought this number would be permanently lower as a result of the Great Recession. Instead, it’s now at the highest rate since 2001, and it continues to grow.
Meanwhile, job opening, job upgrading, and wage growth rates are stabilizing at strong levels that are consistent with lower inflation. Many economists said inflation couldn’t have fallen as much as it has without unemployment increasing; instead, it’s happening amid a record labor market. As housing data continues to come in, and as goods prices normalize and corporate profit margins continue to shrink, there’s room for inflation to decline further. This is a Goldilocks economy, exactly the kind we want to keep going forward.
But hitting the debt ceiling—even just the prospect of it—poses a grave threat to this recovery. There’s no historical precedent for the United States to default on its debt. But experiences from 2011 and 2013 show that even approaching the debt limit has negative financial market consequences. Excessive stock market volatility, an increase in the cost of credit, higher credit default swaps rates, the threat of a credit downgrade—all are risks, and all would have persistent consequences years out.
But it’s not just financial markets that would suffer. Any kind of default would put major stress on the rest of the real economy. Social Security payments would immediately be delayed. That would cause hardships for many, and immediately cause consumers to panic, stop spending, and slow the economy, threatening a major recession.
Estimates from both public and private researchers are consistent on the scale of economic disaster here. According to Moody’s Analytics, even a short debt breach would lead to 2 million jobs lost right away and the unemployment rate skyrocketing to 5 percent. Worse, a protracted default would essentially create a second Great Recession in the second half of 2023, with 8 million jobs lost and unemployment well above 8 percent. Even if payments resume quickly, it would take years to recover from that damage, as unemployment comes down far slower than it went up.
This isn’t about future funding; Congress has told the Biden administration to spend this money. Remember, the Goldilocks economy we have does not need unnecessary spending caps or other makeshift austerity measures. Holding a historically strong labor market hostage to force an unrelated agenda onto the country risks an economic catastrophe we can’t afford. Our economy and our democracy deserve better.