What happens if the government defaults? A former Federal Reserve economist explains
SACHA PFEIFFER, HOST:
Congress is running out of time to strike a deal on the debt ceiling. Republicans have proposed spending cuts in return for raising the debt limit. President Biden isn't interested.
(SOUNDBITE OF ARCHIVED RECORDING)
PRESIDENT JOE BIDEN: We pay our bills, and we should do so without reckless hostage-taking from some of the MAGA Republicans in Congress.
PFEIFFER: Treasury Secretary Janet Yellen has warned that if the government doesn't act, the U.S. could default as early as June 1. This debate over the debt ceiling can sound abstract, the kind of things lawmakers and economists wring their hands about but that ultimately doesn't mean much for day-to-day life. But is that really the case? Former Federal Reserve economist Claudia Sahm is here to explain. Welcome to the program.
CLAUDIA SAHM: Thank you - happy to be here.
PFEIFFER: As a very basic starter question, would you explain what it means for a government to default?
SAHM: It would mean the government is unable to pay its bills, and those are lots of different kinds of bills, whether it's paying for the borrowing costs on the federal debt that we've already taken out or whether it's getting the Social Security checks out, paying the military. It's a cascade of bad events that happen when we default because we're not making good on past promises.
PFEIFFER: And if that's the case, who is affected - people who hold the debt and are waiting for interest payments? Who else would be conscious of this beyond, say, people not getting Social Security payments?
SAHM: At the end of the day, we're all affected by this. In terms of who has a very in-the-moment effect, it would be people who have those payments from the federal government paying. I think the one that maybe is most disconcerting is the idea that our seniors, often many of them who rely on their Social Security payments, would stop being able to get those in full, right? That's a big problem, and that's just one example of many that are problematic. The reality is that we will all be affected and, frankly, children, children's children because defaulting on the debt, not making those payments on our Treasury debts - that is something that could cost the country for a very long time, and it'll become more costly to do future borrowing.
PFEIFFER: And this is where I think it gets very abstract to people. I mean, this federal debt alone is - what? - more than $30 trillion, which people have trouble understanding - conceptualizing. And if we don't make payments on it, it could result in higher taxes down the line, fewer social services. Is that the kind of things you think could be a ripple effect?
SAHM: Think about it that - if you don't pay your credit card, like, if you miss a payment. Often, they're going to start charging you more interest in the future 'cause you've shown you don't always pay on time for whatever the reason is. And so then that means that in the future, maybe you do need to use the credit card, right? Like, it just - it's something you've got to put on the credit card. You're going to pay more for it, and then that means whatever you borrow, you're going to pay the money you borrowed and then all the interest costs. So that's the piece that may be kind of abstract, but it's real. And it's not something that - we don't want to be known as a country that doesn't pay its bills, and that's what a default would mean.
PFEIFFER: What about impact on jobs, on the unemployment rate, on our ongoing fight to bring inflation down - any impact there?
SAHM: No impact from a federal debt default would be good. There's a lot of concern. I share this concern that the labor market, which has been strong, which had been the bright light of this recovery, might not be able to buffer this one. We've had higher interest rates. We've had higher inflation. We also have an unemployment rate at a 50-year low. That is not a given that we stay there. A default would be very disruptive, and even if it didn't last very long, that could be exactly the kind of event that pushes us into a recession. And then we lose the jobs, and then we have a lot of other problems.
PFEIFFER: There seems to be a note of frustration or exasperation in your voice, maybe that we're coming so close to the edge. How are you feeling about this?
SAHM: We have so much to lose right now. I feel very strongly about the recovery in jobs. We've closed a lot of the inequities or started to close them in the U.S. economy. This would be a massive unforced policy error, and it could be very disruptive in people's lives, and I don't see the point. So to me, that is the frustration. And I'm not optimistic about it, but I'd love to be proved wrong. Like, we really could get this to the finish line, and we really should.
PFEIFFER: That's former Federal Reserve economist Claudia Sahm. Thank you very much.
SAHM: Thank you.
(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.