The US may default on its debt within weeks an unprecedented scenario which government officials have variously described as “inconceivable” and “catastrophic.”
As Republicans and Democrats remain deadlocked for now, economists are looking at the potential economic consequences if the situation reaches a tipping point and the US is unable to make some payments.
In the event of a full-blown debt default, it will be felt by anyone who expects funds from the government, whether it’s a Social Security check, a SNAP payment, or a government bond payment. But the impact won’t be felt equally across the country, Moody’s Analytics chief economist Mark Zandi said in a report this week.
“Most state economies will be hit hard if the debt limit is breached, although the economic pain varies,” he and co-authors Adam Cummins and Bernard Yaras wrote.
Washington, D.C., where one in four jobs is related to the federal government, will suffer the most, they say, becoming the “poster child” for financial disaster. States with large federal facilities, such as national laboratories or military bases, will be next in line. This includes Hawaii, home to the US Pacific Command and 11 military bases; Alaska, with vast federal land holdings; and New Mexico, home of Los Alamos National Laboratory.
“Although the public sector usually serves as a stabilizing force, in the event of a breach, it increases the economic consequences,” Moody’s notes.
Regions that rely heavily on federal spending, including defense contractors, are also vulnerable. “Professional services firms are suffering, hurting white-collar support firms in and around the Beltway, particularly in Northern Virginia,” Moody’s said. “The aerospace industry also took a hit from states like Connecticut, Kansas and Washington.”
According to Moody’s, even a short-term breach of the debt ceiling, in which the government defaults less than a week before lawmakers raise the government’s borrowing limit, could push the economy into recession. In this scenario, 1.5 million people would lose their jobs, which would increase unemployment from the current 3.4% to 5%, while the country’s gross domestic product would decrease by 0.7%.
Moody’s also assesses the potential damage from a default lasting several months, an outcome it calls “cataclysmic.” The federal government will have no choice but to cut its spending by about $150 billion. “As these cuts ripple through the economy, the hit to growth will be staggering,” Moody’s said.
“The economic downturn that follows will be comparable to that suffered during the global financial crisis”: almost 8 million jobs lost and the unemployment rate rising to 8%, according to a research firm for financial research. In this scenario, several states would be disproportionately affected, with unemployment rates exceeding 9% in Alabama, Illinois, Ohio and Mississippi, and nearly 11% in Michigan, according to Moody’s estimates.
The turmoil is also likely to send stock prices down nearly 20%, evaporating $10 trillion in household wealth held in 401(k) plans, pension funds and brokerage accounts, according to Moody’s. The cost of borrowing for households and businesses will rise.
Due to the enormous economic consequences of a debt default, it should be noted that Moody’s considers such an outcome highly unlikely. And if there is a breakthrough, it will most likely be short.
“But even a prolonged confrontation no longer has a zero probability,” analysts note. “What once seemed unthinkable now seems like a real threat.”
https://www.cbsnews.com/news/debt-ceiling-breach-states-economic-impact-would-suffer-most/
