How the government defaulting on its debt would affect average Americans

This May 4, 2021, photo shows the Treasury Building in Washington.
The Treasury Building in Washington.
  • Treasury Secretary Janet Yellen called the debt ceiling "very destructive" on Thursday.
  • The White House said in a September 17 memo that "hitting the debt ceiling could cause a recession."
  • Services that don't rely on federal funds to operate would continue if the US defaults on its debt.
  • See more stories on Insider's business page.

Congress members are divided along party lines over whether to raise the US debt ceiling - the legal limit on how much the federal government can owe its creditors - and how to do so.

If Congress does not act to raise or suspend the debt limit by October 18, Treasury Secretary Janet Yellen said in a letter to House Speaker Nancy Pelosi that her department's ability to finance government operations would be exhausted, which could jeopardize the country's credit rating and ability to meet financial commitments.

She also told the House Financial Services Committee on Thursday that the debt ceiling is "very destructive" and supports getting rid of it, something previous Treasury secretaries have also advocated.

Senate Minority Leader Mitch McConnell told Politico on Tuesday he didn't think the US would default on its debt, despite leading a GOP effort Monday to block a measure that would prevent the government from a default. With time running out, Democrats are exploring multiple ways to circumvent GOP opposition and raise the debt ceiling.

If the government defaults on its debt, the effects will be far-reaching.

Which federal services would be affected?

In an opinion piece for The Wall Street Journal, Yellen said millions of Americans would be strapped for cash, as critical payments would become indefinitely delayed, including:

  • Social Security checks for nearly 50 million older people.
  • Monthly child tax credits for millions of families.
  • Paychecks for troops.

The Biden administration echoed Yellen's concerns in a September 17 memo, saying major reductions in federal aid would affect school lunch programs, Medicaid, and disaster relief for hurricanes, earthquakes, and wildfires.

"Hitting the debt ceiling could cause a recession. Economic growth would falter, unemployment would rise, and the labor market could lose millions of jobs," the memo said.

Services that don't rely on federal tax dollars to operate, such as the US Postal Service, would continue.

How could a government default hurt the economy?

Spikes in interest rates, steep drops in stock prices, millions of job losses, and downgraded credit ratings could occur if the country defaulted on its debts, Yellen said.

"Our current economic recovery would reverse into recession, with billions of dollars of growth and millions of jobs lost," she wrote.

In 2011, America's credit rating was downgraded as it approached its debt limit, which led to a severe stock-market downturn that persisted for months. Decisions made by congressional officials over the next several weeks will determine whether the American economy will be set up to suffer similar economic consequences.

Congress raised or suspended the country's debt ceiling three times during the Trump administration and nearly 80 times since 1960, Yellen said.

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