WASHINGTON — What would happen to Minnesota and the nation if the United States defaults on its debt?
No one knows for sure because the last time the United States reneged on its debts was in 1789, when the new nation struggled to pay France over wartime debts. But most economists agree a U.S. debt default is likely to have a catastrophic impact, with massive job losses that would push the national unemployment rate to more than 8%, a meltdown on Wall Street that would send 401(k) and stocks and bonds crashing, the shuttering of many businesses and the plummeting of demand for agricultural and manufacturing exports produced in the state, as well as across the nation.
“It’s hard to tell exactly what would happen because we’ve never seen it before, but it would be extremely severe,” said University of Minnesota economics professor V.V. Chari.
Chari also said the impact of a debt default would upend Minnesota in the same way it would the nation as a whole, since Minnesota’s economy is reflective of an “average” in most ways.
The nation must lift the debt ceiling because the federal government will reach the maximum amount of borrowing allowed by Congress on June 1. In January, the total national debt and the debt ceiling both stood at $31.4 trillion. Since 2001, that debt has been increasing at a pace of nearly $1 trillion a year because the federal government has been spending more money than it receives in taxes and revenues.
So the nation has had to borrow more and more money, usually through the sale of treasury bonds across the globe and has had to ask Congress repeatedly for permission to do so. Congress has usually complied, without preconditions. But now the GOP-led House is demanding a series of spending cuts before it would raise the debt ceiling.
President Biden, however, wants to expand federal spending and reduce future debt largely by raising taxes on high earners and large companies.
The partisan divide is wide and not likely to be bridged during Tuesday’s high-stakes talks in the White House on the debt ceiling.
Rep. Tom Emmer, R-6th District, the House majority whip whose job is to keep the narrow GOP majority united on its demand for spending cuts, has been a cheerleader for the Republican plan try to cut the deficit. That plan to cut spending, and raise the debt ceiling until next March was called the Limit, Save and Grow Act of 2023 and approved by the House on a partisan basis last month.
Emmer had joined House Speaker Kevin McCarthy, R-California, in insisting there would be no compromise on the House GOP plan to raise the debt limit, but seemed to modify his hardline stance in an interview with Fox News on Monday.
“You want to prevent a Biden default? Come to the table with ideas or pass our solution that’s sitting in the Senate,” Emmer said in reference to the House GOP debt limit bill.
Meanwhile, Democrats are calling the GOP plan draconian and would balance the budget on the backs of low-income people.
Using an analysis of the proposed 14% cuts to the federal budget prepared by the Democratic staff of the Senate’s Joint Economic Committee, Rep. Betty McCollum, D-4th District, has warned that the House GOP’s plan would put 153,000 people at risk of losing Medicaid coverage in Minnesota, threaten food assistance to 6,000 people aged 50-55 and eliminate preschool and childcare for at least 4,200 children in the state. McCollum also said housing costs and college costs would increase for thousands of Minnesotans, and outpatient care for veterans would be severely curtailed.
“House Republicans want to make deep cuts into everyday programs that Americans citizens and people that I represent count on,” McCollum said in a recent press conference with fellow progressive, Rep. Rashida Tlaib of Michigan. “They want to do it without spelling out what it is, that’s why they linked it to the deficit bill. These are cruel cuts.”
A ‘politically manufactured crisis’
McCollum has also highlighted the impact of a default on the U.S. economy that included sharp rises in interest on all loans, including those for cars, college and credit cards. The average cost of a new mortgage in Minnesota would rise by $140 a month, the Joint Economic Committee said. And the average American facing retirement would suffer a $20,000 drop in their 401(k).
The debt limit was actually hit on Jan. 19, but the U.S. Treasury is using “extraordinary measures” to come up with the additional cash needed to pay its bills. That cash is projected to run out on or about June 1.
Chari and other economists are not disputing that a default would have a tremendous impact on the U.S. economy. He said the first to be affected would be the nation’s financial sector, which relies on U.S. Treasury bonds in their borrowing and lending.
Mark Zandi, chief economist at Moody’s Analytics, agrees.
“This would be a good time to batten down the financial hatches,” he said. “Not because a recession is at hand, it’s not. And not because the banking system is set to unravel, it won’t. It’s because of a politically manufactured crisis around increasing the Treasury debt limit.”
Then the impact of a debt default would be felt by the nation’s exporters, because international credit – based largely on U.S. dollars – would be greatly disrupted. With interest rates soaring and exports falling, businesses will find it difficult to pay their workers and eventually many would fail. So, Tuesday’s meeting on the debt ceiling is brinksmanship at its worst, Chari said.
“The White House … is just as unwilling to compromise as Republicans,” he said.
Polls show the public is split along party lines when it comes to the debt ceiling crisis, with independents slightly more likely to blame the GOP.
A recent Washington Post/ABC News poll found Republicans are just as likely to blame Biden (78%) as Democrats are to blame congressional Republicans (78%). A 37% plurality of independents say they would blame Republicans, with the remainder divided between Biden (29%) and blaming both equally (24%).