The Council of Economic Advisers also warned that less dramatic failures around the debt limit — including “brinkmanship” in which the limit is approached but not breached — could cost hundreds of thousands of U.S. jobs.
“There is broad consensus amongst economists that such an event would generate an entirely-avoidable economic catastrophe,” the report states. “The economy would quickly shift into reverse, with the depth of the losses a function of how long the breach lasted.”
The new warnings come days ahead of President Biden’s meeting with congressional leaders Monday about the debt limit and government spending. While acknowledging the United States cannot default, Speaker Kevin McCarthy (R-Calif.) has been adamant that House Republicans will not increase the federal government’s borrowing limit unless Biden agrees to trillions of dollars in spending cuts — a position the administration has rejected.
The meeting Monday is expected to kick-start negotiations between the speaker and president, but Treasury Secretary Janet L. Yellen has warned that lawmakers may have only until June 1 before the United States runs out of money to meet all its payment obligations.
Congress approves the maximum amount the Treasury Department can borrow under the law. But federal spending outstrips the amount collected in tax revenue, requiring lawmakers to periodically raise the borrowing limit.
In the new report, the White House economists lay out the potentially devastating economic consequences of failing to act.
If the United States fails to make its payment obligations, interest rates could spike as investors demand a higher premium on purchases of government debt. Higher interest rates would ripple throughout the economy, making mortgages, credit cards and other purchases more expensive for most Americans. Retirement accounts, consumer and business confidence, and consumption would all take a hit.
Because the United States is widely trusted to repay its debt obligations, the federal government can borrow at relatively cheap rates. But that could change if the debt ceiling is breached. The White House report cites an analysis by the Brookings Institution, a Washington-based think tank, finding that federal borrowing costs could surge by $750 billion over the next decade if the limit is breached.
Unlike a traditional recession, in which lawmakers approve new spending to counteract a private market contraction, Congress would have few tools to respond to the economic shocks caused by a debt ceiling breach, the administration report stresses.
“Unemployment increases 5 percentage points as consumers cut consumption, and businesses lay off workers,” the report states. “Unlike the Great Recession and the COVID recession, the government is unable to help consumers and businesses.”
The White House analysis also cautions that getting too close to the debt limit could itself harm the U.S. economy.
Even breaching the debt limit for a week could cost 500,000 jobs, the analysis found. “Brinksmanship” on the debt limit could cost 200,000, the analysis found.