If You Think a Shutdown Is Bad, Wait for the Debt Ceiling Crisis
Source Newsroom: Cornell University
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Steven C. Kyle, an expert in macroeconomics and government policy, and an economics professor at Cornell’s Dyson School of Applied Economics and Management, discusses the impacts of a government shutdown – and even worse, a default.
“A government shutdown would be a monumental problem for the government to sort out – and the rest of us would suffer as a result, some more and some less.
“The government could choose to continue essential functions such as air traffic control or military/security operations, but would have to furlough most bureaucratic employees until the issue is resolved. Mandatory spending items such as Social Security would continue, but anything requiring a bureaucratic process would likely halt, such as getting a new passport or visa, a federally approved mortgage or payments to contractors and employees. All of this would likely slow down economic recovery.
“Far more worrying, though, is the looming federal debt limit coming up in October. When the government hits that limit and exhausts all possible stopgap measures, then the federal government will be forced to default on some of its financial commitments. It is safe to say that financial markets would be severely disrupted, interest rates would rise, and credit crunch conditions would return with a vengeance. All of this means an end to economic recovery.
“If a government shutdown would slow down the recovery, a government default would hit it in the head with a large club.
“All of this is bad news because it will cost all of us money. A good question to ask is why we even have a debt ceiling. It is as if you signed the papers to take out a car loan and then told the bank you were debating whether or not to pay the money back. Congress already voted to spend the money that is owed and world financial markets aren’t going to be any happier with us refusing to make good on obligations we already agreed to pay than your bank would be if you refused to pay off your car loan.”