A collapse of the debt ceiling could double unemployment

If Republicans and Democrats fail to agree on the nation's debt ceiling, the financial crisis could damage the economy so much that unemployment could rise to 7%, according to the analysis.

An increase of that size would mean 6 million people out of a job, according to a report this week by Mark Zandi, chief economist at Moody's Analytics. His forecast showed that the latter, if not addressed, could cause significant economic damage, including doubling the current 3.5% unemployment rate.

The U.S. government hit the $31.4 trillion debt limit set by Congress on January 19, and since then has relied on Treasury Department accounting gimmicks to keep the government running. These tactics allow access to individuals who own U.S. Treasury bonds, pension funds, foreign governments, and others.

Congress has the power to raise or suspend the debt ceiling, as it has about every nine months since 1978, but power in government is split between Republicans (who control the House of Representatives) and Democrats (who control the Senate and the presidency). ). The two sides disagree on how to approach the national debt.

Republicans have said they will not raise the debt ceiling unless Democrats agree to lower government spending. For their part, Democrats say they will not negotiate on the debt ceiling and want it to be raised without limits.

Earlier this month, Treasury Secretary Janet Yellen said the government could use “emergency measures” to continue operating until early June. Moody's estimates that the measures, which include the suspension of payments to many funds, including federal employee pensions, will last until August or October.

Economists and officials have warned of dire consequences if the impasse lasts longer than measures. Basic public services like Social Security benefits would be jeopardized and the US would default on its debt, leaving it unable to pay its creditors.

A US default would cause global investors to lose confidence in the government's ability to pay its debts, which would undermine the financial system, Zandi said. Stocks will fall and interest rates will rise. Even if the default is resolved quickly, the US will no longer be able to borrow on the favorable terms it has enjoyed so far.

“Even if resolved quickly, Americans will pay for this default for generations as global investors rightly believe that the federal government's finances have become politicized,” Zandi said in the report.

The debt ceiling conflict comes at a time when many forecasters are already predicting that the US economy will suffer as a result of the Federal Reserve's anti-inflationary rate hikes.

“The timing could not be worse for the economy,” Zandi said in the report.

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