The debt ceiling has been making headlines lately, with Republicans and Democrats in Congress locked in a stalemate over fervent negotiations to raise the debt limit.
The debt limit refers to the amount of money the government is allowed to borrow to pay its debts. If the ceiling is not raised or suspended by June 1, Treasury Secretary Janet Yellen said, the U.S. would default on its debts for the first time in history.
A Wednesday note from the White House Council of Economic Advisors explores a few different scenarios if this were to happen.
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If the U.S. breaches the debt ceiling for even a brief period of time, the economic impact could be swift and significant. The CEA note anticipates that a short default could lead to around 2 million jobs lost and an increase in the unemployment rate to around 5% (up from its current level of 3.5%).
“Defaulting on our government’s debt could reverse the historic economic gains that have been achieved since the president took office: an unemployment rate near a 50-year low, the creation of 12.6 million jobs, and robust consumer spending that has consistently powered a solid, reliable growth engine,” the note says.
But if a potential default lasts for an extended period, the results could be much worse.
According to a simulation run by the CEA, if a default lasts through the third quarter of 2023, the stock market could tank 45%, damaging retirement accounts and shaking consumer and business confidence. Unlike with the Great Recession and the Covid-19 recession, the government would be extremely limited in what it could do to buffer the impact.
Job loss in this scenario amounts to around 8 million.
“Virtually every analysis we have seen finds that default leads to deep, immediate recessionary conditions,” the note reads. “Economists may not agree on much, but when it comes to the magnitude of risks invoked by closely approaching or breaching the debt ceiling, we share this deeply troubling consensus.”
