Defaulting on debt would have disastrous economic effects, White House cautions

According to an analysis by the White House Council of Economic Advisers (CEA), if the United States government is allowed to default on its sovereign debt, it would trigger a recession comparable to the Great Recession, and would leave the government unable to do anything about it. The report shows that a failure by the government to pay its bills would cause the US economy to quickly shift into reverse, with the depth of the losses a function of how long the breach lasted. The CEA warned that a protracted default would likely lead to severe damage to the economy, with job growth swinging from its current pace of robust gains to losses numbering in the millions. The report comes just days after Treasury Secretary Janet Yellen said the government could reach its statutory debt limit as soon as 1 June. In a letter to House and Senate leaders, Ms Yellen urged Congress to protect the full faith and credit of the United States by acting as soon as possible to raise the statutory debt limit. However, in recent years, Republicans have used the need to raise the debt limit periodically as a way to force Democratic presidents to adopt unpopular positions. The GOP-controlled House last week passed legislation that would raise the debt limit while at the same time cutting spending on various government programs, with prominent GOP figures frequently claiming that raising the statutory debt limit to enable the US to continue meeting financial obligations is akin to authorizing new spending. Mooy’s analysis found that even a short-term default on US debt would cause 2 million Americans to lose jobs and raise the unemployment rate to nearly 5 per cent.