Potential Outcomes of a US Debt Default

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July 22, 2011

In a recent column in the USA Today, Thomas J. Donohue of the U.S. Chamber of Commerce and Robert S. Nichols of the Financial Services Forum outlined four ways that a debt default would hurt America.  While the authors concede that “the precise implications of a default are difficult to know in advance,” they predict that a default would halt government operations, increase interest rates, weaken the dollar, and slow economic growth.

Citing analysis by the Bipartisan Policy Center, Donohue and Nichols report that failing to increase the debt ceiling “would require the United States to immediately cease honoring 44% of its obligations during the month of August.”  They argue that the government would be forced to choose which programs to fund and would have little money left over for essential government operations.

Donohue and Nichols also address the impact a default would have on the debt and deficit.  From the article:

It’s been estimated that a one-notch downgrade in the nation’s credit rating (the smallest reduction) would raise yields demanded by investors by a full percentage point. Higher borrowing costs mean wider deficits and higher debt levels. Even a one-half percentage point increase in rates would increase our annual deficit by $10 billion in the short run, and by $75 billion per year as outstanding debts roll over.

In addition to negative effects on government operations and the national debt, Donohue and Nichols believe a default would also weaken the dollar and dampen economic growth.  They note that a default could potentially downgrade the United States credit rating, which “would accelerate calls for a new non-dollar global reserve currency — to the detriment of every American business, saver, investor and consumer.”  The authors contend that this would lead to slower economic growth causing thousands of Americans to lose their jobs.

Teachers could use this article to help students understand the potential risks involved in defaulting on the national debt.  Students should be encouraged to investigate these claims and determine the extent to which these concerns are evident in the debate on Capitol Hill.  Do the debates about tax increases and spending cuts include a discussion about what might happen if an agreement is not reached?  If so, how are those discussions approached by lawmakers and received by their constituents?  If not, why are those discussions avoided?

As with every article that students discuss, the issue of perspective and bias should also be addressed.  Thomas J. Donohue is the President and CEO of the US Chamber of Commerce, an organization that identifies itself as “the voice of business” whose “core purpose is to fight for free enterprise before Congress, the White House, regulatory agencies, the courts, the court of public opinion, and governments around the world.”  Robert S. Nichols is the President and CEO of the Financial Services Form, a “non-partisan financial and economic policy organization” whose purpose “is to pursue policies that encourage savings and investment, promote an open and competitive global marketplace, and ensure the opportunity of people everywhere to participate fully and productively in the 21st-century global economy.”  How do the missions and purposes of these organizations influence their views about the national debt and the debt ceiling?  Does their experience and expertise in business make their opinions more valuable in fiscal discussions, or does it indicate a potential bias about these issues?  Teachers should encourage students to consider these questions as they develop their own opinions about these important fiscal issues.

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