How a US debt default will damage the country’s economic power – and global standing

The economy would most likely sink into recession – or worse.

May 12, 2023 - 03:30

How a US debt default will damage the country’s economic power – and global standing

US Congressional leaders at loggerheads over a debt ceiling impasse sat down with President Joe Biden on May 9, as the clock ticks down to a potentially catastrophic default if nothing is done by the end of the month.

Republicans, who regained control of the House of Representatives in November 2022, are threatening not to allow an increase in the debt limit unless they get spending cuts and regulatory rollbacks in return, which they outlined in a bill passed in April 2023. In so doing, they risk pushing the US government into default.

It feels a lot like a case of déjà vu all over again.

Brinkmanship over the debt ceiling has become a regular ritual – it happened under the Clinton administration in 1995, then again with Barack Obama as president in 2011, and more recently in 2021.

As an economist, I know that defaulting on the national debt would have real-life consequences. Even the threat of pushing the US into default has an economic impact. In August 2021, the mere prospect of a potential default led to an unprecedented downgrade of the the nation’s credit rating, hurting America’s financial prestige as well as countless individuals, including retirees.

And that was caused by the mere specter of default. An actual default would be far more damaging.