The White House has warned that a continuing violation of the debt ceiling may lead to "significant disruptions" in the financial markets and "severe damage" to the economy, including the loss of more than 8 million jobs.
The White House Council of Economic Advisers underlined in a study released on May 3 that a historic U.S. default on its debt obligations—dubbed the "X-date"—is rapidly approaching, and such a move would cause the economy to "quickly shift into reverse."
The warning comes just days after Treasury Secretary Janet Yellen suggested the US might default on its financial commitments as early as June 1 if Congress does not act to raise the country's $31.4 trillion debt cap.
White House analysts warned of three possible outcomes if debt-limit discussions between Republicans and Democrats are extended further: brinksmanship, a quick default, and a lengthy default.
According to the Biden administration, in the first scenario, in which the limit is reached but a default is averted, 200,000 jobs may be lost, the yearly GDP would be reduced by 0.3 percentage points, and the unemployment rate would rise by 0.1 percentage point.
In a short default, in which Congress acts quickly to allow the country to borrow again after defaulting, roughly 500,000 jobs would be lost, the annual GDP would be reduced by 0.6 percentage points, and the unemployment rate would rise by 0.3 percentage points.
A protracted default, the most dangerous scenario in which the US fails to raise borrowing levels for more than three months, would result in the loss of approximately 8.3 million jobs, an increase in unemployment of 5 percentage points as consumers cut consumption and businesses lay off workers, and a 6.1 percentage point drop in GDP.
According to analysts, the effect would be a "immediate, sharp recession" comparable to the Great Recession, with the stock market falling by an estimated 45 percent.
“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,” economists wrote. “Unlike the Great Recession and the COVID recession, the government is unable to help consumers and businesses. As the breach continues, the economy heals slowly, and unemployment is still 3 percentage points higher at the end of 2023.”
“While policymakers have thus far, in the long history of our Nation, avoided inflicting such damage on the American and even global economies, virtually every analysis we have seen finds that default leads to deep, immediate recessionary conditions,” economists wrote. “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.”
The White House forecasts are similar to those of a recent Moody's Analytics analysis (pdf), which employed a different macroeconomic model but reached a similar conclusion, stating that the resulting economic slowdown would be "comparable to that suffered during the global financial crisis."
Biden and Republicans have been at odds over the debt ceiling and government spending, with the administration unwilling to decrease expenditure unless the debt ceiling is increased.
Last week, Republican legislators barely passed a package permitting a $1.5 trillion debt-ceiling raise in return for curbing government spending in an effort to avert a potential default.
