How would a debt default impact Americans?

Marketplace Staff Jul 7, 2011

How would a debt default impact Americans?

Marketplace Staff Jul 7, 2011

STEVE CHIOTAKIS: The White House and Republican leaders are again at this hour trying to find some sort of common ground on addressing the nation’s debt limit. Republican House Majority Leader Eric Cantor said this morning tax reform is on the table when it comes to negotiations. Closing business loopholes, reforming the tax code, among other scenarios. But he cautions there needs to be cuts made to make up for any perceived tax increase.

ERIC CANTOR: Why would you want to raise taxes in a sputtering economy? And that’s the position that we’ve held all along. So any discussion about loopholes must be accompanied by offsetting tax cuts.

The Treasury Department says the U.S. will default if a deal isn’t signed and ready to go by August 2. So what would a default mean for the government? And, specifically, you and me?

Mike Dorning covers the White House for Bloomberg. And he’s with us from Washington. Good morning Mike.

MIKE DORNING: Good morning.

CHIOTAKIS: If we can’t raise the debt ceiling, what happens if the nation defaults?

DORNING: First off, there is some income that the government would get, and the tax revenue would cover about 56 percent of expenses. So at the end of the day, basically the Treasury Secretary can pick and choose who gets paid.

CHIOTAKIS: And what kind of choices are we talking about?

DORNING: Forty-four percent of the government expenses would have to be delayed, so it would be up to Barack Obama and Time Geithner. Do you pay the Chinese bond holders? Do you pay the soldiers? Do you pay farmers? Do you pay elderly people Social Security checks?

CHIOTAKIS: What happens down the road to the economy and specifically to Americans if we end up defaulting? I mean obviously some Social Security checks aren’t going to go out, but what else could happen?

DORNING: Some people on Wall Street have looked at this and the thought is a default would immediately, even if it was paid back quickly, raise interest rates on treasury bonds and then cut into the economic growth. I mean, if it’s just a short, technical default it might not tip you back into recession, but it would lower growth.

CHIOTAKIS: That’s going to make a lot of people unhappy though right?

DORNING: No matter what you do, and this is something that everyone has told me no matter what you do, you’re going to make people really unhappy and it’s going to seem unfair because you’re choosing among people who all have equal claims, who all have legal obligations that the U.S. is supposed to satisfy.

CHIOTAKIS: Mike Dorning, White House correspondent at Bloomberg. Mike thanks.

DORNING: Thank you.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.