Why a government default could be worse than a government shutdown

Why a government default could be worse than a government shutdown

The talk of a government default if Congress doesn’t raise the $31.4 trillion debt ceiling evokes memories of prior shutdowns. Most government workers stayed home during shutdowns, while TSA agents and others worked. Offices piled up work, while untended national parks piled up litter.

A government shutdown is not a debt default.

America has experienced four shutdowns in 30 years. A default is more unclear and could have greater domestic and global consequences. Negotiators are seeking to prevent the first default.

Both’s known and unknown:

Government shutdown

Congress fails to pass financing legislation, causing a shutdown.

Congress must authorize or extend government financing before spending. The military guards essential work, but most federal workers are sent home and activities stop until Congress acts.

It hurts the economy and disrupts life, but it’s not disastrous.

The Committee for a Responsible Federal Budget reports four actual government shutdowns that lasted more than one business day. Park maintenance and benefit checks are limited, and non-essential federal employees are sent home.

“We know what a government shutdown looks like,” said s,Shai Akaba director of economic policy at the nonpartisan Bipartisan Policy Center. “Everyone knows when.”

The White House has many agency shutdown contingency plans. December was close.

Government default

If the government exceeds its lawful borrowing limit, it will default.

The timing and sequencing of a default are unknown.

Akabas said a default would vary from a shutdown. “We don’t know what the effects would be because it’s never happened in our country.”

He said there is “massive uncertainty” about the U.S.’s X-date, when it can no longer borrow money to pay obligations.

“There is no blueprint for how the government can manage a debt limit default,” said Manhattan Institute tax senior fellow Brian Riedl. Much of it would depend on how Treasury paid or delayed its obligations.

President Joe Biden, Treasury Secretary Janet Yellen, and many economists have warned of a “catastrophic” default.

This week, Yellen said it would kill employment and businesses and “likely go unpaid” millions of federal government recipients, including Social Security beneficiaries, veterans, and military families.

“A default could cause widespread suffering as Americans lose the income they need,” she said. Federal government disruptions would affect “air traffic control and law enforcement, border security and national defense, and food safety.”


In a default, Brookings Institution economist Wendy Edelberg said, “it is widely assumed that Treasury would figure out how to make principle and interest payments until they had money to pay all non-interest payments.”

In “debt payment prioritization,” debt holders like China would get payments while the U.S. gathered enough money to pay for several projects.

Akabas added that while Social Security recipients received automated payments and scheduled checks during a shutdown, they may not in a default.

Riedl said workers may or may not show up. Federal personnel are expected to work and get compensated.

“No specific blueprint. He claimed money determines their agency’s fate. “If we hit the debt limit, there will be many new court cases on who gets paid and how.”

Negotiations stand

Despite their debt limit deadlock, Democratic and Republican leaders say a default will not happen.

Biden said he was “confident” the U.S. could increase the debt ceiling before leaving Wednesday for a Group of Seven conference in Japan.

Republicans want deep expenditure cuts before raising the debt limit, and the president has recently been open to budget talks.

Biden and McCarthy appointed chief negotiators to discuss a settlement.