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A look at some of the consequences if the U.S. defaults on its debt


The debt ceiling debate can feel a little bit like Groundhog Day - same drama, different year. Of course, it is possible this time is different. Congress may actually fail to reach a deal in time. So what exactly happens to the economy and to the lives of everyday Americans if the U.S. defaults on its debt? NPR's Stacey Vanek Smith takes a look.

STACEY VANEK SMITH, BYLINE: Sometimes it feels a little like the U.S. is the country that cried debt ceiling. But this year there seems to be real worry the country might slam into that spending limit and actually run out of money, not be able to pay the bills - the dreaded default. And that sounds bad, but is it really so bad? What exactly happens if the U.S. defaults, anyway? I put this question to Darrell Duffie, professor of finance at Stanford's Business School.

DARRELL DUFFIE: So it would be a disaster, and the reputation of the government for meeting its debt obligations would be in tatters.

VANEK SMITH: And Duffie says that reputation is worth money - a lot of money, actually. The U.S.' reputation for always paying its debts has allowed it to borrow trillions of dollars at very low rates - $31 trillion to be exact. If we default, the interest rate on that debt would go up because the U.S. would be seen as a risky borrower, just like your credit card interest rate would go up if you started missing payments. A higher interest rate would mean that huge U.S. debt would immediately start getting hugely huger really fast. But some debt ceiling diehards say, OK, so we default. Our debt gets bigger. Our reputation gets a black eye. Maybe that would be the kick in the duff Congress needs to actually get spending under control, negotiate like adults.

JUSTIN WOLFERS: And that's a totally reasonable view.

VANEK SMITH: Justin Wolfers teaches economics and public policy at the University of Michigan.

WOLFERS: Just like your family has to live within a budget, you might say you want Congress to live within a budget, but defaulting on the debt does not reduce our spending. It just means we stiff our creditors. So we default. That will teach them. That confuses who gets hurt.

VANEK SMITH: Wolfers says if the U.S. defaults and there's no more money to spend, the government suddenly wouldn't have cash to run basic operations like roads and schools. Right away, government workers might stop getting paid. Businesses that have contracts with the government might not get paid, and that could mean a lot of layoffs. Social Security checks could stop going out. Also, Wolfers says it would shock financial markets, might even cause a panic. After all, banks have loaned the U.S. government billions of dollars. They hold a lot of the debt that suddenly no one is sure will be paid. People could start to worry whether banks are on solid ground.

WOLFERS: And that's when the financial system freezes up. That means there's no more borrowing. Businesses stop investing. The markets go absolutely haywire. And so that's the sense in which all of this could very quickly look, in many respects, like the financial crisis of 2008. Well, the only thing that's different is that the self-inflicted shock.

VANEK SMITH: In short, the U.S. economic engine could start to seize up, putting different parts of our economy at risk all at once, says Stanford's Darrell Duffie.

DUFFIE: Operations would start to break down. A recession could follow. It's the most critical part of U.S. national economic security that the government can fund itself.

VANEK SMITH: Now, Duffie points out countries default on their debt all the time, and they do keep going. But the U.S. is not just any country. It's the biggest, wealthiest economy on the planet. Countries all over the world own billions of dollars worth of U.S. debt. An economic shock in the U.S. would spread all over the world. In recent decades, some larger economies have defaulted, including Greece, Iceland, Argentina. They did all bounce back to some extent. But economist Justin Wolfers says in each of those cases, it was a long, painful journey.

WOLFERS: Each of those countries went through recessions that are arguably close to depressions. So I'd say, let's not join that group. That's my insightful economic advice.

VANEK SMITH: And it's estimated Congress might have less than a week to follow that advice. Stacey Vanek Smith, NPR News. Transcript provided by NPR, Copyright NPR.

Stacey Vanek Smith is the co-host of NPR's The Indicator from Planet Money. She's also a correspondent for Planet Money, where she covers business and economics. In this role, Smith has followed economic stories down the muddy back roads of Oklahoma to buy 100 barrels of oil; she's traveled to Pune, India, to track down the man who pitched the country's dramatic currency devaluation to the prime minister; and she's spoken with a North Korean woman who made a small fortune smuggling artificial sweetener in from China.