What Does Breaching The Debt Limit Mean For You?

If Congress fails to extend the Treasury Department's borrowing authority, consumer confidence could take quite a hit, says one expert.
Government Flickr Photo

Government Flickr Photo

I caught up a few days ago with Boston College Economics Professor Robert Murphy, a former member of the White House Council of Economic Advisors.

I wanted to get Murphy’s thoughts on what would happen to ordinary Americans should Congress fail to extend the Treasury Department’s borrowing authority beyond Thursday, which is the date on which Treasury Secretary Jack Lew says his agency will be forced to begin using its cash on hand — essentially spare change — to pay some big bills.

First off, although there has been some debate about whether Lew would be unable to cut benefit checks to Social Security recipients and Veterans, Murphy said that the Secretary is basically telling the truth.

He told me to picture the situation like an individual who has set up an auto-pay system for all of his or her bills. In the case of one person with a handful of bills — a mortgage payment, some utility bills, a couple of credit cards — it’s rather simple to cancel payment if something happens to that person’s finances. You go online, click “stop auto-payment,” and that’s pretty much it.

Murphy said, however, that in the case of the federal government, it’s not that simple.

“I think what [Lew] is saying is, ‘we don’t have the ability to turn on a dime and say, ‘okay we’re not gonna pay this or that.’”

No one should really be surprised by that. After all, when has the federal government ever done anything quickly and efficiently?

Back to the original question at hand. I reminded Murphy that many times, average Americans who insulate themselves from day to day politics in D.C. don’t really notice when something officials define as “catastrophic” occurs. A prime example of this is sequestration. Sure, some out there have felt the impacts of the across-the-board spending cuts that took effect back in March, but the economy seems to be sailing along.

Murphy replied with two words; Consumer confidence.

“People will say, ‘gee, if they can’t figure it out then I should pull back and be cautious about the future because I don’t know what’s happening,” he said.

To that end, Murphy makes a good point. Look at what happened to consumer confidence levels back in the summer of 2011, the last time Congress threatened to miss its deadline to extend the debt ceiling.

Though consumer spending is traditionally a large driver of this country’s economic output, there are disagreements over whether it leads to higher unemployment. But with unemployment already relatively high, and the holiday shopping season right around the corner, the last thing businesses here or abroad want to see is fewer Americans buying things.

So to recap, Murphy believes that the inability by lawmakers to agree on a way to extend the debt ceiling will likely cause two things to happen. First, even if Treasury can prioritize its payments, markets and institutions will still perceive the U.S. to be in default since the country will be ignoring certain debts to pay for others. Secondly, regular Americans will experience a drop in confidence, forcing them to scale back on spending and investing.

Got it?

Geoff Holtzman
Geoff Holtzman is Talk Radio News Service's Deputy Bureau Chief. As one of TRNS's primary correspondents, he helps cover the White House and Capitol Hill. Geoff also covered the 2012 presidential campaign, following the candidates to Iowa, New Hampshire, South Carolina, North Carolina, Florida and elsewhere. In the process, he learned that not all Motel 6's are created equal. Follow Geoff on Twitter @Geoff_Holtzman.

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