The economic consequences of hitting the debt ceiling may be bigger than you realize. If the government can't pay all of its bills and the agencies downgrade America's credit rating, one likely effect is higher interest rates. That would obviously slow down the economy, by, among other things, making it more expensive for business to take out loans.
But hitting the debt ceiling could have an even more direct impact on growth, as Michael Ettlinger and Michael Linden point out in a newly updated briefing for the Center on American Progress. Remember, if the government can no longer borrow money in order to finance its operations, the Treasury Department will have to stop paying some of the government's bills. As Ettlinger and Linden explained a few weeks ago, when they first produced this analysis:
Freezing the debt would result in an immediate withdrawal of billions of dollars of economic activity from the economy that would rapidly affect businesses nationwide. The loss could be greater than that suffered in the worst quarter of the Great Recession. Members of Congress, including very influential and high-ranking conservatives, are threatening not to raise the debt ceiling, and the recent softness in the recovery may stem from employers and investors being reluctant to hire and invest in the face of this uncertainty.
The chart above reflects the latest economic data, including Friday's discouraging report on economic growth. It's yet one more reminder that the debate over how to raise the debt ceiling isn't abstract concepts. It's about jobs and the overall state of the economy.
Of course, if we really cared about those things, we would be a much different political debate right now.
