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Bernstein: Shutdown’s Economic Threats and Costs of Default

In his latest post for the New York Times’ Economix, CBPP Senior Fellow Jared Bernstein discusses the government shutdown’s economic impact and warns of the costs of breaching the debt ceiling.  Bernstein lays out some of the shutdown’s damages, noting:

About 800,000 federal government workers have been furloughed without pay…. Their reduced spending will be felt in areas in which they’re concentrated. . . .

The shutdown is also coming at a bad time for the real estate market.  Based on the current tight credit environment, homebuyers seeking mortgage loans need an IRS document to verify their income.  The shutdown is throwing sand in that wheel, lengthening the loan process and slowing down a housing sector that’s has had a bit of momentum lately. . . .

The threat [to individuals and families] is already breaking bad, and it gets worse with time.  Children with cancer blocked from National Institutes of Health protocols (that’s happening), vets not getting pension or disability checks (two weeks out); poor moms and their infants losing nutritional benefits (one week out); Head Start slots that dodged the sequestration bullet hit by this one (happening already).  . . .

Bernstein also highlights the detrimental effects that would come from a default:

Interest rates would soar and not just on government debt but on all the securities out there which are tied to Treasuries.  Even with just the shutdown, we’re already seeing short-term lenders to the Treasury demand a risk premium: there’s been a mini-spike in the yields on one-month T-bills.

Our stock of national debt is $12 trillion.  That means a one-percent risk premium raises debt service by $120 billion. . . .

Click here for the full post.