And a default on the federal debt, which may occur within 30 days without congressional action, would be much worse, economists say. Failing to raise the debt ceiling would require the government, a major driver of growth, to cut spending by about a third, potentially forcing delays in Social Security checks, military pay and payments to doctors.
There are other risks, too. On Oct. 17, the Treasury is scheduled to ask investors for $120 billion in loans. But if investors grow nervous about whether the United States will be able to pay them back, they are likely to demand higher interest rates, which would cause rates to spike throughout the financial system, leading to more expensive mortgages, auto loans and credit card bills.
Doubt could grow about the safety of parking money in U.S. bonds, the linchpin of the global financial system.
“It’s corrosive on the economy,” said Mark Zandi, chief economist of Moody’s Analytics. A lengthy shutdown followed by a default would be “the nightmare of the recession all over again.”
Even if lawmakers find a way out of a shutdown or a default, this fall’s brinkmanship — the fourth such crisis in two years — is likely to have negative effects on the economy. With so much uncertainty in Washington, economists say that businesses, flush with cash, have been reluctant to invest and hire.
“The simple story is it creates a tremendous amount of uncertainty,” said Ethan Harris, a top economist with Bank of America. “One of the unfortunate side effects of the brinksmanship is a message to business leaders to delay long-term commitments and wait to see whether something really bad happens.”
There are already signs of intensifying anxiety in the financial markets, which had largely brushed off the fiscal clash previously.
The stock market, as measured by the Standard & Poor’s 500-stock index, was down four of five days last week, and the dollar also fell. More relevant, the cost of a type of insurance that investors use to protect themselves against default in U.S. government bonds has rocketed higher in recent days, suggesting the chances of default are increasing.
Business interest groups, usually aligned with the Republicans, have urged the GOP to abandon their demand for policy concessions, such as delaying President Obama’s signature health-care law, in exchange for funding the government and raising the debt limit.