Debt ceiling threatens NC’s poorest and federal workers. How it could affect you.

In less than a week, the U.S. likely won’t have the money to pay its debts, and if Congress fails to act, the ramifications could be catastrophic.

Breaching the national debt ceiling could hurt North Carolina’s federal workers, its poorest residents and its financial institutions.

“If the US defaults on the debt and we can’t pay the bills, folks on Social Security and food assistance won’t receive payments, and veterans won’t be able to get the care they rely on,” said Rep. Kathy Manning, a Democrat from Greensboro, on Twitter. “It will shock financial markets, raise interest rates and result in recession.”

Experts expect the stock market would crash, interest rates would spike, the federal government would shut down and a recession would begin.

Breaching the debt ceiling means that the government can no longer pay its bills and will have to begin prioritizing payments. Moody’s Analytics Senior Regional Economist Adam Kamins said economists believe that the government would pay back debt holders, like those holding treasury bonds, first, over a Social Security beneficiary or a government contractor.

Most economists and political experts believe that Congress will find an 11th-hour compromise to avert disaster, but Moody’s Analytics now believes there is a 10% chance Congress breaches the debt ceiling at least for a short period of time. And worst case scenario: There’s a 5% chance that the debt ceiling is breached for a long period of time.

Moody’s Analytics estimates that a long-term breach would cause a peak unemployment rate of 8.6% in North Carolina, while a short-term breach would cause a peak unemployment rate of 5.6%

How did we get here?

In January, the United States hit its $31.4 trillion spending limit, set by Congress. Treasury Secretary Janet Yellen warned that if Congress did not raise the debt ceiling by around June 1, the country would not be able to make its debt payments, causing both national and global calamity.

To prevent this from happening, House Republicans passed a bill last month to increase the debt ceiling. But the bill was a nonstarter because it also slashed major policy wins President Joe Biden had worked toward since taking office.

The Senate, where Democrats hold a slight majority, went home last week for a Memorial Day recess, without taking up the House’s bill. That left House Speaker Kevin McCarthy and his team negotiating with White House officials on a bipartisan bill that could be passed through both chambers and to the president’s desk by June 1.

Republicans and Democrats differ on how they want to manage a possible breach of the debt ceiling, with Democrats wanting to only raise the spending limit, but Republicans wanting to pair an increase in the limit with spending cuts and other policy. The GOP calls for taking back unused COVID-19 funds, creating and changing work requirements to qualify for Medicaid and food stamps and reforming energy and mining permitting.

White House Press Secretary Karine Jean-Pierre said Thursday afternoon that defaulting on the national debt was not an option. But when reporters pressed for an answer on whether she could guarantee a deal is reached in time, Jean-Pierre said, “Congress has a job to do.”

Meanwhile, the U.S. House recessed Thursday afternoon to begin a weeklong Memorial Day break, with the understanding that its members are on call with 24 hours notice to return to Washington to vote on a debt ceiling bill if a compromise is reached. The Senate has been out all week but is set to return Tuesday. Biden plans to spend his weekend at Camp David and at his home in Delaware.

Jean-Pierre said she can’t speak for Congress, but Biden can negotiate from anywhere in the world.

“I want a damn deal to be done,” said Rep. Patrick McHenry, a Republican from North Carolina, who is serving as one of the top negotiators for House Republicans.

Without a deal: “It would be a terrible outcome,” McHenry said.

Federal employees

One of the first things expected in the event of a debt ceiling breach is a government shutdown.

More than 42,700 federal workers live in North Carolina and could lose their paychecks in this scenario. It could also impact the more than 78,000 people living in North Carolina who are entitled to a federal pension or other federal benefits.

North Carolina is home to a large military presence — several military bases and more than 630,000 veterans, Kamins said. Kamins said the good news is every time a budget battle comes up, military funding is fairly “sacrosanct.” But civilian contractors could be harmed in a shutdown, he said.

“They are getting paid by the federal government,” Kamins said. “Our federal government workers, they would very likely be affected and that could have an outside impact on North Carolina.”

Kamins added that North Carolina is also home to a lot of firms that contract with the federal government to provide goods or services.

“The federal government is a really important economic driver in North Carolina, so kind of off the bat, I think there’s a lot of concern about what would happen with with firms along those lines,” Kamins said.

Banking and Charlotte

Kamins said another concern is specific to the Charlotte region.

Charlotte is the second-largest banking center in the country, according to the Charlotte Regional Business Alliance.

“Big banks, like Bank of America, obviously have a very large presence in the state, likely would face some real turmoil,” Kamins said. “We don’t forecast individual company layoffs or things like that, but that also could be a potential ramification.”

Social safety net

Then there are the social-safety net benefits.

One of the first things experts anticipate being cut in a debt ceiling breach would be Social Security benefits. Those benefits help retirees, the disabled and those who have lost a parent or spouse. More than 2.2 million Social Security beneficiaries live in North Carolina.

“I think those those absolutely could be affected,” Kamins said. “So when we think about kind of the social safety net programs, payments to seniors and payments to poor Americans, it’s probably that second pocket that is more problematic for North Carolina. There’s an above-average poverty rate there.”

More than 2 million North Carolinians are enrolled in Medicare, and another 1.6 million are enrolled in Medicaid, two programs whose benefits and reimbursements could be lost in a breach.

Then there are those enrolled in the Supplemental Nutrition Assistance Program, known as SNAP, or food stamps. An average of 900,000 North Carolinians use SNAP benefits each month but may lose that service.

Kamins said he believes if social services programs are cut in a debt breach there would eventually be back pay, but he said that doesn’t relieve the concerns for those living “paycheck to paycheck or SNAP benefit to SNAP benefit.”

When will a breach occur?

It’s not yet clear when a breach of the debt ceiling would happen.

Yellen had predicted June 1 as the key date, and negotiators are using that date as their deadline to come up with a compromise. But Yellen said this week she was working to get a more exact estimate of when the U.S. would run out of money.

Moody’s Analytics puts the date closer to June 8 and the Congressional Budget Office estimates the date closer to mid-June.

“I think if there’s some signs of progress, that I think we could forestall a disaster,” Kamins said. “And I don’t think the fact that the House recessed will be the kind of thing that causes everything to collapse.”

He said if Congress moves closer to June 1 and it’s clear that negotiations have stalled or are at an impasse, then panic might set in.

McCarthy did promise lawmakers 72 hours to review any bill he brings forward before a vote. Then the bill has to make its way through the Senate and to the president for final approval.

If Yellen’s prediction is correct, all of that needs to happen in less than a week.