AUGUSTA, Maine — Defaulting on the federal debt for an extended period could lead to the loss of 21,000 jobs in Maine under a doomsday scenario envisioned by the state economist.
It highlights the major stakes in negotiations between President Joe Biden and House Speaker Kevin McCarthy, R-California, who are trying to ink a bipartisan spending deal before the federal government defaults on its debt for the first time in history.
This would make for a national economic calamity reverberating in Maine, threatening federal payments and leading to job losses whether the crisis lasts days or weeks. Negotiators are working to ensure the worst does not happen, but here’s what you need to know if it does.
What would default do to the national economy?
The national debt limit of $31.4 trillion was hit in January, and the Federal Reserve has been undertaking a series of procedural moves to delay the effect until early June.
Going past the deadline would almost immediately trigger the risk of a deep recession, according to the Brookings Institution. After the debt ceiling is exceeded, the government would not have enough money to fulfill its obligations at some point, although that time is hard to pin down. It could happen within a few weeks or take until the fall.
Under a 2011 plan during a similar impasse, the Treasury would continue paying interest on securities and auction new ones for a corresponding amount. Payments for everything else, such as Social Security and Medicare, would be delayed as long as there is not enough cash to meet obligations. Federal workers would continue to work but go unpaid.
The economic hit would be major. In 2021, Moody’s Analytics wrote that a default would be “a catastrophic blow” to the recovery from the COVID-19 pandemic and would corrode the economy for years to come because global investors would no longer trust U.S. finances. They would charge higher interest rates, prolonging the damage after a recession.
How would it reverberate in Maine?
Working off past national projections from Moody’s and others, State Economist Amanda Rector came up with a range of economic scenarios for Maine, and even the short-term ones are bad.
If the government is without enough cash to fully operate for roughly a week, Maine would lose about 6,000 jobs by the end of 2023, Rector predicts. By the end of 2025, cascading effects would lead to a 1 percent drop in total personal income relative to the status quo.
But if such a standoff lasted for several weeks, Maine would lose roughly 21,000 jobs through the end of 2023, and personal income would drop 5 percent by 2025’s end.
Maine would be able to step in and cover federal funding gaps, in part due to a record $896 million in the state’s reserve fund fueled by pandemic aid from the federal government. But that option would only exist for about two months, said Sharon Huntley, a spokesperson for Maine’s budget department, and the state would also require a promise that the feds would pay it back.
Pauses on Social Security and Medicare would also have an outsized effect in Maine, given that it is the nation’s oldest state by median age. In 2021, nearly 26 percent of Mainers were on Medicare, according to the Kaiser Family Foundation.
Is default likely at this point?
Default has never happened for all of the aforementioned reasons. Negotiators for Biden, a Democrat, and House Republicans plan to keep working on a deal through the weekend. McCarthy acknowledged Friday that talks had hit a “crunch” time.
Contours of a spending deal have been taking shape to cut spending for 2024 and impose a 1 percent cap on spending growth for 2025, but the two sides remain stuck on various provisions. The debt ceiling would be lifted for two years to pay the nation’s incurred bills.
The sides are dug in over Republican demands to impose stiffer work requirements on people who receive government food stamps, cash assistance and health care aid. House Democrats have called such requirements for health care and food aid a nonstarter.
Asked if Republicans would relent on work requirements Rep. Garret Graves of Louisiana, a top party negotiator, fumed: “Hell no, not a chance.”
But a spokesperson for Rep. Chellie Pingree, a Democrat from Maine’s 1st District, said lawmakers were expected to vote after the holiday and with 24 hours notice on any deal. So Tuesday would be the earliest that a vote could take place. Nobody wants a default.
The Associated Press contributed to this report.
