Defaulting On The National Debt Ceiling Would Be Catastrophic For Small Businesses
Here we go again. It seems every time this issue arises, lawmakers seem intent to put the U.S. economy and small businesses at risk.
Unfortunately, the U.S. Department of Treasury Secretary Janet Yellen has said that the federal government will run out of money on October 18 if the debt ceiling is not raised. The government reached its debt limit at the end of July and Treasury has been taking steps to keep from defaulting. If the debt ceiling is not raised in the coming weeks, the U.S. will default on its debt for the first time in its history and that will be catastrophic for small businesses.
There is no question that our national debt needs to be addressed in the coming years with a mixture of revenue raises and spending cuts as the Clinton Administration did in the 1990s. However, defaulting on the debt is not the answer. It will not be some teachable moment on government spending. Instead, it will have unnecessary and irreversible consequences for almost all Americans. A Navigator survey also found that 58% of Americans support raising the debt ceiling. Unfortunately, this has become a political issue. Just a few days ago, Senate Minority Leader McConnell blocked Democrats from using a simple majority to get this done.
Why? Republicans may want to use this as a campaign issue against Democrats this coming fall trying to claim that they are growing the national debt. But, the real story is, the national debt has risen regardless of which party is in control. There will be a time when Republicans will be in the driver’s seat and need to raise the debt limit, and let’s hope Democrats move beyond politics because playing “chicken” with the debt limit is not good politics, not good for small business, not good for our national security, and not good for the economy. In fact, an analysis by Moody’s Analytics chief economist Mark Zandi estimates that defaulting on the national debt would wipe out as many as 6 million jobs and erase $15 trillion in household wealth.
“We can’t emphasize enough how disastrous it would be for Congress to consider a government shutdown if consensus cannot be met in advance of the funding deadline. Small businesses are especially vulnerable and many would not survive a government shutdown at this time due to the pandemic, particularly with the rapid spread of the Delta variant, and trying to move from crisis to recovery,” wrote Candace Waterman, President and CEO of Women Impacting Public Policy, in a letter to U.S. House and Senate leadership.
Here are five ways defaulting on the national debt would harm Main Streets across the country.
1. More Expensive Small Business Loans
A majority of credit rating agencies rate the U.S. federal government at AAA, the highest level. Defaulting on the debt would lead to an automatic downgrade of the country’s credit rating, driving up interest rates for all Americans. Small business loans will become costlier as private lenders are forced to increase their interest rates. Even Small Business Administration (SBA)-guaranteed loans, which are often lower cost and more accessible but still reflective of market conditions, will become more expensive.
2. Higher Credit Card Interest Rates
Many small business owners use their personal credit cards to cover business expenses and manage debt. As with loan rates, small business credit card and personal credit card interest rates will also rise, squeezing the amount of capital small business owners have to work with and potentially driving them into more debt.
3. Tightened Credit Markets
One can look at the stories of Argentina and Greece to see what happens to a country’s credit markets when it defaults on its debt. The same will be the case for the United States if it follows in these countries’ footsteps. Credit markets will tighten up and U.S. banks will prioritize lending to businesses where they have pre-existing relationships, which are more likely to be larger ones than small ones. Small businesses, especially unbanked ones and those in underserved communities, would be at a severe disadvantage when they have the least financial cushion.
4. Plunging Stock Markets
The Moody’s Report estimates that stock prices would likely plunge by one-third, sparking that $15 trillion loss in household wealth. This would be a one-two punch for small business owners who would see their own retirement savings dissipate and then lose business from consumers who are now dealing with their lost nest egg. In turn, larger public companies could lose value, thus making it harder to incorporate small businesses into their vendor supply chain.
5. Delayed Treasury Payments
The Treasury Department has been taking steps to meet its obligations, including payments to households such as Social Security. If the U.S. defaults on its debt, the government would immediately need to stop more than 40% of expected payments, including Social Security and other household income. There are a number of downstream effects this would have on small businesses, including a loss of customers and a strain on business owners and employees now taking steps to make ends meet for themselves and their loved ones.
The American economy and its Main Streets are working through their greatest crisis since World War II. Both are still standing right now but a default on the national debt would be a knockout blow. Let’s stop playing politics and get the debt limit raised. Once that’s done, we can return to the important work of getting an infrastructure bill passed that has the ability to pave the way for the next generation of American small businesses and entrepreneurs.