Think of the debt ceiling as the limit on the nation’s credit card. For decades, Republicans and Democrats agreed that failing to raise the debt ceiling would be catastrophic. So they routinely increased it periodically to meet the spending obligations they had already approved and to meet the needs of our changing economy and society.
What would happen if Congress failed to raise the debt ceiling, either tomorrow or the next time the issue comes up? Some have recently said that fears about such an event are overblown. We disagree: a grave economic downturn seems sure to follow Congress’ failure to raise the debt ceiling, a downturn that would grant no special leniency to those with recent college degrees.
True, failing to raise the debt ceiling might not lead immediately to a formal default. The Treasury might be able to prioritize payments on its bonds, thereby avoiding the unprecedented breakdown of U.S. credit worthiness and depression of markets that would come from putting the world’s safest asset – the U.S. Treasury Bill (T-bill) – into unqualified default. However, while protecting T-bills, the government would resort to savage spending cuts and go into arrears on many payments, from contractor bills to medical bills. Social Security checks might be delayed. The government bonds would be downgraded and interest rates would rise, rattling investors and consumers alike. It would not be long until we sunk into a new recession.
A quick look at recent history indicates that students would feel the impact of such a recession. According to the Bureau of Labor Statistics (BLS), when the economy tanked in late 2008, the surge in the unemployment of “young college graduates” equaled the rise in joblessness in the overall labor force: from around six percent in summer 2008 to 9.5 percent in the summer 2010. In particular, the unemployment of college graduates aged 21-24 without an advanced degree and not enrolled in further schooling jumped from 6.2 percent in summer 2008 to 10.4 percent in summer 2010. Young college graduates suffered even higher rates of underemployment: part-time workers who wanted full-time work were 9.9 percent of the labor force in 2007, 18.7 percent in 2009 and 19.8 percent in 2010. The 2008-2009 jump in combined underemployment and unemployment approached 30 percent.
College education does not safeguard its recipients against recession.
Then in 2009-2010, in the first two years of the Obama presidency, things changed dramatically from job loss to job growth (see table). Deceleration of job losses became dramatic by May 2009, three months after Obama’s February signing of the American Recovery and Reinvestment Act. Job gains became the norm in March 2010 and proceeded at a pace of, on average, a little over 100,000 per month since then, with the unemployment rate down to 7.3 percent in August 2013 (the last month of reporting from the BLS before the Oct. 1 government shutdown).
With a freezing of the debt ceiling and recession or worse, the economy will be thrown back into a period of large job losses resembling those of 2008-2009. These 2013-2014 losses, emerging from an economy already suffering from over seven percent unemployment, would raise unemployment and underemployment rates beyond any of those of the recent recession. Mark Zandi, chief economist at Moody’s Analytics (and member of John McCain’s economics team for his 2008 presidential run), recently warned the congressional Joint Economic Committee that we have few policy options in the face of a new recession caused by a failure to raise the debt ceiling: “There’s no monetary policy response in the current context. We’re already at zero interest rates.”
Moreover, those who threaten to freeze the debt ceiling will block stimulative spending. Without a quick raise in the debt ceiling, current job prospects for young Americans are dismal. A college degree will provide scant immunity. Finding a good job, much less any job, will become at least as hard as it was in 2009. Indeed, research by Ohio University economist Richard Vedder, based on 2010 data, found that “barely half of college graduates are in occupations requiring bachelor’s degrees or more.”
Alex Hicks is a professor of sociology and Richard Doner is a professor of political science at Emory.