What happens if Congress fails to raise the debt ceiling?

Congress is barreling toward a mid-October deadline to raise or suspend the debt ceiling, but Democrats and Republicans on Capitol Hill are locked in a fierce stalemate with no clear plan to avert what would be the first-ever default in the U.S.

There are no signs the partisan showdown is coming to an end: Senate Majority Leader Chuck Schumer is planning a vote as soon as Wednesday on a measure passed by the House to suspend the legal debt limit until December 2022, but Senate Minority Leader Mitch McConnell has pledged to block the effort – marking the third time Republicans will do such a thing. 

"Let me be clear about the task ahead of us: we must get a bill to the president’s desk dealing with the debt limit by the end of the week. Period," Schumer, D-N.Y., wrote Monday in a letter to his Democratic colleagues.

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With control of the White House as well as both chambers of Congress, Democrats are facing intensifying pressure to go at it alone and raise the ceiling using the procedural tool known as reconciliation, which allows them to bypass a filibuster by Senate Republicans. 

"Why should we help facilitate their reckless spending and tax increases?" Sen. John Cornyn, R-Texas, said this week. "If they’re going to do it, they need to do it by themselves."

The Treasury Department began implementing so-called extraordinary measures to keep the government running after the debt limit was reinstated in August to around $22 trillion – about $6 trillion less than the actual level. But the clock is running out for Congress to address the matter: Treasury Secretary Janet Yellen told Congress the limit must be raised by Oct. 18 or the U.S. government will run out of cash to pay its bills. 

"I do regard Oct. 18 as a deadline. It would be catastrophic to not pay the government’s bills, for us to be in a position where we lacked the resources to pay the government’s bills," Yellen said Tuesday during an interview on CNBC. "I fully expect it would cause a recession as well."

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The economic implications of a debt default would likely be severe, experts say: Interest rates would likely spike, and demand for Treasurys would drop; even the threat of default can cause borrowing costs to increase. Once the U.S. runs out of money, Treasury would be unable to meet about 40% of all payments due in the several weeks that follow, according to one analysis conducted by the Bipartisan Policy Center.

"New data demonstrate that Congress has only weeks to address the debt limit," Shai Akabas, director of economic policy at the Bipartisan Policy Center, said in a statement. "If they don’t, the U.S. government risks missing or delaying critical bills that will come due in mid-October that millions of Americans rely on, from military paychecks and retirement benefits to advanced child tax credit payments."

The U.S. has never defaulted on its debt before, although it came close in 2011 when House Republicans refused to pass a debt-ceiling increase, prompting rating agency Standard and Poor's to downgrade the U.S. debt rating one notch. 

One analysis by Moody's Analytics chief economist Mark Zandi shows that breaching the debt limit could plunge the U.S. into another recession: The default could eliminate as many as 6 million jobs, pushing the unemployment rate as high as 9%, and wipe out up to $15 trillion in household wealth. 

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"A bedrock of the U.S. economy and global financial system is that the U.S. government pays what it owes in a timely way," Zandi wrote in a research note. If the U.S. defaults, "The U.S. and global economies, which still have a long way to go to recover from the recession caused by the pandemic, will descend back into recession."