USA Today

By Thomas J. Donohue and Robert S. Nichols

A vigorous debate is underway in our nation's capital and at kitchen tables across America regarding the so-called "debt ceiling" and what would or might happen if Congress doesn't raise the ceiling and the Treasury stopped paying the nation's bills. Some have argued that not raising the debt ceiling would have few serious consequences and, in fact, is the sensible and responsible thing to do.

While the precise implications of default are difficult to know in advance, there are at least four compelling consequences that make clear that becoming a dead-beat nation would not be good for America:

Government operations halted: Failing to increase the debt limit would require the United States to immediately cease honoring 44% of its obligations during the month of August, according to an analysis by the Bipartisan Policy Center. The U.S. Treasury is expected to take in about $170 billion in tax revenue in August, but needs to pay $300 billion in expenses. The resulting $130 billion deficit would require the government to pick which programs — Medicare, Medicaid, food stamps, unemployment insurance — to pay for and which not to fund. And there would be little money left to pay our troops or to run the courts, the prison system, the FBI, or other essential operations.

Our debt and deficit would get worse: The "full faith and credit" of the U.S. government is regarded as iron-clad and virtually risk-free. As a result, the U.S. government enjoys the lowest borrowing costs in the world. 

If, as a consequence of failing to raise the debt ceiling, a default were to occur, interest rates would rise as global investors demanded a risk premium to continue buying Treasuries.

It's been estimated that a one-notch downgrade in the nation's credit rating (the smallest reduction) would raise yields demanded by investors by a full percentage point. Higher borrowing costs mean wider deficits and higher debt levels. Even a one-half percentage point increase in rates would increase our annual deficit by $10 billion in the short run, and by $75 billion per year as outstanding debts roll over.

Implications for the U.S. dollar: Related to the central role of U.S. government debt in global credit markets, the U.S. dollar has been the world's reserve currency since WWII. Nearly 75% of global trade is denominated in dollars, virtually all trade in oil is dollar-denominated, and two-thirds of the foreign currency reserves held by central banks around the world are dollars. In other words, the global economy operates on our terms. The dollar's role as the world's reserve currency facilitates capital formation, trade, cross-border investment, and economic growth, yielding enormous benefit to U.S. savers, investors, businesses and consumers.

In recent years, however, the dollar's status as the reserve currency has been increasingly questioned. Other nations have openly called for an alternative to the dollar. A default and subsequent downgrade of U.S. government debt would likely cause a significant depreciation in the dollar and would accelerate calls for a new non-dollar global reserve currency — to the detriment of every American business, saver, investor and consumer. 

Implications for U.S. economic growth and job creation: Higher borrowing costs and a falling dollar mean slower economic growth and job creation. According to an analysis by the Federal Reserve, a one-percentage point rise in Treasury yields would reduce economic growth by 0.8 percentage points. That number sounds small, but it is not. Economists tell us it would translate into hundreds of thousands of lost jobs every year. After last Friday's bleak unemployment report the last thing in the world we should do is needlessly trigger the loss of even more American jobs.

To be sure, America must learn to live within its means. Restoring balance to our national finances by cutting excessive government spending and reforming entitlements is essential, but we must not fail to meet our existing obligations. Doing so would not only be painful but self-defeating — dramatically worsening our already challenging debt situation and robbing Americans of the jobs they deserve.

Thomas J. Donohue is president and CEO of the U.S. Chamber of Commerce. Robert S. Nichols is president and CEO of the Financial Services Forum.