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As politicians clash over the government’s borrowing limit, the looming debt default threatens the livelihood of troops and puts the stability of the defense industry and the Hampton Roads economy into question.
The U.S. government could run out of money unless politicians agree to raise or suspend the debt ceiling. Defaulting, which Treasury Secretary Janet Yellen has warned could happen as soon as June 1, would mean military and federal civilian employees would go unpaid.
Where would that leave Hampton Roads, where federal defense dollars account for approximately 40% of the region’s economy?
Robert McNab, professor of economics at Old Dominion University, said a prolonged default — one lasting more than two weeks — would be “a government shutdown to end all government shutdowns” and “would undoubtedly create chaos” across Hampton Roads, rippling out to Virginia and the nation.
“When I say devastating, catastrophic, unprecedented, the great unknown, an abyss of economic turmoil — it is because it is so frightening what could happen. It could be a generational shift downward in the standard of living in the United States,” McNab said.
Should a default occur, McNab said the federal government will likely try to immediately curtail discretionary expenditures to make up for underwhelming tax revenues.
“And of course, the Department of Defense is the largest discretionary program in the United States government,” McNab said.
Defense Secretary Lloyd Austin confirmed during a Senate Defense Appropriations panel last week that the troops’ paychecks are at risk should Congress fail to avoid a default.
“What it would mean realistically for us is that we won’t, in some cases, be able to pay our troops with any degree of predictability. And that predictability is really, really important for us,” Austin said.
According to the Bipartisan Policy Center, about $4 billion in military salaries is scheduled to be paid out June 15.
But, the effects of a prolonged default would be felt by more than just service members.
The continued curtailment of expenditures could mean a $1 billion to $2 billion economic loss for the region each week the federal government is in default.
“So if you have an economy that’s roughly $106 billion and you are cutting economic activity by 1 to 2% a week, you are plunging the area into an immediate, significant, deep and devastating recession,” McNab said.
Department of Defense civilians and contractors may find themselves under stop work orders. Combined with active duty and reserve military members, this means around 20% of those employed in Hampton Roads could all go unpaid. Another 15% of Hampton Roads employment would be indirectly impacted.
How the shipyards would be affected is uncertain, with Gen. Mark Milley telling the Senate Defense Appropriations panel the Columbia-class ballistic missile submarines acquisition program, which will see the next five submarines built at Newport News Shipbuilding, “would be at risk.”
“Things like that would be stretched out long-term,” Milley said. “So it would have, I think, a very significant negative impact on the readiness and then of course the future readiness.”
McNab said “some work” at shipyards on projects with multiyear appropriations may continue.
“But we’re assuming that the federal government will allow that work to continue and not say, ‘We need to invoke force majeure’ and start terminating contracts left or right,” McNab said.
Force majeure is a clause included in some contracts that absolves the involved parties of liabilities should an uncontrollable event make it difficult or impossible to fulfill the terms of a contract.
Several defense analysts declined to comment further on how the defense industry might feel the effects of a default.
“I’d like to be helpful, but I think if anyone in this country tells you they have a clue what happens, they are being dishonest,” said Bryan McGrath, of Ferry Bridge Group.
Just the prospect of a federal default is pushing market yields and interest rates higher as the treasury’s cash dwindles.
“When people say, ‘They are just arguing in D.C. It doesn’t affect me,’ what people in Hampton Roads need to understand is this bleeds through all types of credit,” McNab said.
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On May 1, the market yield on one-month treasuries was 4.49%. By May 12, it increased to 5.79%.
“It is just a 1.3% increase, but that is 1.3% on millions, if not billions, of dollars in short-term debt,” McNab said.
But, McNab said 30-year market trends indicate this is a short-term political issue.
“Market yields, so far, are saying this would be terrible and catastrophic — ‘Don’t do this.’ But, the market yields are also basically betting that the government is not stupid enough to allow a default to happen,” McNab said.
The divided Congress has never defaulted on federal debt before, although it has come close to an impasse in previous years.
“There’s always been the expectation that at some point, Congress will get its act together and pass an appropriations bill, and then, everybody gets paid essentially in arrears,” McNab said. “The problem with a debt default is it is uncharted territory, and we don’t know if the federal government would have the same capacity to borrow after a default that it has today.”
Caitlyn Burchett, caitlyn.burchett@virginiamedia.com