Economist: Iowans to see personal impact if U.S. defaults on debt

State officials anticipate little immediate effect on Iowa treasury

By: - May 26, 2023 10:47 am

Iowans are likely to feel the effects of a federal debt default in the form of higher interest rates and a stock market drop. (Photo by Getty Images)

With a potential federal debt default less than a week away, Iowans will feel the pain if the U.S. reaches the point of failing to pay its bills, University of Iowa Economics Professor Anne Villamil said.

Congress has left Washington, D.C., for a weeklong holiday break with no deal on addressing the debt limit. Treasury Secretary Janet Yellen has reported that the U.S. government is “highly likely” to run short of funds to pay its bills after June 1 if Congress does not act on increasing or suspending the debt limit.

Anne Villamil is an economics professor at the University of Iowa. (Photo courtesy of University of Iowa)

Villamil points to the 2011 debt ceiling crisis as an example of what is at stake in the U.S. House.

“In 2011, it was costly,” Villamil said. “It led to higher interest rates and the U.S. credit rating being lowered, which, if it happens right now, it will impact the ability for the United States to be a credible economic power … The U.S. dollar underpins the world financial system. U.S. treasuries are considered to be default free. And if we continue to flirt with default, we will not be viewed as a good steward of the world financial system.”

She said higher interest rates in times of default directly affect Iowans and U.S. citizens across the country. The stock market dropped in 2011 as a result of the U.S. debt crisis, something that Villamil is concerned about this time as well.

“The drop was five and a half percent,” she said. “Hopefully such a drop would be brief and it would come back, but it’s just not useful for the economy. There is a concern about policy uncertainty and the inability to implement policies (to prevent default) going forward.”

While Iowans may feel a financial pinch from default, the state of Iowa is not expecting an immediate effect, Iowa State Treasurer’s Office Chief of Staff Russ Trimble says.

“We don’t have a lot of exposure to treasury bills and treasury bonds and we also don’t really have a liquidity issue,” he said. “We don’t really anticipate that there is going to be much of an impact on the state of Iowa, but we certainly are watching the debate and hoping that they come to a resolution so that there isn’t an issue.”

He said the state’s finances are in a strong financial position and a potential debt default would not immediately affect them in a negative way. 

While Villamil, Trimble and many others hope to see some sort of resolution to the current debt ceiling debate, Villamil is concerned about the longer-term economic policy issues that may be created by the current conversation and lack of bipartisanship. 

Villamil said the debt ceiling is not something everyday people should be afraid of. She said Iowans should be encouraging their elected representatives to come up with a plan that is passable in both houses of Congress in an environment of a divided government. 

“This is a serious issue and we are really depending on our politicians to either raise the ceiling or come up with a fundamental solution so we aren’t back in this position in the future,” she said. “We have solved this problem before, but it takes cooperation and it is not the kind of thing you want to leave to the 11th hour. It is deeply concerning that people have walked away from the negotiating table when this will impact everyone.”

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Eleanor Hildebrandt
Eleanor Hildebrandt

Eleanor Hildebrandt is a senior at the University of Iowa majoring in journalism and mass communication and global health studies, with a minor in German. She is a managing editor at the university newspaper, the Daily Iowan, and has served as an reporter intern at Iowa Capital Dispatch.