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Default would ripple through markets, economy

Default would be first since War of 1812.

Nobody can say exactly what will happen if the federal government defaults this week. But one thing seems to be clear: It won’t be a good thing.

Social Security payments could be delayed. Stocks would likely tumble. (The Dow was off more than 100 points on Tuesday). The weakened economy would be jolted as companies scale back plans to invest. Physicians may have to wait considerably longer to be paid for the Medicare patients they treat.

“This is a game of Russian roulette that those who refuse to increase the debt ceiling are playing with the lives of Americans,’’ said Henry J. Aaron, an economist at the Brookings Institution in Washington.

Ned Hill, a professor of economics at Cleveland State University, said “default would be absolute disaster for the U.S. economy nationally.’’

Despite these cataclysmic warnings, the Senate and House Tuesday night continued their bitter partisan battle as lawmakers groped to find a way to end a partial government shutdown and raise the government’s $16.7 trillion debt ceiling.

Without Congress raising the debt ceiling, as it has routinely done for years, the federal government will not have the money it needs to meet its obligations, raising the specter of the first default since the government was unable to pay its bills after the British burned the White House and the Capitol.

“At some point, we’re going to run out of funds,’’ said Stan Veuger, an economist at the American Enterprise Institute, a conservative leaning non-profit in Washington, who said the government can only pay for about 70 percent of its spending from the tax money it collects.

While Treasury predicted that Oct. 17 will be the date that the government can no longer borrow, some economists suggest the U.S. will begin spending more than it collects within a matter of days after that.

By Oct. 31, according to the nonprofit research institute Bipartisan Policy Center, the government will have to pay a $6 billion interest payment on the federal debt. By Nov. 1, the government will owe $18 billion for Medicare payments, $25 billion for Social Security benefits, $12 billion for military pay, retirement and veterans benefits and $3 billion for Supplemental Security Income benefits.

Then, on Nov. 14 and Nov. 15, two more big payments: $12 billion for Social Security benefits and $21 billion for interest on the debt, respectively.

The prospect of a federal government unable able to pay its bills has alarmed American business organizations. Even as polls show that Americans hold Republicans largely responsible for the impasse, many business organizations are angry with both political parties.

“It would be fair to say that business folks on a bipartisan basis are disgusted that we are even having this conversation at this late hour,’’ said Alex Fischer, president and chief executive officer of the Columbus Partnership, which represents much of the Central Ohio business community.

“It absolutely goes for both sides,’’ Fischer said. “There is just a frustration that important issues are not being dealt with in an appropriate and timely way.’’

Economists say there is no blueprint on how President Barack Obama and Treasury Secretary Jack Lew will handle a default. Aaron said Obama could delay payments to bondholders, who are the individuals and governments who own U.S. debt.

Aaron said Obama also could slow payments to a broader group that includes veterans, food stamp and Social Security recipients, physicians reimbursed for Medicare, and defense contractors.

“We will be entering unknown territory,’’ Aaron said. “The extreme consequences one can speculate on, but nobody, nobody can know for sure what will ensue.”

Steve Bell, a former GOP Senate budget staffer now with the Bipartisan Policy Center, said it’s unclear how quickly a default will occur, pointing out October is a notoriously unpredictable month for tax collection. And the results of default are also unpredictable.

But, he said, “Is, ‘I don’t know what will happen?’ the way you want to run the largest economy in the world?”

Even if Congress agrees to re-open the government and raise the debt ceiling, the fallout could produce a more sluggish economy and a potential electoral catastrophe for Republicans next year, according to people on both sides of the political aisle.

“The only good news is I believe the environment may be better today for us to put together a comprehensive plan (to reduce the deficit), because most of the people in the Republican Party know if we don’t come up with something comprehensive, next year will be one of the most disastrous years we’ve seen,’’ said retired Sen. George V. Voinovich, R-Ohio.

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