How a Default Will Affect Average Americans

A looming default on the federal government's debt would harm more than just Congress' poll numbers.

To people whose lives don't hinge on what happens inside the beltway or on the floor of the New York Stock Exchange, it can be easy to shrug off the nation's fiscal fights as something for the John Boehners and Jack Lews of the world to think about. The shutdown has yet to truly affect many parts of the country, and the debt ceiling remains a nebulous economic concept. Hitting it, economists say, could cut some large chunk off of economic growth, but it can be hard to conceptualize.

To help, think of a hypothetical, average working American named Jane. Jane is 28 years old and works as a cashier at a grocery store somewhere in Nebraska – far from Capitol Hill or Wall Street. Still, a government default could profoundly affect her life. Here's how:

[READ:How Each New Fiscal Crisis Makes the Economy a Little Shakier]

Government payments

Among the first effects of a default would be to government transfers, in programs like unemployment, food stamps, and Social Security. Jane does not use those programs, but her friends and relatives who are dependent on government transfers could start seeing late or bounced checks soon – according to aReuters analysis, the government would finally come up short on October 30, and the Treasury has said it cannot choose who will and won't get paid (though some have argued otherwise).

"Treasury makes about 80 to 100 million payments each month," says Greg Daco, senior U.S. economist at Oxford Economics. "It would be very hard for the government to actually prioritize amongst those payments if they wanted to prioritize certain payments."

He adds that payments could also simply be delayed if policymakers decide to go that route, but that could also create hardship for some recipients.

In other words, Jane's unemployed brother, her best friend who is on food stamps, her mother who relies on Social Security – they all could need financial help very soon.

Buying a house

With relatives staying on her couch, Jane might like more space to move into. Like millions of other young Americans, Jane has long been excited about someday buying a house, and she nearly has enough in her savings account for a down payment. But if the government hits the debt ceiling, it could send interest rates on U.S. treasuries spiking, as investors move away from these investments that once looked like such a sure bet.

Mortgage rates are tied to interest rates on treasuries, however, as are the interest rates on any number of loans.

"Any loans this person would be taking out would [carry] a much higher interest rate," says Gus Faucher, senior economist at PNC. "Mortgage interest rates would go up, car loans, small business loans, those types of things, the interest rates on those would spike much higher."

All of which means Jane might have to buy a smaller house than she originally planned, or perhaps forgo the house altogether until things improve.

401(k)

Jane's employer generously provides a 401(k) plan to all full-time employees, and Jane has conscientiously socked plenty of money away for retirement already. Unfortunately, a lot of that money is in stocks, and a default could send stock markets into freefall as markets worldwide panic.

Employment Worries

Delayed food stamp payments mean people spending less money at the store where Jane works, meaning fewer customers, meaning less income, meaning less need for workers, which could mean Jane's hours get cut...or that, eventually, she would get cut altogether.

On a broader scale, says Faucher, this kind of cycle could wreak havoc nationwide.

"[Default] could very well push the economy back into recession: large job losses, big increases in unemployment, all of those things," he says. "People can't borrow. People won't be able to buy or sell homes, people won't be able to buy cars. ... All those factors will restrain growth."

[READ: Shutdown, Week Two: Markets Sell Off, but For How Long?]

Lower taxes

Finally, some relief. Or not. If Jane is working fewer hours, then her tax bill is lower. But then the government is taking in less money not only from her but her coworkers and people nationwide who have been hurt by the new economic downturn. That means the government either has to borrow more – at the new, higher interest rates caused by the default – or cut back its spending, meaning less money paid out in the form of unemployment checks, for example. People who get those checks readily spend that money. Cut that spending back, and it can perpetuate the vicious cycles of low spending, slower growth, and lower government revenues...hurting not only Jane but the rest of the country.

To be clear, there are plenty of uncertainties at work here: first off, many economists do not expect the U.S. to default on its obligations. In addition, the nation has never defaulted before, and there's no telling exactly how markets would react. But then again, simply considering the financial ruin that could result from a default shows just how unsettling it is that it is being discussed as a potential outcome.