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Hitting Debt Ceiling Could Erase Two Years Of 401(k) Gains: Economist

Debt

The Huffington Post   First Posted: 07/07/11 05:52 PM ET Updated: 09/06/11 06:12 AM ET

Testifying before a Congressional committee on Thursday, economist Heather Boushey said that reaching the debt ceiling could trigger a stock market plunge that would wipe out nearly two years of 401(k) gains, Think Progress reports.

"Reaching the debt ceiling will, in all likelihood, trigger a sharp fall in the stock market, which also
will likely reduce employment," Boushey told the Congressional Democratic Policy and Steering Committee.

"The drop in stock prices will have an immediate effect on the economy, but also on families. Families with 401(k)s would likely lose all the gains they have made in 2010 and much of their gains in 2009, moving them further below where they were at the end of 2007 after the stock market fell sharply."

Boushey, a senior economist with the Center for American Progress, also warned that if the debt ceiling is not lifted, the housing market is likely to experience "a severe double-dip contraction marked by much-lower home sales and depressed house prices."

And, she said, hitting the debt ceiling could worsen the nation's unemployment problem.

"If the government is forced to limit spending to what it takes in in revenues, the resulting deterioration of economic conditions could very well be deeper than the worst quarter of the Great Recession," said Boushey. "Between the third and fourth quarter of 2008, the economy contracted by 2 percent and shed nearly 2 million jobs."

The United States will reach its borrowing limit on August 2, unless a deal is reached to raise the ceiling. On Thursday, President Obama announced that he would meet with lawmakers this Sunday to continue negotiations.

The president expressed a hope that by Sunday, all parties involved would be able to "start engaging in the hard bargaining necessary to get a deal done."

A full transcript of Boushey's remarks is available here.

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