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Small Businesses Spooked by the Prospect of a Federal Default

S.J. Steinhardt
Published Date:
May 22, 2023

Small businesses are increasingly concerned about the prospect of a federal default, which could result in delayed payments, stalled projects and sweeping layoffs, The Washington Post reported.

“This really has the potential to be catastrophic,” Rosemary Swierk, president of Chicago-area Direct Steel and Construction, told the Post. “If we have to shut down a project, that’s 300 people who aren’t working anymore. Then what do we do? Do we keep people on payroll? Do we lay them off?”

Her concerns were echoed by David Berteau, chief executive of the Professional Services Council, a trade association of federal government contractors. “What’s the contingency plan if we wake up on X-date and don’t have enough cash to pay everybody? We just don’t know,” he said. “There has been remarkably little visibility into what happens if we do default. Which bills will get paid and which won’t? We’re talking paychecks, rent, contract invoices, electricity bills.”

A default could also stop government paychecks, food stamps, Social Security and other federal benefits, and affect retail and service businesses. It could trigger 7.8 million job losses and a $10 trillion loss in household wealth, Moody’s Analytics estimated. But even if there is a last-minute resolution, inflation, higher borrowing costs and a slowdown in consumer spending have already taken their toll.

About 10 percent of Pennsylvania-based Karns Quality Foods’ sales are funded with federal assistance, such as the Supplemental Nutrition Assistance Program (SNAP), and many shoppers at the companies 10 supermarkets rely on Social Security checks or are government employees, Andrea Karns, the company’s vice president of sales and marketing, told the Post. She said that more people are buying meat in bulk and lower-priced items such as chicken and pork instead of steak.

“Any pause, any delay, any cuts to SNAP benefits would directly affect our shoppers’ ability to get food onto their tables and it would 100 percent impact us,” she said.

Jonathan Graf, a behavioral specialist in northwest Oregon, works with children and adults in crisis and relies on Medicaid for most of his income. A possible default would likely mean not getting paid. A Republican proposal to tie Medicaid benefits to work requirements, if enacted, would leave many of his clients without care, and him without pay.

If a default occurs, small-business groups say they would not be a top priority to get paid for government contract work. “A lot of small companies have built their businesses around doing work with the Pentagon or other government agencies,” Joe Wall, national director of 10,000 Small Businesses Voices, a small-business lobby organized by Goldman Sachs, told the Post. “Those businesses are particularly nervous because it feels like this is another problem that’s being layered onto an already-complex environment.”

Baltimore construction firm Trident Builders is scheduled to start work on a federal building very soon. Owner Brendan McCluskey is worried that the project could stall if the debt limit isn’t lifted.

McCluskey has seen down-to-the-wire debt limit negotiations before, and he told the Post, “I have to have a little bit of faith that the worst is not going to happen. I think this is an awful lot of brinkmanship. But if it does happen, I really don’t have a plan. We’re in an impossible position.”

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