Debt ceiling showdown "was incredibly costly" to U.S., economic expert says
On Saturday night, Republicans and Democrats reached a tentative agreement ("in principle," House Speaker Kevin McCarthy said) to raise the debt ceiling.
For a topic that's been front-page news for weeks, the debt ceiling sure seems to mystify a lot of people.
- What happens to Social Security if the U.S. breaches the debt ceiling?
- If the U.S. breaches the debt ceiling, which states would feel it most?
- What happens if the U.S. defaults?
The debt ceiling crisis is wonky and complicated, and I don't want your brain to glaze over. So, allow me to explain it … in song:
"The Debt Ceiling"
When Congress and the President agree on what to spend
Our taxes rarely cover it; but that's not quite the end
The Treasury can borrow from investors - that's OK!
They know they'll get their money back. 'Cause we're the USA!
But almost every year these days, we spend more than we got
But when we ask to borrow more, we learn that we cannot
The Treasury says, "Sorry, there's no money on the shelf –
"You folks have hit the limit – one that you all set yourself!"
Now they can vote to raise the ceiling; wouldn't that be nice?
But here's where things get awkward, 'cuz the votes come with a price!
One party seeks concessions, saying "This is where it stands:
"I'll risk a global meltdown if you don't meet my demands!"
"One side is saying, 'Give me what I want, and if you don't, I won't allow Treasury to issue more IOUs, and it's gonna explode the global economy," said Laura Veldkamp, a professor of economics and finance at Columbia Business School. "This is a disaster. It's an entirely avoidable disaster. This was a ridiculous way to try to save money."
In the olden days, Congress had to ask the Treasury to borrow money every single time it passed a spending bill. But when World War I required a whole flurry of spending bills, Congress passed the Second Liberty Bond Act, which lets the government borrow money whenever it wants, up to a certain limit. And until this weekend's negotiations, that "debt ceiling" was $31.4 trillion.
Now, if you miss a payment on one of your loans, you're in trouble. But if the United States misses a payment, the entire world is in trouble.
"These IOUs function sort of like the money of the global economy," Veldkamp said. "Everybody treats it as safe. 'Safe' means you're gonna pay it back. And so as soon as that comes into question, people are gonna want some extra interest to compensate them for the fact that, 'Well, I'll probably get paid back, but maybe not?'"
And higher interest rates could lead to all kinds of chaos: "That's gonna make doing business much more expensive," Veldkamp said. "This could show up as a decrease in the value of the dollar. If you like fruit in the wintertime, it will be more expensive. All kinds of electronics, most of the apparel we wear is not made in this country. All of those things will instantly be more expensive."
Maya MacGuineas is president of the nonpartisan Committee for a Responsible Federal Budget, a think tank whose directors once ran agencies like the Federal Reserve, the Treasury Department, and the Congressional Budget Office. According to her, "We cannot default. It would be beyond stupid. We could create a recession here. We could create a recession around the world."
Pogue asked, "What do other countries do when this happens?"
"The debt ceiling is not something that other countries use around the world," MacGuineas replied. "This is not common practice, because it doesn't make sense. For instance, more of them have spending caps than we do."
When MacGuineas (who describes herself as a political independent) is asked if one party is worse than the other in dealing with the debt ceiling, she replied, "To generalize, of course, Republicans are more allergic to tax increases. Democrats are more allergic to spending cuts. But the truth is, neither of them really wants to do anything that's hard."
In this country's history, Congress has raised the debt ceiling over 100 times, under both Republican presidents and Democratic ones. But only Republicans have ever threatened to let the country default as a form of leverage.
MacGuineas said, "This, in my mind, has been the most dangerous debt ceiling standoff we've had. They are willing to really hold it hostage in a way that is more dangerous than I think we've ever seen before."
In the latest negotiations, the Republicans, in exchange for their vote to raise the debt ceiling, sought a package of savings, like tighter restrictions to qualify for Medicaid or food stamps, and less money to the IRS for enforcement.
Remember: These negotiations aren't about what to spend money on in the future. As Laura Veldkamp points out, they're about paying for bills that Congress has already passed. "When you've already decided what taxes will be, what spending will be, and we simply need to pay the bills that are coming due, this is not the time to have that discussion," she said. "We already decided what taxes will be, what spending will be, and they simply need to pay the bills that are coming due. That's not the time to renegotiate."
Washington teems with ideas to avoid these periodic debt showdowns. Maybe the debt ceiling rises automatically every time Congress passes a funding bill; maybe we appoint an expert commission to fix the problem once and for all; or maybe we eliminate the debt ceiling completely.
Pogue asked Veldkamp, "As it turns out, we dodged the bullet, razor's edge, they got a deal. But is there a takeaway here?"
"Even having done it, it was incredibly costly," Veldkamp said. "Because you called into question whether the U.S. government would actually pay back the debt. And the very thought that they wouldn't will make it more expensive for us to borrow in the future, because we're gonna have to compensate people for the risk that this whole drama will play out again in a few years."
Maya MacGuineas said that we need a new playbook, but it won't be easy: "The solutions are really hard. Fixing the budget deficit and debt mean we have to raise taxes and cut spending. Nobody likes that."
Pogue asked, "Some of the things that you say, Maya, are probably unpopular; do you get dirty looks at events and conferences?"
"I do," she replied. "Nobody likes to be reminded that somebody has to pay the bills, but somebody has to pay the bills. And we should really be paying our own bills instead of pushing them onto our children."
For more info:
- Laura Veldkamp, professor of economics and finance, Columbia Business School
- Maya MacGuineas, president, Committee for a Responsible Federal Budget
Story produced by Gabriel Falcon and Young Kim. Editor: Joseph Frandino.
