Thanks for joining us here on
9 News Plus. I'm Chris bianki.
While the United States reached
its borrowing limit last month,
what that means is that Congress
has to raise the debt ceiling,
which the amount of money
that the US can borrow.
But there are some very loud rumblings
from congressional Republicans in
particular that they want stipulations
attached to any raising of that debt
ceiling that potentially sets up
a political showdown this spring,
or most likely early this summer sometime.
June, that could have major consequences.
Marcus Schneider,
an associate professor of economics
at the University of Denver,
joins us now to discuss what those
consequences could be and basically
kind of what this all means and how it
could impact us on a day-to-day basis.
So, Professor,
thanks so much for joining us today.
You're very welcome.
It's my pleasure to be here.
Well, Professor, I guess before
I get into anything else, one,
did I get that right and what should,
is there anything else I missed in
there that we should know about
the debt ceiling specifically?
No, you gotta pre
write. It's a kind of interesting
decision process that that Congress
has designed for itself in the early
part of the 20th century to make
decisions on how much to spend and
what to spend on separately from a
sort of absolute limit in dollar
terms on how much it can borrow.
And throughout history that
sometimes has led to problems.
Most of the time it's been a non issue
and Congress has simply as a matter
of business raise the debt ceiling.
As necessary.
Now what would happen if we decide
in early June that we don't want to
raise the debt ceiling or we just
can't reach an agreement on it?
What would happen at that point?
So this is something that economists
are to to a surprising degree very
much in agreement about that that
would just be a very bad scenario.
And the reason is that not
just in our financial markets,
but in global financial markets, U.S.
debt, so bonds that the US government.
Issues through the Treasury are seen
as in a sense the ultimate safe asset.
And so anybody who's working
to diversify risk across their
portfolio uses that as a,
as a backstop,
as a safe app asset to reference
risk premiums from a default sort
of calls into question of whether U.S.
debt is really that safe and.
Basically because it's an upheaval
in all of those risk calculations
across portfolios across the world
and that would throw global financial
markets into quite an upheaval.
So let me let me think about this
and correct me if I'm wrong here.
Based on what you're saying here,
Professor, what would an analogy be like?
You decide to stop paying your mortgage?
Is that a way to think of it?
In a sense, yes, right.
And so you would be requalified
as a much riskier borrower,
right, when you make those stop
making those payments and would
have a harder time borrowing.
Actually, more accurately borrowing in the
future would become more costly, right?
But also, this isn't just that it
becomes more costly for the government.
It's likely to become more
costly for all US consumers.
Because ultimately the government
represents us as a country.
So let's go down to that I count
to go down the rabbit hole little
bit of if we don't we can't reach
an agreement on the debt ceiling.
You mentioned how it would become more
expensive for us to borrow where the
ultimate safe currency and and borrower
in this situation what sorts of maybe
downwind impacts could that lead to?
Could it perhaps lead to a
recession or something like that
it would almost certainly
lead to a recession as I.
You mentioned earlier,
I called it upheaval.
Really what I had in mind was
a global financial crisis as I
think all kinds of valuations,
there are certain currently
pegged off of that U.S.
debt would have to be
recalculated and reevaluated.
Oh boy. Well, that's not fun.
Well, with that said,
you mentioned at the beginning
that this has never led to this
has never happened where the US
has not raised the debt ceiling.
But back in 2011 and 2013,
we did come close both times
with similar political battles.
But I my understanding is in
those times that we did see some
downwind ramifications as a result
of simply the proxy fight over.
Long story short.
Those two battles did lead
to some issues back then,
didn't it?
It did. And in fact, you know, U.S.
debt was downgraded and it's called
by one of the ratings agencies and and
that resulted in higher borrowing costs.
Now we never quite, as you said,
we didn't reach the debt limit,
we didn't default on our debts and
so it never came to a sort of the
full storm of things but I think.
We're potentially looking at a different
situation here unless something
comes through in the last minute.
Professor also heard some rumblings
about a possible or possible types of
workarounds from the Treasury Department.
How would that work and could they be
effective in if again, politically,
there's no resolution to this?
Yeah. So. So there's a couple of
ideas that have been floated,
although Secretary Janet Yellen
has pretty much put the kibosh on
most of them, as far as I know.
One of them is this idea that the
Treasury can simply print more
money instead of going into debt.
That can work in the short term,
but ends up devaluing the
value of the dollar,
which sort of has other undesirable
consequences potentially downstream.
Especially since we're coming out of
a period of high inflation already,
that's seems unlikely.
Another option that has been talked
about is prioritizing who gets repaid.
Apparently that was looked at
in previous fights, but again,
both the White House and Treasury Yellen
have made the point that one being
unwilling to sort of really do that.
The Treasury says that this is not
something that they're authorized
actually to really do in the first place.
The other problem is that.
It creates all kinds of other
issues that make it unclear that
it would really work, right.
the US would still default on
its debt and this idea that if
we prioritize paying bondholders
over say making other payments
like paying government employees,
that that would hold off a recession.
But that's actually very unclear
if you look at how many people are
employed by the government who would
then not be able to pay their debts,
their bills.
So they'll be kind of like you
have you owe on four credit
cards and you're trying to side.
Maybe. Which two to pay off?
That's right, that's right.
Or paying a car for credit card and
instead of paying your rent, right?
It doesn't really get you out of
the fact that you're not be able
to pay all of your bills, right?
And creditors will recognize that.
OK, so I'm gonna wade into a little bit,
admittedly some political territory here,
but surely there's a a reason going in here.
So I want to make the
argument from both sides.
The Republicans are saying that
the amount of debt that the US
has right now is unsustainable.
That's why they're seeking
some of these concessions,
I guess, to maybe expand into
the Republicans point here.
Again, I know there's a
political lean to this question,
but how bad is the nation's
budget deficit at this point?
Well, I am not personally
and professionally not particularly
concerned about the nation's deficit.
I think I look at it this way.
I think there's a lot of narrative
out there about balancing budgets
and it's like households tightening
their belts and and these kinds
of things you hear all the time.
But I think that's actually
just not accurate.
You know, when you look at households and
this is well established in economics,
we recognize one households are young,
they tend to borrow more.
In anticipation of growing as a household,
of developing their careers and making
investments in housing and transportation
and in education into the future,
so their time and households
when most households actually
do take on quite a bit of debt.
And then later in life, right,
they pay off those debts.
Now a country is not like a household
in the regard that it doesn't
have this well defined lifespan.
We like to think that US will
be around for a very,
very long time and certainly the
prospects of growth are there
for an extended future.
So what I really look at that is the
US is more like a younger household
that is looking to make investments
and should make investments in
its future to sustain that growth.
Now,
there's always a question of what are
good investments and how is that best done?
But that's different than saying
we shouldn't spend deficits or
we should balance our budgets,
which I think is just getting along.
The same applies to to businesses.
Businesses that have a prospect for
growth tend to borrow so they can
sustain that growth and make that happen,
right.
So this idea that somehow there's
something virtuous about balancing our
budgets and not going to deficit spending,
I think it's just an incorrect argument.
It's appealing.
But I don't think it reflects the world
that we live in and how we should act.
So you would say that you're not
all that concerned about the budget
deficit and the lack of a balanced
budget here in the US right now.
I am not. And especially because what I
look at is not so much the debt overall,
which tends to be a scary dollar amount
that none of us can really imagine.
Like most economists, I tend to look
at that debt as a percentage of.
Our GDP. So how much?
How indebted are we relative to how much
economic activity there is in the country?
That's spiked for understandable
reasons during the pandemic because the
government did step in and avoid it.
A more full blown,
longer lasting recession by spending extra.
So that's debt we took on and we do have to
sort of figure out what to do with that debt.
I'm not saying that that's irrelevant,
but what we've seen is that we're
coming out of the recession.
Is quite fast growth relative
to the last few decades?
Couple decades?
And as a consequence,
that ratio of debt to GDP is
already declined by about 14%.
And so by that measure,
we are actually working on the
sense working off that debt.
Well, maybe leading from
that point to another one.
So the argument on the flip side from the
Democrats would be that these battles,
and again, I know this is a bit
more of a political question here,
but the way to resolve these
sorts of issues is not through,
it's through Congress,
it's through bills and budgeting and not
whether or not to raise the debt ceiling.
And again, I know this is a bit
more of a political question.
Is that your understanding as well
as that's how these sorts of budget
questions are typically handled?
Yes, absolutely,
because we're really litigating here.
And there's a good sort of.
Litmus test for me to to
to look at this right.
This comes up when a president
from the other party is in power.
But the Republicans have
taken power in the house.
If they're sort of unhappy with
recent policy that has happened.
Raising the debt ceiling has nothing
to do with authorizing future spending,
and the Treasury is very clear about that.
It's about making good on commitments that,
through the political process,
lawmakers have decided up on.
Already now the Republicans are unhappy
because those decisions were made when
they were not in power in the House.
And so this is really about.
Going back and trying to exert power
about something that was already
decided through the political process,
through voters putting more Democrats
in the house before the 2022 election.
OK and we come with another analogy.
So hang with me here, Professor.
So would this be like?
I go out and spend.
I don't know, I decide to
spend some money on things.
My wife doesn't like it,
so she decides not to pay
the credit card bill.
Or, or your wife threatening
to not do that in order to sort of make
you a promise to not go on another
shopping spree in the future, right,
because you've already spent the money,
it's already on the credit card bill.
But now your wife is saying, well,
we just won't make rent this month
unless you promise not to get a new
pair of shoes next month either.
OK, alright, that's a OK.
Just trying to think about this.
Better ways.
But I guess with that said,
hopefully we've laid it
out for our audience here.
Is there anything else that we missed
about the debt ceiling and the potential
clash looming ahead that we have covered?
I don't think so.
I think I well, no. There
is actually one more thing that
I think is very important and
very telling in this discussion.
And it goes a little bit to the the
politics of this one thing that's.
Currently playing out and
that's very telling as.
Living up to the promises that Republicans,
some Republicans have made to their
constituents about balancing a budget,
being fiscal conservatives,
actually living up to those promises is
very hard and most voters don't support it.
So when you look at analysis of
what has to be cut and by how much.
Most voters, including a lot of Republicans,
don't support making those kinds of cuts,
which is why what you see now playing
out in the house is that a lot of
Republicans are very reticent about
spelling out what they would cut.
And and so that's another sort of wrinkle
and dimension here because people
don't want Social Security on on broad.
There are obviously individuals who do,
but they're abroad.
the US population does not want
Medicare and Social Security touched
if you don't touch those in those.
Guts.
You're looking at really severe cuts
in all kinds of other government
services that people hold dear.
Yes, and maybe to quickly
expand on that here, Professor.
My understanding is that in order to
have a balanced budget and again I've
seen the same things that you have,
that Republicans mostly again
waiting to political waters here,
but Republicans mostly avoided discussing
specifically what they would cut.
But economically speaking,
we're talking most likely Social Security,
basic infrastructure,
defense spending because that accounts
for more than half the budget, correct?
Correct. And and then, you know,
you now start seeing Republicans
saying that they would not touch those,
in which case you're talking about
really extreme cuts to what's left.
Because to your point, what's left is
a pretty small part of the budget.
Hmm. Well, yeah.
Interesting, professor.
Well, we appreciate a few minutes of
your time here in spelling out hopefully
in a bit more layman terms in terms
of what the debt ceiling crisis is,
what sorts of impacts it could have,
which don't sound particularly
pleasant to say the least.
But more than anything,
we appreciate you letting us a few
minutes of your time and your expertise,
your professor.
You're very welcome.
It's great to be on again,
Marcus Schneider and associate
professor of economics at
the University of Denver.
Thank you again for joining
us here on News Plus.