We have a lot of talk about the default. Every agrees we can't have a default be
terrible. We don't spend quite as much time
talking about what lies behind this crisis, which is addressing the debt
problem. There is a real debt problem, is there
not? Well, there is.
I mean, Pete was right. And I think the way to think about the
debt ceiling crisis is to break it into two pieces.
What do we have to do right now? And that's going to be some near-term
spending restraint, like returning unspent Covid funds, some of the
spending caps, for example, that Senator Manchin has talked about.
But longer term, we've got to go to a different model and we have to have
either a spending limitation, as I've argued in the past, or some kind of
model. For example, like the Swedes do have a
fiscal policy commission that takes a look at the budget.
But we need that longer term discussion. Dare I say, maybe even another
commission to take a look at it. But it has to be separate from the short
term, which we have to do first. But I wonder, we'll come back, if we
could. Two possible solutions to the immediate
price crisis with default or would be default.
But the Republicans sell their homes are right.
We'll never get to the second part if we don't hold hostage on the first.
That's basically anything. A lot of Republicans position, if we go
along with you on the debt ceiling, will never do the second part, which is so
important. Well, that's right.
But when you catch the car, you have to know what to do.
And you also have to have a plan. And since neither side has what I would
call a reasonable long term fiscal plan at the moment, the right thing to do
would be to take a deep breath. The problem is the same problem actually
when Pete talked in nineteen ninety three, it has to do with runaway social
spending. This is at a time where we need to spend
more on defense. We need to spend more on preparing
Americans for the future. So we're going to have to make some
fiscal adjustments, some of those maybe tax increases, some maybe spending
adjustments. But we have to pivot to that world.
So let's talk about getting past the immediate crisis for the moment.
You know, Washington well, put aside for a moment what you think is
the right answer. Let's talk about what is the doable
answer, because that's terribly important.
There are some red lines here, such as, for example, they're going to say we can
not increase revenue. Full stop, can't do it.
Is that right? Does the White House have to give on
that point? We're not going to do anything in terms
of raising revenue. Well, I think in a negotiation, you have
to let the other side tell you a bit about what it takes to have victory.
And I think if Republicans have said there's no revenue increases in the near
term, I wouldn't put that in a negotiation.
I think a near term is the spending restraint.
So something like returning the union spent Covid funds and a two year
spending cap even there's something that can be done.
So Republicans have a victory. Biden, I think, knows independent voters
also agree with Republicans on many of these points.
And he could come to the middle on that. That's where I think the solution has to
be. What about the work requirement?
Because I suspect a lot of Americans do look at and say it's not too outrageous
that you should have to try to work if you're really getting a lot of funds.
It's definitely not too outrageous. And if you look at polls, independents
in the middle, about two thirds support the work requirements.
The only risk in a negotiation is when you start adding things that aren't
central to the discussion, i.e. taxes, spending, you make it difficult
to get the resolution. So each side has to look the other in
the eye and say, well, what is he or she need to win or at least think they've
won and move on. So this week we saw the hopes go up.
We saw the hopes go down. I mean, we heard they were making real
progress. And then on Friday, they stormed out of
the meeting, which is not unheard of in Washington.
You, Glenn Hubbard, knowing, watching the way you do, knowing the situation,
the way you do. How worried are you about an actual
default? I'm not terribly worried.
That said, the probability isn't zero. And so the two sides have to be
significantly working harder to come together in the past.
I always knew this was theater. Would simply work out and we just have
to endure it. This time, there's a little bit more
uncertainty. So I do think pressure needs to be
brought to bear on both sides to come to a near term agreement and then pivot, as
you say, to the longer term discussion that we've really got to have as a
nation. So let's turn to that.
Let's make that pivot actually to the longer term discussion.
Let's get the sooner we get past the default issue.
Now we're going to dress it. You suggested, for example, a commission
might be when we do. You've done that with Social Security.
We've done that with base closings. Is there political will on the two
sides, at least enough political will to actually do something about this instead
of just talk about it? There has to be the math will catch up.
We are already in fiscal year 2023 for the government will have interest
payments exceeding the money that we spend on children.
That's crazy. We need to be spending more on defense.
We need to be writing a number of ships in the country.
We have to take a look at the composition of spending and revenue.
A commission gives both sides a chance to have that discussion.
And I think it's absolutely essential. I want to come back to your book, The
Wall The Bridge, for a moment, because one of the issues is how can we grow the
pie by investing and spending the money, how much it is in a way that grows the
pie? Is there an appetite for that?
Because. Republicans certainly say it's all going
to be about growth. Well, but you also have to have the
social support and the political support for growth.
If we had programs that supported work that prepared more Americans for the
future that they will have as opposed to a nostalgia for the past.
We could do that fairly modestly with new spending.
We would need to pay for that by cutting other spending or raising taxes.
But it's doable. In my book, I suggested programs that
together cost less than President Biden's student loan forgiveness.
We know how to do this. We know how to find the money.
We need to do it for something useful. Let me go back to the here and now and
where we are with the economy right at the moment and what the Fed needs to do
where we're looking at economy. Let's assume we get past the default for
just a moment. We hear that, in fact, maybe the neutral
rate will go back down. What do you think?
Where do you think we are right now with the economy and what does the Fed need
to do? I don't think this is a time for the Fed
to do what markets are suggesting and start cutting rates in the very near
future. The Fed, at a minimum, would have to
keep the funds rate where it is. I would argue if there's a change in the
funds rate in the next several months, it's probably up, not down.
Inflation is still very, very sticky. So despite what markets think, I think
the Fed still has an awful lot of work to do.
There was a report of the Bloomberg actually that in fact, if we get past
the default problem, there will be a tightening necessarily in liquidity
because the Fed has been spending the Treasury I'm sorry, has been spending
down what's in the coffers going out to replenish that by issuing a lot of T
bills over the course of the summer as a pregnant, that will soak a lot of equity
in the system. Will that tighten enough in itself?
Some people say it's at least 25 basis points.
I don't think so. It's a modest effect, as you suggest.
There are two ways in which those T bills can be bought.
One is through bank reserves, the other through money market funds.
But I think it's a modest effect. The bigger concern, it strikes me, would
be a credit crunch that's in the offing from the banking problems.
If you're thinking about effective monetary tightening, there's probably
another 100 basis points of effective federal funds rate increases in that
credit crunch. That's the one to watch.
One where we have a sense of, in fact, whether we have 100 basis points,
because I've heard that number before. But I'm not sure if we know yet whether
we have it. Well, that number is a blend between
effects on small and mid-sized banks will be much larger.
And then, of course, the very large banks where it would be very small.
I think the Fed in the next several months will be watching that very
closely, which is an argument for the kind of pause the chair Powell has
signaled. So many of us are not particular pleased
with what we're seeing going on in this negotiation about default.
The notion that we would even think about reneging on the full faith and
credit is really embarrassing. What does it do to us globally?
Does it affect the value of the US currency as reserve currency?
What is the rest of world thinking right now?
Will there be longer term effect? Well, I think they think we're crazy.
And of course, we are in this kind of process.
But the point is, we need a new spending process.
We have had a series of budget resolutions and budget performs over the
years. I mentioned Sweden before.
I think using something like the Swedish plan and the Swedish Fiscal Policy
Council. It's hard to advise conservatives to
look at Sweden as an example, but that I do that I think is our roadmap.
Are there people in Washington talking about these things right now?
There are, but I think at the moment the negotiation is so mired in each side
thrashing the other, it's hard to get out.
What about think tanks? Are they helping?
I think so. I think they're trying to get
information to both sides of the aisle on the costs of what is happening on and
on things that might be proposed in the medium or long run as opposed to the
action we have to take before June 1st. So you're concerned, but hopeful always.
Oh, is that it, I should say?