Everything you wanted to know about the debt ceiling

Make Me Smart May 17, 2023 Transcript

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Kimberly Adams 

And on that note, shall we?

Kai Ryssdal 

My goodness. Yes let’s. If Juan Carlos is… oh yes there we go. You never know. Hey everybody, I’m Kai Ryssdal. Welcome back to make me smart, where we make the day make sense. It is the 17th day of May today.

Kimberly Adams 

It is. And I’m Kimberly Adams. This is what do you want to know Wednesday? And today because we just can’t get enough of it, we’re dedicating the full episode to answering your questions about the debt ceiling. If you have a question you’d like us to answer about the debt ceiling, or deficits or anything else, that you feel, you know, burning in your soul, you can leave us a voicemail at 508-UB-SMART, or email us at makemesmart@marketplace.org

Kai Ryssdal 

Our first question today is an email. It’s from Becca, she’s in New York. Here is what this email says: “I think I understand the difference. But can y’all clarify for me? If we default will that be the same or different than a government shutdown?” You want to take this one?

Kimberly Adams 

Absolutely, because it makes sense that it’s confusing because both of them are sort of telling you that the government is going to stop in some way. But yes, there is a difference. A debt default would be different from the government shutdown, which has happened several times, or at least we’ve had partial government shutdowns. So a partial government shutdown even though we often hear just the headline “government shutdown” it’s partial. It happens when Congress doesn’t pass an appropriations bill on time. You hear people talk about the budget. The budget lays out what they’re supposed to spend on. Appropriations are saying, “Yes, actually spend the money.” Those appropriations bills are usually what get jammed up in Congress. And so the appropriations bills would, the lack of passing them, means that the federal government can’t spend any of the money that that bill would authorize. When this happens, non essential functions of the federal agencies have to stop until a spending bill gets passed. There’s usually exemptions, you know, things like Social Security will still get paid. Often the military is exempted. Things that have to do with national security, because it’s only federal spending that’s dependent on annual appropriations where they have to approve the spending every year. Some budgets are set on multi year spending calendars, but also stuff that has to do with national security and, you know, taking care of seniors often gets exempted. Now then, the Treasury during a shutdown will still pay interest on the national debt, US Treasury debt, because they don’t want to crash the markets. And that’s considered a good thing to avoid. On the other hand, a debt default, which has not really happened, that occurs when the government fails to make payments on the existing debt. So the government shutdown is not paying for new stuff. Default happens when we’re not paying for stuff that was already, you know spent on. And a reminder here, that raising the debt limit does not increase spending beyond what has already been approved by Congress. It just allows the government to pay the bills. And unlike a government shutdown, a debt default would affect all federal spending because the government literally would lose its ability to borrow money in order to cover the bills that are coming in. This has never happened before and that makes it a lot more difficult for a federal government to prepare for one. By now we’re old hats at dealing with partial government shutdowns. But this is a new one, this is a new one. But what we do know is that a national debt default would be very, very bad. For one, the government may not be able to pay the salaries and benefits of you know, people in really crucial functions which would end up in another situation. Remember how bad it was when the TSA didn’t get paid for really long time during a partial government shutdown? And those folks were going to work anyway, just because, you know, they were good people. Imagine that, but at a much bigger scale. And also social security payments, veterans benefits, those sorts of things could potentially not be paid in the event of a default. Not to mention the full faith of and you know, credit of the United States would be called into question. And the economic consequences of that are kind of beyond what we can imagine likely. So there’s that. That’s the difference. It was a good question.

Kai Ryssdal 

Yeah, super good question. Super good question. And yes, you know, the default would be terrible. I just want to be on the record there.

Kimberly Adams 

All right, on to the next question.

Karen 

Hi, this is Karen from Honolulu, Hawaii. Everyone has talked about that back in 2011, at the last big showdown between the Republicans and the Democrats, we went to the brink on the debt ceiling. The credit agencies downgraded the US ranking. Assuming that this happens again, how long if ever did it take for the US ranking to go back to its original level? Or did it ever go back to their original level?

Kai Ryssdal 

Yeah, really good question. I will cut to the chase here. The United States never did get its credit rating back from S&P, Standard and Poor’s, which is just kind of mind boggling. Anyway, so here’s the history of this. Back in 2011 we had a very similar situation to today. A Republican majority in Congress was pushing for spending cuts in exchange for raising the debt limit. There were negotiations this and that, blah, blah, blah, 72 hours before the apocalypse, there was a deal done. But S&P, Standard and Poor’s, one of the three big credit rating agencies –Standard and Poor’s, Moody’s and Fitch are the credit raters… Standard and Poor’s said, “yes, there is a challenge to the fiscal health of the United States, because our deficits are so much, but also our political process is so paralyzed, that we are going to downgrade our rating,” that is to say, the credit worthiness of the government of the United States “and we’re going to take it down a notch.” It didn’t take it down a lot. It didn’t take it down to B or junk or anything. It just got it off the very tippy top layer. And that is very bad, because what that means is that we then have to pay more to borrow. And in point of fact, the GAO came out a year later, that found that delays in raising the debt limit and associated costs and factors, increased Treasury’s borrowing costs by $1.3 billion, which might not seem like a lot of money, but it’s a lot of money! It’s 1.3 billion dollars Right. And so cutting to the chase, S&P has never bumped us back up to its top level. And in point of fact, all three credit rating, rating agencies have said, this year, that downgrades could come even if a default is avoided. So this is not something to screw around with. I can’t emphasize that enough. It is not something to mess around with. At all. At all. Anything you want to add?

Kimberly Adams 

I mean, it seems here in Washington, like folks are starting to take this really seriously. You know, we had news today that, you know, last night, sort of the Biden team and the McCarthy team have sort of winnowed down the negotiators. So now it’s sort of a core group of people with actual decision making power, trying to hammer out a deal. Although I will note, if we go back a little bit, Biden said he wasn’t going to make a deal. Biden said that he wanted a clean bill, and that we shouldn’t negotiate over this. And just it’s worth noting, the negotiations are happening. And all evidence seems to point to that there is going to be a negotiation and some sort of deal to raise the debt ceiling. And that’s going to set a precedent that may not be good moving forward.

Kai Ryssdal 

Yeah. And what’s interesting is, and you can hear this in the language that the Democrats are using, right? They’re saying, Schumer is saying this, and Biden is saying it, they’re saying, “well, these are negotiations over the budget. We’re gonna get a clean debt limit out of this and these negotiations over the budget.” And you’re like, “Sure, sure, Joe. Sure they are.” Whatever.

Kimberly Adams 

I mean, sure, they may package it in two different bills, one that raises the debt ceiling, and another one that does all the things that, you know, the Republicans end up demanding, but in effect, it is the same thing. I’m also very interested to see whether any deal negotiated by McCarthy can actually make it through the House. Because remember, folks thought his speaker nomination was locked up and then there was a certain contingent of the House Republicans who held out for their own demands and held that up for 13 rounds. So when the stakes are this high, and you have to have the votes, what’s to say that they won’t do that again?

Kai Ryssdal 

Exactly.

Kimberly Adams 

Just things that I think about. Alright what do we have next?.

Kai Ryssdal 

Alright. Next question, Gus, from Duluth, Minnesota. It’s an email here you go. “In the discussions about how the Treasury might prioritize payments, does the treasurer you have the ability to include Congressional and Senatorial pay in their priority list? To me the obvious solution would be to pay Congressional Representative, Senators, and then the President last.”

Kimberly Adams 

In theory, the Treasury could prioritize whatever it wants. However, we’re not actually sure if the Treasury can actually prioritize payments. There’s not really a rulebook for how this should work because the idea was never to get here. And so there’s not sort of formalized structures that say, “Hey, Treasury, here’s what you have permission to do in the event of a default.” That that those rules don’t exist anywhere. So even if it’s technically possible, very few people if any, know exactly how it will work. Some former Fed officials have said it would be logistically impossible to prioritize payments because government systems just aren’t set up like that to say “you go first, you go next” because bills have due dates. And, you know, maybe you want to prioritize Social Security. But, you know, a bond expires before that, you know. And you can’t really balance that out. It’s possible, if it is possible that Treasury would prioritize these payments, they could decide to prioritize the interest payments first in order to protect the markets. But that would mean letting some Americans potentially go without salaries and critical benefits, which would not look good politically. We talked about this a little bit the other day about the narrative of, you know, the federal government paying off Chinese bondholders before, you know, American social security. And then, of course, there would be lawsuits. I mean, there’s already been, you know, government unions or worker unions with federal workers saying they would sue if their salaries got deprioritized. And so that would be just one of many court battles if the government chose to meet some obligations, if not others. I mean, good luck telling Boeing you’re not going to pay them for whatever contract they have. Any way you slice this up, some bills would go unpaid if Congress doesn’t raise the debt limit. It would significantly hurt the economy. Now that to answer the specific question about pay for members of Congress and other political leaders, there is at least one member of Congress who agrees with Gus on this. Representative Abigail Spanberger, a Democrat from Virginia, has called for the house’s chief administrative officer to withhold pay for members of Congress until they can resolve the debt limit crisis. She wrote this in a letter and here’s the quote, “if the American people and the American economy are suffering as a result of congressional inaction, then members of Congress should not be rewarded with their pay.” And not all, many members of Congress are independently wealthy, but not all of them. So some of them would would feel it.

Kai Ryssdal 

That’s interesting.

Kimberly Adams 

All right. Last question of the day, here we do.

Marilyn 

This is Marilyn in New London, Connecticut. I would have thought that the business community from Wall Street to Main Street would have pressured House Republicans to raise the debt limit without conditions. What am I not seeing?

Kai Ryssdal 

Well, so a couple of things. I mean, it’s a good question, because that that would seem to be the obvious way things would break out. But until pretty recently, and Justin did a story for us on Marketplace not too long ago, until pretty recently the business community has been kind of sanguine, and Wall Street has been kind of sanguine, because we’ve, we’ve been down this road before. And eventually they do reach a deal and everything, you know, turns out, relatively speaking, fine, right? Things have started to change. A bunch of big CEOs, I think it was yesterday, maybe or the day before, sent a letter to Congress basically raising the alarm saying stocks will crash, it would be a very bad thing. Goldman Sachs, by the way, thinks that 65% of small businesses believe they would be negatively impacted by default. 77% are already worried about being able to get loans. Credit conditions are tightening for a lot of reasons. One of them is the potential default and a month, right? Lots of banking stress, obviously, as we’ve talked about. Federal interest rates, Federal Reserve interest rate increases. But look, there’s a reason businesses and Wall Street aren’t freaking out. And that’s because up till now, there have been enough sane and cool heads in Congress to understand the risks here are ginormous. And this, the cast of characters now has changed. And what you have are members of the Republican Party in the House, who are willing to drive the car off the cliff to number one, score political points, but number two to score policy advantages. And that is completely completely different. And that’s why this is scarier. And that’s why I think you’re seeing pressure ramp up, and you’re seeing Jamie Dimon start speaking, and you’re seeing Wall Street banks start speaking because they understand that the downside risks… and you know, I have to believe the members of Congress, who are you know, instigating this fight, understand the downside risks. They do, they just don’t care. You know, that’s the only conclusion I can draw. I don’t know.

Kimberly Adams 

On the other hand, though, you know, if you’re in the GOP, you’re gonna say this is the best moment of leverage that we have to achieve the policy goals for which we were sent here to get, you know. There are things that they want that will never make it through the Senate in any way, shape, or form, unless they have some leverage and up until now, there hasn’t been much that they could use as leverage. So, I mean, from a purely political standpoint, it makes sense that this is what you would choose to force the Biden administration to negotiate on your policy priorities, because they have to do something. They have to.

Kai Ryssdal 

I understand what you’re saying, and I appreciate that you’re playing devil’s advocate. It is deeply, deeply responsible. It is economically damaging. It maligns our reputation in the world and it will scar a generation believe me. That’s what I got. Alright, well, we’re gonna end on that, I suppose.

Kimberly Adams 

Such a happy note.

Kai Ryssdal 

Well you know, I’m not in charge of the news. If you’ve got a question on anything else related to the economy, other than you know armageddon, business, technology, whatever, let us know. 508-UB-SMART or email us makemesmart@marketplace.org

Kimberly Adams 

Armageddon wow.

Kai Ryssdal 

I wish I was kidding.

Kimberly Adams 

Make Me Smart is produced by Courtney Bergsieker. Ellen Rolfes writes our newsletter. Our intern is Antonio Barreras. Today’s program was engineered by Juan Carlos Torrado.

Kai Ryssdal 

Ben Tolliday and Daniel Ramirez composed our theme music. Our senior producer is Marissa Cabrera. Bridget Bodnar is the director of podcasts. Francesca Levy is the executive director of Digital and On-Demand