The NPR Politics Podcast - The US Is Flirting With Financial Calamity: What You Need To Know

Episode Date: May 9, 2023

Congress has long directed the government to spend more money than it collects in taxes. That means the government has to borrow money to meets its obligations, which it does by selling Treasury securities.Treasury securities are a promise from the government that you if give it money now, it will pay you back with interest later. They have long been considered among the safest investments in the world.But now, the U.S. is flirting with not paying its bills by refusing to increase the amount of money that the government is legally allowed to borrow — its "debt ceiling."We explain the basics of how the system works and what the consequences might be if the ceiling is not raised and the government runs out of money.Previously on the podcast: Much Ado About Debt, Jan. 18This episode: White House correspondent Tamara Keith and political correspondent Kelsey Snell.The podcast is produced by Elena Moore and Casey Morell. Our editor is Eric McDaniel. Our executive producer is Muthoni Muturi. Unlock access to this and other bonus content by supporting The NPR Politics Podcast+. Sign up via Apple Podcasts or at plus.npr.org. Connect:Email the show at [e-mail] the NPR Politics Podcast Facebook Group.Subscribe to the NPR Politics Newsletter.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

Hi, this is Nadia, a recent college grad hiking through Europe. Currently, I am trekking my way through the heart of Switzerland. This podcast was recorded at 1 16 p.m. on Tuesday, May 9th, 2023. Things may have changed by the time you hear this, but chances are I will still be walking. All right, y'all. Here's the show. Tam, you and I are hiking our way through mountains of debt, and she's hiking her way through actual mountains. Yeah, she is living her best life, and we're just barely getting by. We're just here.

Hey there. It's the NPR Politics Podcast. I'm Tamara Keith. I cover the White House. And I'm Kelsey Snell. I cover politics. The U.S. is on the precipice of potential economic calamity. The debt that took 230 years to accumulate overall,

overall, unless we do what they say. They say they're going to default unless I agree to all these wacko notions they have. If Washington wants to spend more, it will have to come together, find savings elsewhere, just like every single household in America. America will not default on our debts unless President Biden chooses to do so.

To ensure America does not default on our debts, the House Freedom Caucus is offering a responsible solution to this self-imposed crisis. Even coming close to the debt ceiling without raising it will raise borrowing costs for American households and businesses for a good long time. That was President Biden, Speaker of the House Kevin McCarthy, Pennsylvania Republican Representative Scott Perry, and Treasury Secretary Janet Yellen. And we are talking about the debt ceiling, a legal provision that says the United States can only borrow so much money. But we've been here before, like in 2011. We don't have time for games. We don't have time for trying to score political points or maneuvering or positioning.

Not on this. We've made clear that we're fighting for the largest spending cuts possible. We're talking about real spending cuts here, no smoke and mirrors. It is a plan to give our children a debt-free nation so they too can realize their American dream. Default by the United States would precipitate a crisis worse than the one we just went through. I think it would make the crisis we went through look modest in comparison. That was former President Barack Obama, former Speaker of the House John Boehner, former Wisconsin Republican Representative Paul Ryan, and former Treasury Secretary Timothy Geithner all speaking in 2011 when the country went through the same kind of debate we are seeing now. Once again, a Democratic

president finds himself at odds with a Republican House of Representatives that doesn't want to raise the debt ceiling. They say history doesn't repeat itself, but sometimes it rhymes. With that, let's set the table of where we are now. There is some rhyming happening in history. President Biden in 2011 was vice president. He was extremely involved. He was sort of leading the charge on negotiations between the White House and Republicans in Congress. We saw him on the Hill all of the time. He was very active in this process.

And now he's president of the United States. He has taken some lessons from that experience. The Republicans in Congress seem to have taken some lessons. Some different lessons. Some very different lessons. And they really are not seeing eye to eye at the moment. Right. And you would be forgiven if you feel like you're hearing about the debt limit kind of all of the time, in part because that 2011 debt limit fight kind of set the stage for repeated conflicts, political conflicts over whether or not it was OK for the government to flirt with the idea of not paying the debt that they have already racked up. We saw it happen throughout the Trump administration.

This is not not new to people who are observing Congress and the White House, though. I think it can sometimes be very easy to be confused about whether we are talking about just a regular old government shutdown or something completely different and more dire, which is actually what is on the table right now. Yeah, these are very different things that get kind of combined together, in part because the politics of debt and spending find a way of weaving themselves together in most cases. So the conversation that we are going to have today is going to attempt to explain how we got here, not just the current political moment, but like the American history. Yeah. What even is the debt limit?

Right. So what even is the debt limit, Kelsey Snell? Well, to begin with, the U.S. has debt because we as a country have things that we need to spend money on. Everything from our military to spending money on Social Security and Medicaid to veterans benefits, basically everything that keeps the government running, we have to fund in some way. It's either through taxes or often it is through debt. And debt is a way for the country to keep going with the spending commitments that already exist without having the money in the bank immediately. This has always happened. This is not a new concept. This isn't something that was invented

by the administrations of the past 10 to 15 years. Right. So the U.S. has always had debt? Since at least the Revolutionary War, that is true. Okay. So there is this thing. The U.S. from time to time, all the time, has debt. And yet it can have debt. But there's a debt limit. There is. There is a debt limit that, as I talked to experts, they explained to me that it really started to become a thing around World War I when the government needed to fund, you know, a war effort. And so they decided to really increase the amount of space the government

had to spend money, rack up debt. And, you know, Jason Furman, who was an economic advisor under the Obama administration, he's now at Harvard, he was telling me that that was kind of the standard way things went for a long time. It's because Congress passed laws and those laws said you should spend this amount of money. You should collect that amount in taxes. And as a mathematical consequence of the laws Congress already passed, you have to borrow a certain amount. So authorized spending, borrow money. That was kind of the agreement. So at what point did those things become decoupled? a certain amount. So authorized spending, borrow money. That was kind of the agreement.

So at what point did those things become decoupled? Or like, when did the debt limit become something that could be a hostage? Well, there have been political fights about the debt limit for decades. And so it isn't exactly a new idea to have a fight about the debt limit or as a way to kind of force a conversation about how much the government should be spending. Maya McGinnis runs the Center for a Responsible Federal Budget. And this is kind of the thing they really focus on is debt and whether or not the government should be spending as much money. And, you know, she told me that it's really not new to fight about the debt in this way. Everybody uses the debt ceiling for their favorite policies.

But the real problem here is that you now have people actually talking about defaulting. So, yeah, that is where things kind of change is after 2011, there started to be a number of particularly House Republicans, but it has spread since then, who kind of raised the idea that what would really be the problem if we didn't pay the bills on time? Well, I guess we have the potential to find out. So the thought was, I guess, that there would be this debt limit so that debt couldn't get out of control. Where is that debt coming from? I mean, that debt is coming from a lot of things. It comes from money that was spent during the pandemic. It comes from money that was spent on roads and bridges. It's money that is spent on military efforts. Like I said, you either can raise taxes or borrow money to pay for things that the government spends money on. And the government spends money on a lot of stuff. One point that I think we should make here is that this debt isn't entirely a liability. People can buy U.S. treasuries. It is a huge part of the global financial system, the U.S. selling these securities and U.S. treasuries. So it is more than just, you know, a negative on the balance sheet. It is part of what keeps the global economy running.

Right. And zero debt is not a goal. It is not a goal, except, well, it is not a goal for most people in Washington right now. Right. So now that we know more about the debt itself, let's talk about what happens if the U.S. can't pay its debt, if Congress, for whatever reason, decides not to increase the debt ceiling or doesn't do it in time.

More on that in a second. And we're back. And Kelsey, let's talk about that potential economic calamity. Let's go back to the last big standoff about the debt ceiling. It was during the Obama administration. It looked like the U.S. might default or might not pay its debts. It got very close. And there were some consequences, even though the U.S. didn't ultimately go over the cliff. Right. And, you know, you're not the only one thinking about 2011 here. Most of the economists and experts I talked to referenced that moment as the clearest comparison to where we are today. Marcus Andy of Moody's Analytics reminded me that the markets

got really spooked. After a lot of drama and a lot of market turmoil, the stock market at one point, I think, was down intraday almost 20%. So that's a pretty large market swoon. So there's a lot of angst. And then, of course, after it was all said and done, S&P, one of the credit rating agencies, downgraded the nation's debt for the first time ever. Yeah, I remember the night that the S&P, one of the credit rating agencies, downgraded the nation's debt for the first time ever. Yeah, I remember the night that the S&P downgraded the U.S. debt and being live on the radio from the backseat of a car. Oh. Having left dinner because this thing happened. Yeah. So what are people saying now about what could happen if the debt ceiling is not raised?

Well, let's let our experts speak for themselves on that. The U.S. is not able to govern itself in a way that is functioning. And we should all be worried both about the debt ceiling itself, but also about what it says about our politics. Don't worry about your stock portfolio. Worry about your job, because a lot of jobs are going to be lost. Unemployment is going to be a lot higher. The economy is struggling already trying to avoid recession because of high inflation and high interest rates. This will certainly push us in, and it's going to be about layoffs. Stock portfolios will be the least of people's worries.

It could be worse than Lehman Brothers, where everyone basically demands their money back because they don't believe the collateral anymore, and you have the equivalent of a run on the global financial system. So that's Jason Furman. He was an economic advisor during the Obama administration. And when he talks about Lehman Brothers, he's talking about the bank, Lehman Brothers in the 2008 financial crisis. And before that was Mark Zandi and Maya McGinnis. So that's some pretty dire stuff. Yeah. And the thing is that the U.S. has never been to this point before.

Right. The point of default. The U.S. has never gotten to default. As you mentioned, 2011, they got pretty close. Quite close. But we don't actually know exactly what will happen because we've never actually been there. But everyone who knows anything is quite concerned. Right. And, you know, they're concerned. But part of the problem here in this political moment is we don't exactly know when that concern should hit. And that's because there's this thing called the X date. And that's kind of the range of time in which they think the government will run out of money to pay their bills. Now, I say a range of time because it's really hard to predict an exact date when that might happen, in part because they're calculating a couple of different things. One is how much money the government is bringing in. And there are certain dates along the calendar where the IRS reports money that's coming in from taxes. That's an important starting point. But then there are the dates in which there are big payments due and they can't move those payments around. So it has a lot to do with the alchemy and timing of when money comes in and money is supposed to go out. Well, and today there is a meeting that is taking place at the White House with the top congressional leaders and the president of the United States. And I've got to say, there's not obvious urgency.

They're kind of blasé about it at the moment. We're three weeks away from what could be the beginning of the X date, from the potential X date. And the urgency isn't there. I guess part of that is because it may be June 1st or it may be July 15th. Right. Or it might be even later than that. They don't really know exactly. And some of the concern for the experts I talked to is that this lack of urgency around when the exact date is makes it so it's harder for them to get a deal. The markets aren't exactly responding right now. Politicians aren't responding maybe because the market's not responding. But all of the experts who are watching it are getting more and more and more anxious. So there is a lot of tension in this exact moment,

and a lot of people are talking about kind of harebrained ways to fix it that does not really involve Congress. Let's talk about them because there's sort of a long list here, including some ideas like, let's just not pay some bills. Is that an option? Well, there have been plenty of people in the past 10 years who have suggested that, you know, you could choose which bills to pay and when. But most economists, most experts say that is simply not possible, both for constitutional reasons, but political reasons. Deciding not to pay foreign debt, but choosing to pay, say, for veterans health care is just not a decision that our government is set up to make. All right. Let's go through a few others because this is fun. The trillion dollar coin. Yes. The trillion dollar coin is something that popped up again out of 2011. The idea was that

the government would create this platinum coin, trillion dollar coin, though I should say it has to be much more than a trillion dollars now adjusted for inflation and the amount of debt. But the idea would be that, you know, you would have this coin that would cover all of the debt and it really wouldn't be a problem. Okay. Yes. Is anyone serious talking about that? No. Okay. How about just paying the bills, just ignoring the debt ceiling, blow past it?

Well, some of that is kind of talking about the 14th Amendment and the idea that the public debt quote shall not be questioned. This would essentially, you know, allow them either not to pay it or let Biden just to plow ahead and pay those bills without Congress acting. Again, constitutional problem. They could go down this route. It would almost definitely be challenged in court. And you still have this market problem of a court battle trying to determine whether or not debts are paid. Markets aren't going to like that. No, I mean, I suspect that another idea that's being talked about is just a short term extension. That's like the most talked about thing is like, let's just do a couple months, you know, get past the summer. And I wonder how the markets would react

to that. You know, that's hard to say, because if there is a question about whether or not the markets truly believe that the debt payments are at risk, if the markets, the people I talked to said if the markets really think that, you know, they'll come around to getting a bigger deal eventually, it may be fine to have short-term extensions. And a lot of people kind of expect that might be the way it goes. Another idea is just raise the debt limit by a lot. The U.S. is the only country in the world that really has this type of crisis. Yeah, one of the only ones, yeah. Because the U.S. is the only country that does it this way. So why not just raise the debt ceiling by so much that we never have to talk about it again on this podcast? They like to set deadlines for themselves and force themselves to revisit a big question. It's something that they do with a lot of stuff and debt and deficit being, you know, one of the biggest things that Congress deals with.

They like cliffs. They like cliffs not just because it forces them to take action, but it forces them in theory to be responsible about how they choose to act from a policy perspective. The other reason, the flip side of that, is Congress is really bad at dealing with big things and taking big risks because they are ultimately people who have to get reelected. And when you have to get reelected, you don't like to do things that are going to make people mad. So I guess that would rule out eliminating the debt ceiling entirely because you don't want to be the member of Congress who voted to say the debt should never be a problem. Yeah. I mean, the bigger overarching thing that happens here is you have to pass a law to change this. And that means all of these politically unpopular things become really hard.

And a programming note here. This afternoon, congressional leaders are at the White House meeting with President Biden to try to hash out this debt ceiling stuff, though I will say the White House says it is not a negotiation about the debt ceiling. And the congressional leaders have a different idea. So everything is great. We will be following that meeting and its results, and we will report it back to you in this podcast feed sometime later this week. In the meantime, I'm Tamara Keith. I cover the White House. I'm Kelsey Snell. I cover politics. And thank you for listening to the NPR Politics Podcast.