Watch Fareed’s interview with Wolf and Minton Beddoes on GPS this Sunday on CNN at 10 a.m. and 1 p.m. ET
GPS Digital Producer Jason Miks sits down with Zanny Minton Beddoes, economics editor of The Economist, and the Financial Times chief economics commentator, Martin Wolf, to discuss the recent government shutdown, politics in Washington, and why the debt ceiling is “absurd.”
Congress managed to agree to a last minute deal over the debt ceiling and government shutdown. But how would a debt default have affected average Americans, or how could it if this comes up again in the future?
Minton Beddoes: October 17 was the day on which the Treasury Department said it was going to run out of capacity to juggle its finances such that it could continue borrowing. And that means that from October 17 it would have had no more borrowing authority, and it essentially would have had to go to a cash budget overnight. It could then only spend what tax revenue was coming in, which is the equivalent of about 65 percent of spending. That means the government would not have been able to pay all its bills. Something would have had to give: that could mean stop paying interest on the debt, or stop sending social security checks out, or stop paying other obligations, whether to soldiers or suppliers.
There was one practical question and a lot of legal ones. The practical one was whether the Treasury, which pays millions of people every day, would find it practical to prioritize certain payments – could they actually do that, legally and practically.
And secondly, if they could, what would they prioritize? The rest of the world was worried most that they would fail to pay the interest on their bonds, so that would be a technical default. If they were unable to send out social security checks, it would be equally breaking the law, because it would be breaking a promise that they had made. But that would have a very different impact – it might not have paralyzed global financial markets, but it would have had a very big political impact as millions and millions of senior citizens didn’t get their social security checks.
There was a clear timetable of what payments were due when, but it wasn’t clear on what day a calamity might occur, the Treasury still has about $30 billion in cash on hand and it could have drawn that down. So probably on October 18, nothing would have happened. On October 19 nothing. On October 20, probably nothing. But at some point, something would not have been paid, and I suspect in anticipation of that, financial markets would have become much, much more jittery.
So the impact on the rest of the world was 1) the potential of a default and 2) the huge fiscal tightening that would happen if you had to suddenly cut back your spending. And that alone would have pushed the economy into recession.
Wolf: Some people would not have gotten their money. Many of those people would have been Americans. Lots of securities deemed to be completely safe would cease to be safe. If that had happened, it would have created devastation in the financial markets because these are the safest form of collateral that are used in the markets for borrowing.
If they had avoided that and just focused on the domestic economy, the recession would have been, my own guess would say, deeper than 2009, because you would have an instantaneous fiscal tightening of GDP and all the automatic mechanisms to smooth such a tightening would disappear. It would have had a devastating economic effect, and the long term credibility of the United States would have been seriously damaged. And we would also without a doubt ended up with a host of law suits, and nobody knows how they would have been resolved with the administration no longer meeting its obligations.
So, should the debt limit be scrapped?
Wolf: It’s an absurd law. In my view, it over determines the system. Basically, what a government does is that it makes budgets, it determines its tax law, and it determines its spending law. That has certain implications for borrowing, and you can adjust these over time to make the borrowing manageable. That’s how it works. If you in addition impose a limit on how much you borrow, and that becomes binding, then you can’t meet your spending obligations or you have to change your tax law, which wouldn’t be done in the short term.
So if this bites, the government is required to break the law. You can’t have a law that requires the government to break the law. It seems to me that this is completely crazy. And if it is implemented, it blows up the world. So having a law that requires illegality if it bites and blows up the world – it seems to me almost impossible to imagine inventing such a bad law. And if you have a bad law you should get rid of it. The way the U.S. has always been able to handle it in the past is because they have always raised it. That’s fine if you ignore it. It becomes a problem if you stop raising it.
Minton Beddoes:That’s right. They’ve had this law since World War I. And originally Congress had to agree on every single debt issue, and introducing the debt ceiling seemed to be a rationalization of this so you didn’t have to deal with every single one. And as Martin says, it was almost a formality for a long time.
I think the reason it has become a problem now is not so much a function of the stupidity of the rule, which I agree is a stupid law. It’s that it is a symptom of the dysfunctionality whereby certain groups in Congress think it’s perfectly OK to vote for spending and not vote for the debt authority to fund it. It plays to the idea that you can both hate government and vote for spending bills.
It’s the same kind of phenomenon as people saying “Get the government off my Medicare” It’s the view that government is terrible, we’re not going to fund government – but then we’re going to have all this spending. Getting rid of the debt ceiling is important in that it would stop this brinkmanship. But it would also ensure that you had consistency so that if you voted to change spending, voted to change tax policy, that’s the way you would impact the budget –not have some rearguard action later on an extraneous issue. That’s what happened this time – it was about Obamacare, which didn’t have anything to do with the immediate tax and spending plans.
So this growing suspicion of the government – is there something unusually American about this?
Minton Beddoes:I think it’s particularly extreme here. I remember some years ago in Utah at a national park having a long conversation with the ranger, who is obviously employed by the federal government. He was explaining to me how the federal government was terrible and it needed to get out of people’s lives. And you have that kind of dissonance again and again.
Martin, people hate the government in other countries too, but here it seems a particularly extreme version of that…
Wolf: I think it’s unique. And that’s because of the historical ideology of the United States, which has traditionally been against government – they regard it as an intrusion. But nonetheless, in the 20th century, here as everywhere else because we live in a modern industrial economy, government has had to assume many responsibilities, often in crisis or war. And really everyone is happy about that. So they hate the idea of an active and intrusive government – it is seen as a very wicked thing. And they are also utterly dependent on it. One of the ironies if I remember correctly is that the one program that everyone seems to agree they should abolish is international aid. And actually the United States spends a couple of tenths of a percent of GDP on it – it is so small. They don’t know. The Utah story is very important – most Americans don’t know what the government spends its money on.
Minton Beddoes:The whole irony of this government shutdown was the government got shut down, but then the House wanted to vote on the bits of the government that were popular. So on one program after another that appeared popular, they suddenly became great fans of it. The dissonance of people’s views is remarkable.
Most commentators seem to agree that the health of the U.S. economy in the long term depends on finding a balance of spending cuts and revenue increases. How optimistic are you that some sort of balance can be struck?
Minton Beddoes: I think that everyone sensible recognizes that America’s real fiscal problem is not a short term fiscal problem, it’s a medium to long term one. To deal with it you need first to get health care costs under control, and keep them under control, because Medicare costs are the single biggest thing driving the long term budget problem.
Secondly, you need some actually relatively modest change to the social security system, like raising the retirement age, changing the benefits structure so you means test a bit more. Ideally, I would say although it’s not essential, that some sort of tax reform should be undertaken, because this is one of the most inefficient tax systems in the world. It would be good for America to do all of those. And I think sensible people in both parties could coalesce around a big, bold fiscal reform strategy that includes these elements.
The problem is that extremists on both sides, particularly Republicans, don’t want to countenance large parts of that agenda. On the left there are people who don’t want any change to entitlements at all, while on the right there is the view that all tax increases of any sort would be terrible. So we have reached this stalemate where the only thing that happens is stupid short-term cutting, like the sequester, but which doesn’t address the long term problem.
Can we change that? We can hope that maybe this whole debt ceiling drama has shaken up the extreme wing of the Republican Party so they can see there is something to be gained by achieving something more meaningful. But I have to say I’m skeptical. The ideological positions are so far apart. I think there is such mistrust and almost loathing between the two sides that I don’t expect anything really dramatic until we’ve had afew more election results.
Wolf: I agree completely. I would just add two things. One is the underlying one – the longer term deal that Zanny has broadly underlined is that the non-social security, non-assistance for the poor, parts of the budget are getting too small. I think there is a real question about whether the U.S. is investing adequately through the government in its long term future. The U.S. government is an important part of the innovation machine. So there is a question about the future of government.
But the crucial point that Zanny made is that none of this is urgent. The truth is that none of it has to be fixed until the 2020s. It would be nice if they fixed it now, but the next 10 years are not a serious problem. There’s no doubt the U.S. can support its current debt, and the latest forecast from the Congressional Budget Office suggests the debt situation will actually improve a little over the next decade.
So there’s no urgency about it. So you have to just wait and see what happens on the politics. And on that, I think it’s open – we’ll see what happens. So the idea that there needs to be a long term deal now is nonsense. There are a lot of people pushing for it, and many of them don’t realize how big a tightening there has been. But there is an immediate need, and that is what Zanny said.
The sequester process is now implemented, and it is an appalling process. If you talk with experts about what it is doing to the Defense Department, for example, what it is doing to the National Institutes of Health, it is very bad. So what they need to do is reach a deal if they can over what is to my mind a much too low level of spending.
But they have to recast spending to get rid of these sequester caps, because they were designed to do damage – that was the idea so that people would renegotiate. Well they are doing damage – but people aren’t renegotiating them. And so the real need in these budget talks, about which I have little optimism, is to reshape the spending envelope so it’s less damaging to the United States. And I’m not even confident they can agree on that.