A political standoff over the debt ceiling could harm the U.S. economy
JUANA SUMMERS, HOST:
The economy is driving towards a cliff, and my hands are tied. That's essentially the message of a letter from Treasury Secretary Janet Yellen to congressional leaders. If Congress does nothing, the country will default on its debt sometime this summer. And that would not be good.
ROHIT KUMAR: It's bad. It's just a question of how bad.
SUMMERS: That's Rohit Kumar. He's a principal at PricewaterhouseCoopers where he advises businesses on economic and tax policy.
KUMAR: Most models suggest at least a two-quarter recession in the United States. It's a drop in the market, spike in interest rates, mortgages go up, credit card loans go up, auto loans go up, all of that, you know, to the harm of the general public.
SUMMERS: To avoid this, Congress will have to raise the nation's debt limit. Here's how Harvard economist Jason Furman explains it.
JASON FURMAN: Congress has to give Treasury permission every time it goes out and borrows money, which it has to do quite a lot because we spend more than we collect in taxes. Starting about 100 years ago, they gave a blanket permission that you can borrow up to a certain amount, and you can't borrow past that even if you're borrowing money to pay bills that Congress itself passed a law saying you have to pay.
SUMMERS: Right now, the amount is set at $31.4 trillion. Republicans who control the House say they won't agree to raise that debt ceiling without big cuts to federal spending. President Biden says there should be no strings attached, and he won't negotiate on the issue. In her letter to Congress, Yellen said the U.S. will hit that limit tomorrow.
It's not an immediate disaster. The Department of Treasury can use what Furman describes as under-the-hood accounting moves to stabilize things. But that will only work so long.
FURMAN: This is really more of the starting gun for a process that, you know, five, six months from now will get much more serious when those extraordinary measures run out and the government would be faced with defaulting on the debt or defaulting on its other obligations if nothing was passed by Congress.
SUMMERS: I spoke with Jason Furman, along with Rohit Kumar, who you heard earlier, because they sat on opposite sides of the negotiating table during the most perilous standoff over the debt ceiling. That was in 2011, when the government came within hours of a default. Furman was an economic adviser to then-President Obama, and Kumar was a top aide to Senate Republican Leader Mitch McConnell. I wanted to know what their experiences might tell us about what to expect this time around.
So thinking back to where we were in 2011, Jason, from your perspective, how close did the country actually get to default, and what was it that finally broke through the ice there?
FURMAN: There were moments when I was pretty scared. We had an initial set of meetings that actually then-Vice President Biden oversaw, and I thought they were very amicable. Everyone got along really well. But they fell apart. And the meetings moved into the Cabinet Room, and it was pretty acrimonious, and it was pretty ugly. And I was pretty nervous. But I did know that everyone in that room really understood the gravity of the situation and the need to solve it. And so for me, that was the ace in the hole that made me think that we'd get it done.
Now, for that to work, you do need the people in the room to have enough power on the people outside of the room as well. And there I always knew if Senator McConnell agreed to something, he would get Republican senators to agree too. Frankly, I was more nervous about Speaker Boehner and whether the Republicans in the House would follow him. And right now, I'd be terrified that even if Speaker McCarthy had a view, that he could line up the votes from his caucus to implement that view.
KUMAR: So I think I was probably more nervous than Jason. And I distinctly remember Friday night, 72 hours before default. I did not see a path to an agreement. And I said as much to my wife at the time. I said, we are in - I used a word I won't use now - but I expressed a lot of dismay about the possibility of striking an agreement. And it wasn't actually until the following morning that we had kind of the final breakthrough. And then we spent the next couple of days rapidly drafting this into law.
And to Jason's point, it's because, ultimately, everyone in the room understood this had to be done. There was no way around it. And the consequences of failure were just too terrible to actually contemplate.
FURMAN: I should say, Rohit did carry around a binder. On that - on the cover of his binder it said, buy gold. At the time, he told me it was just a joke. But listening to him now, I'm nervous.
SUMMERS: Jason, you alluded to this a bit, but you made the point that one of the reasons why you thought that there could possibly be an agreement is because the people outside the room would follow the lead of the people inside the room. And I'm thinking about what the House looks like today, with Speaker McCarthy's slim majority. To both of you, how does that change things? And as from people who have been in these rooms, what do you think that the current makeup of the House and the Senate tells us about how this might go?
FURMAN: Look, I think it makes it much harder to have any form of negotiation. I think it's that experience and how close we came to the brink in 2011, how much more difficult a negotiation would be now that has informed this administration's approach and, frankly, the approach that most administrations take, which is that they're not going to negotiate over this. It's a basic piece of business that Congress needs to get done. They need to figure out how to get it done.
Part of how we did it in 2011 was sort of a messaging-type thing that made it look like it was a little bit more of President Obama's fault. It was a mechanism. Probably Rohit designed it. It was super clever. You know, if you need to do something like that for optics, you know, make the president own more of it, that's fine. But to have a big negotiation in the current climate, I think the downsides for the country are much larger than the potential upside.
KUMAR: So on this one, I think the tables have been turned. I'm a little bit more optimistic than maybe Jason is. And that's because, at the end of the day, whatever becomes law is not going to be something that gets the votes of only 218 Republicans in the House. You have a Democratically-controlled Senate, you have a Democrat in the White House, so any bill that becomes law to include something on the debt limit is, by definition, going to have to be bipartisan.
It's not that no Republicans would have to vote for this in the House or the Senate. You would still need 60 votes in the Senate, so you needed a minimum nine Senate Republicans. You would need some cohort of House Republicans as well. But it's not like you've got to get the same 218 that Speaker McCarthy had to get to be elected speaker. So the narrowness of the majority makes it a little trickier, but I don't think it sort of fundamentally alters the dynamic of how a bill is going to become a law in this arrangement of power.
FURMAN: I mean, the issue - and you know the Congress far better than I do, Rohit - is that it needs to come to the floor. And most speakers are very reluctant to bring something to the floor unless at least half of their own party votes for it. And will he be willing to sacrifice his speakership, which he has already made an awful lot of compromises to get in the first place? That makes me nervous.
KUMAR: No, look; I agree. I think the challenge is, can you get a so-called majority of the majority? So out of the, you know, 222 House Republicans, can you get, you know, half of them? But that is a much easier hill to climb than getting all 218 Republicans to vote for something that President Biden is going to sign into law.
SUMMERS: Jason, a question for you on the White House's position on this - unlike former President Obama, Biden is saying that he has no plans to negotiate over raising the debt ceiling. And I wonder, from your perspective, does he actually have that option?
FURMAN: Yes. Now, to be clear, he is going to have to negotiate the level of government spending. Every year in the United States, there's something called discretionary spending, which covers everything from education to national defense, and Congress has to pass those laws every year. So if you want to borrow less, you spend less. Pass a law to spend less. Don't take the debt limit hostage. I think that's his view. And I think that's, based on experience, the right one.
SUMMERS: Jason Furman is now an economics professor at Harvard, and he advised President Obama during the 2011 debt ceiling negotiations. And Rohit Kumar is now with PricewaterhouseCoopers. He was an adviser to Republican Senate Leader Mitch McConnell during those negotiations. Thanks to both of you.
FURMAN: Thank you.
KUMAR: Thank you. Transcript provided by NPR, Copyright NPR.