We’ve got a double-barrelled podcast for you. Jeanna Smialek, economics reporter for The New York Times, joins us to break down the debt-ceiling showdown that’s enveloping Washington. Plus, economist Jason Furman is back to rehash his debt-ceiling grievances from the Obama administration, then answer some deeper questions about the U.S. debt trajectory and the state of the economy today. But first: a new way to think about the debt ceiling and fears of the U.S. government running up the tab.
In the following excerpt, Jeanna Smialek explains the origins of the U.S. debt limit and breaks down the current situation in Washington.
Derek Thompson: So the U.S. has this thing, the debt ceiling. We have a limit on our ability to borrow money, even for spending that Congress has already approved. And if we don’t increase that limit, if we default on our debt, bad stuff happens. So I want to sort of dig into some of the basics here. First off, why does the U.S. have so much debt?
Jeanna Smialek: We have debt because we spend more than we take in on an annual basis. So the government has a bunch of outlays every year: Medicaid, Medicare, social security, defense spending, all the various programs that we’re all familiar with. And those cost more than the government raises in tax receipts. And so we end up with a deficit that adds up over the years. We have to borrow in order to fund that deficit. And that is why we have a big debt pile.
Thompson: Dozens of countries have deficits, dozens of countries have debt, even countries that control their own currency. The U.S. and Denmark are the only countries in the world that have a debt limit. So just give us a little history of that, why are we so unique in this way?
Smialek: So the debt limit is something that historically made a lot of sense. Congress used to be very involved with how the government was funded. It used to be pretty intimately connected to the money-raising process that the Treasury uses. That has sort of faded over time. With the dawn of World War I back in the 1910s and then World War II after that, we really saw the Treasury exercising a lot of autonomous ability to go ahead and raise debt, sell government bonds in order to raise money to pay for the nation’s deficit. And so it became the kind of situation where the government would authorize spending and the Treasury would basically figure out how to fund that spending. But the debt limit lived on as this vestige from the days when Congress was involved in those decisions. And so now we regularly have a situation where Congress passes budgets, those budgets are clearly going to push us past the debt limit, but we still separately have to go ahead and raise the debt limit in order to authorize the debt issuance that will raise the money for the spending that we’re already planning on doing.
Thompson: What’s so confusing to me about this conceptually—I understand the words that you’re saying; I understand the definition of the debt limit; I understand that it’s this 106-year-old law—but what’s so bewildering is that the way that we teach kids how a bill becomes a law is we say, “Congress passes a bill, the president signs the bill, the bill becomes a law, end of story.” But what you’re telling me is—and this is true—it’s not the end of the story, because Congress has to separately approve of the federal government’s ability to pay for the things that Congress has already told the federal government to pay for.
It is a weird double step. When you’re trying to explain the logic of this rule to friends or family or even to yourself, is there a metaphor that comes to you? It’s like having to pay off a credit card and then separately having to tell the bank that has the checking account that you’re paying off the credit card with, like, “Yes, I approve this spending, yes, I approve this spending.” It’s a really bizarre sort of two-step here.
Smialek: I actually often use the credit card metaphor, but I use it a little bit differently than most people do. So a lot of people will say, “Oh, raising the debt limit is raising your credit limit.” And I actually think that’s kind of wrong, because that implies that you’re going to do all this new spending that you wouldn’t otherwise have done because you’ve raised the debt limit, which could be true to some degree, but that’s not what this is fundamentally about. I think it’s more apt to say that raising the debt limit is like agreeing to make and raise the money to pay back the bills you’ve already incurred on your credit card. You’ve got that Netflix subscription you know is just going to hit your credit card at the end of the month, and raising the debt limit is raising the money you need to pay back that Netflix subscription. This is spending we’ve already committed to.
Thompson: That’s right. It is spending you’ve already committed to, and a huge difference between households and the federal government—I’m remembering my 101 macroeconomics reporting here—individuals, households do not have a machine at home that prints money. The federal government has a machine at home that prints money; it’s the Federal Reserve. We have the capacity to create more of our own currency. We control our own currency. And so in that case, yes, it’s exactly what you said. It’s kind of like me having to approve of a W2 or 1099 income that’s coming into me. I have to approve that I can use that money to pay off a credit card. It’s a completely bewildering two-step.
All right. Back to reality here. Back out of the world of metaphors. So what does it actually mean to default on our debt? What are banks afraid of happening if we simply do not raise the debt limit?
Smialek: I think it’s important to think about the two kinds of spending that happen with the debt limit. There are spending authorizations, money that’s just going to flow out of Treasury, that just happen on a regular basis—think military, salaries, social security payments, etc. And then there is the Treasury statutory ability to issue more debt, to pay back principal on old debt, and to pay its coupons, which is sort of the interest it owes on the debt it’s already issued, so the bonds.
So the thing that people are, I would say, most worried about, especially on Wall Street, is the possibility that you could run into a problem with those latter two areas that we could get to a situation where the government realizes or decides that it can no longer pay back the principle on the bonds that it’s issued, or it can no longer pay coupons interest on the bonds that it’s issued.
Because if that were to happen the government would be in financial default. We would not be paying back on our loans to foreign investors and to everyday people who hold these in their retirement accounts. And that would be catastrophic. It would suggest that you can no longer trust America’s debt markets to be the deepest, the most liquid, the safest in the world. And we would lose a huge benefit that we derive from having these very safe, very secure debt markets, which is, we probably end up paying more for our future borrowing.
And so that is what Wall Street is so worried about. They think it could be just catastrophic if that were to happen. They’re also obviously worried about not being able to pay the other bills. I think that nobody thinks that it’s a good idea to not pay any bill that the U.S. government owes. The default is seen as sort of the most catastrophic possible scenario, but many people think that if you don’t pay social security recipients, or you’re not paying some of your state and local governments money that is due to them in time, people are still basically going to see that as a default. And so we are in a really tough situation where any mispayment is pretty bad news.
Host: Derek Thompson
Guests: Jeanna Smialek and Jason Furman
Producer: Devon Manze