Answering Listeners' Questions On The Debt Ceiling

The debate over whether to raise the federal debt ceiling is multifaceted — and often confusing. So, All Things Considered invited listeners to tell us what they would like to understand better. Robert Siegel puts a few of their questions to economist and former Federal Reserve Governor Larry Meyer and NPR congressional correspondent Andrea Seabrook.

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MELISSA BLOCK, Host:

For nearly 100 years, Congress has limited just how far the U.S. can go into debt by setting the so-called debt ceiling. The limit has been increased dozens of times to adjust for inflation or major expenditures, war for example, but as we just heard, increasing it this time around is proving more difficult.

Back in April, in an interview on ABC, Treasury Secretary Timothy Geithner made clear what he thought would happen if the ceiling is not raised.

(SOUNDBITE OF TV SHOW, "ABC NEWS")

TIMOTHY GEITHNER: We'd have to stop making payments to our seniors - Medicare, Medicaid, Social Security. We'd have to stop paying veterans' benefits. We'd have to stop paying all the other payments on all the other things the government does. And then, we would risk default on our interest payments. If we did that, we'd tip the U.S. economy and the world economy back into recession, depression.

ROBERT SIEGEL, Host:

Well, we acknowledged this is a very complicated subject, so we asked you last week what questions you have about this conundrum, and many of you sent in questions.

Here to help answer them is, first, economist and former governor of the Federal Reserve system Larry Meyer.

Welcome once again.

LARRY MEYER: Pleasure to be with you.

SIEGEL: And we're also joined by NPR congressional correspondent Andrea Seabrook to field the political questions.

Andrea, thanks for joining us.

ANDREA SEABROOK: Great to be here, Robert.

SIEGEL: And a lot of listeners asked us to start with a primer, a little historical context.

MICHAEL HARRIS: My name is Michael Harris. I'm from Statesboro, Georgia. And I would like to know how often has the debt ceiling been raised in the past, and has there ever been this much controversy over raising it?

SIEGEL: Andrea, first, this is an issue that Congress has tackled pretty routinely over the years.

SEABROOK: It has been raised 102 times since 1917, when the debt ceiling was first established. Just in the last decade alone, it was raised eight times under President Bush, and it's been raised three times so far under President Obama.

So it's something the Congress is very familiar with, and oftentimes, the party in the minority will vote against it. But this time, it seems to be a lot more of a stalemate than usual.

SIEGEL: In fact, we should note that Senator Barack Obama, as his Republican rivals now often point out, once did vote against raising the debt ceiling.

SEABROOK: Yes. And a lot of the Republicans currently in Congress often voted for raising the debt ceiling before, just about every one who's been in Congress for longer than a year or two has both voted for and against raising the debt ceiling at some point or another.

SIEGEL: Well, Larry Meyer, here is the - well, a question that sums up what we heard from many listeners. This was how it was put by Benita Johnson(ph) of Pittsburgh, Pennsylvania.

BENITA JOHNSON: My question is: What would the implications to our economy be if the debt limit were not increased?

SIEGEL: What do you think?

MEYER: Well, first of all, it would be unprecedented, so we have to keep that in mind. But it's clear if it is raised or not, as we approach that day, bond markets would become unsettled. If it's breached, then interest rates will rise, the dollar will fall, equity prices will fall as well.

But this is not the real fiscal train wreck that we worry about. This is probably not catastrophic as long as a bunch of compromises is reached, and it doesn't take too long to do it, but it's going to be ugly.

SIEGEL: But when you say the bond markets would be worried, how would ordinary people feel the difference, say, after passing August 2nd without an agreement and, on the other hand, raising the debt ceiling before that date?

MEYER: Well, let me take it just a step further if there's no compromise, so we make it a little bit more...

SIEGEL: OK.

MEYER: ...you know, intense. So they'll pay more for their mortgages. They'll pay more when they borrow to purchase a car. They'll be poorer because their portfolio will have declined in value as equities fall. They...

SIEGEL: You mean the stock market would...

MEYER: Right.

SIEGEL: ...go down right after?

MEYER: And a more subtle point is the dollar will depreciate. The meaning to them is they have to pay more for all the goods that the U.S. imports, which is a lot of goods.

SIEGEL: Since we talk about the possibility of default, if bond holders from whatever country or state or municipality get 99 cents on the dollar or one quarter is deferred in repayment, is that a default?

MEYER: Yes. Any interruption of interest-to-principal payments is a default.

SIEGEL: Not being paid on time and in full...

MEYER: Absolutely.

SIEGEL: ...is a default?

MEYER: Absolutely. Partially paying it is a default. Now, there's no question that when a budget compromise is reached, they will be made whole. This is not that they're going to fail to get their interest. There could be some delay, but even that raises some serious concerns.

SIEGEL: If those consequences became clear before the 2012 election, Richard Thomas(ph) of Alexandria, Virginia, writes: Isn't that equal, Andrea, to political suicide for both parties?

SEABROOK: Well, the question would have to be more political suicide. I mean, in a lot of ways, the Congress has already committed a lot of political suicide in the past few years, hence their approval numbers are in the low teens, where they've never been.

The Congress is not a favorite body of the American voter right now, and the mood is to throw them all out. That Americans didn't get what they wanted in 2008, and they didn't get what they wanted in 2010, either. So, I think yes, it would make it much, much worse than it already is. The fact that we're even here in the first place is making it worse for voters.

SIEGEL: Well, here's a listener question for former Federal Reserve Board governor Larry Meyer. A lot of different plans on how to tackle this issue have been flying around Capitol Hill. Brian Melton(ph) of Philadelphia offers this apparently simple one.

BRIAN MELTON: If the government is no longer allowed to borrow money to meet its obligations, why can't it just print more? I know that would be inflationary, but isn't that preferable to default?

MEYER: Well, that's a simple answer to that: Because they're not allowed to. There are only two ways that the government can finance its spending, and that's by tax revenue or by borrowing. Only the Fed can inject money into the economy.

And so the question really comes down to: Would the Fed buy the government debt in effect to prevent interest rates from rising and as a consequence allow inflation to get out of control? That's the question. So the answer, in my view, is not voluntarily they wouldn't, only if politicized and only if they lose their independence.

SIEGEL: Here's a question from David Feelkoff(ph) of Baltimore, Maryland, who sent this observation and a question.

DAVID FEELKOFF: If the debt load is so big, you would think investors would demand a higher yield from treasuries, yet yields remain historically low. Why?

SIEGEL: Larry Meyer, explain.

MEYER: Well, I can't explain it. I think that's a great question. The bond markets are complacent. We don't see any impact on interest rates either from concern about the debt ceiling or from the fact that the fiscal train wreck is coming down the tracks. So that is hard to explain.

But presumably, and I would expect that complacency will evaporate really quickly, if we go down to the wire with the debt ceiling and absolutely if there's no credible budget compromise.

SIEGEL: Larry Meyer, we have this deadline that's coming, and earlier, we thought it would come in the spring. Now we see through various methods of accounting it can be deferred until August 2. How well does that arbitrary deadline match our sense of danger to the economy at large? Do you think the country has to now change its behavior?

MEYER: Absolutely. More concerning than not extending the debt ceiling was not to get a budget compromise. Now, that would not have been such a problem perhaps a little while ago, before it became so controversial. Now the public is really attuned to it. The markets are really attuned to it. So yes, we would have much more severe consequences, immediately in that case.

SEABROOK: And I think one thing to watch going forward, Robert, is how - if the Congress does come to an agreement, and it does raise the debt ceiling, for how long do they raise the debt ceiling? Do they set this up to be another political fight right before the 2012 elections, or are they willing to raise it to get through the next elections and maybe pose a more serious stance on this?

SIEGEL: Well, thanks to both of you. Our guests were economist and former Federal Reserve governor Larry Meyer, who is now senior managing director of the firm Macroeconomic Advisers; and NPR congressional correspondent Andrea Seabrook. Thanks to both of you.

MEYER: Pleasure being with you.

SEABROOK: Thanks, Robert.

SIEGEL: And thanks to all of you for writing in your questions.

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