How The Debt Debate Might Play Out

The White House and Congress continue to wrangle over a deal on the debt ceiling before Aug. 2. If they don't, the nation will default on its loans. Host Scott Simon talks to Mark Zandi, chief economist at Moody's Analytics, about the obstacles to a deal, what a short-term deal might look like, and the consequences of no deal being reached at all.

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SCOTT SIMON, host: This is WEEKEND EDITION from NPR News. I'm Scott Simon.

President Obama all but hit the roof on the debt ceiling debate this week. At a midweek news conference, the president scolded Congress for failing to reach a deal and effectively held its members after school.

President BARACK OBAMA: If by the end of this week we have not seen substantial progress, then I think members of Congress need to understand we are going to, you know, start having to cancel things and stay here until we get it done.

SIMON: Now, part of the scolding seemed to work. The Senate has cancelled its July 4th week recess and will stay in the capital in an attempt to hammer out a deal. The negotiations were made more urgent yesterday when the Treasury Department said that a deal must be struck by July 22nd to avert a government default by August 2nd. House Speaker John Boehner charged that President Obama has been AWOL himself from the debt limit debate. We're joined now by Mark Zandi. He's chief economist of Moody's Analytics and he joins us from West Chester, Pennsylvania. Mark, thanks so much for being with us.

MARK ZANDI: Thank you.

SIMON: What do you make of the way the president used the famous bully pulpit this week?

ZANDI: Well, I think he's sounding the alarm bells, and I think he should. I think it's vital that Congress and the administration come together and raise this debt ceiling limit in the next couple, three weeks because if they don't I think we're going to have a mess on our hands.

SIMON: Describe that mess.

ZANDI: What will happen is we'll come back from our July 4th weekend. By mid-July, if there's no progress, I think global investors will start getting nervous. They'll attach probability to the possibility that the debt ceiling isn't increased by August 2nd. Financial markets will become increasingly unsettled. By the end of July I think they will very unsettled. If nothing happens by August 2nd, I think it'll be turmoil. I think interest rates will rise. I think stock prices will fall. I think the dollar will fall in value.

SIMON: So, you take this deadline as real, not just an attempt to focus the mind?

ZANDI: It's very real. I think the Treasury runs out of options and will literally have to balance the budget overnight. And, of course, we're running a $1.3, $1.4 trillion annual budget deficit. So, that means draconian cuts to lots of everything - Social Security payments, Medicare, everything in between - and I think that would just send the economy into a recession.

SIMON: So, what would August 3 look like under this scenario?

ZANDI: Well, come August 3, the Treasury is going to have to start making some hard choices. Somebody's not going to get their money. Now, they probably certainly would give IOUs but the checks would stop flowing. And pretty soon - I think they have a Social Security payment due a few days later - I don't think they'd have enough cash to pay all the money they're obligated to to those Social Security recipients, so they wouldn't get all their money. They'd get an IOU but they wouldn't get all their cash. And, of course, the cash problems will just intensify with each passing day and the cost to the economy, the damage to the economy would mount.

SIMON: The president sounded a little optimistic at Wednesday's news conference in this sense. Let's listen to what President Obama said:

OBAMA: I think there's a conceptual framework that would allow us to make huge progress on our debt and deficit and do so in a way that does not hurt our economy right here and right now.

SIMON: Mark, do you share that view?

ZANDI: Yeah. You know, I'm optimistic that policymakers are going to get it together here in time to avert a real problem. I think there is a reasonable amount of commonality between the parties. I think everyone's onboard with the amount of deficit reduction we need to do - four trillion over the next decade. And I think there's agreement on big aspects of how to achieve that. So, I think this is increasingly just a question of politics and not economics. It's a matter just signing on the dotted line, finding the political will to do that, and I think, you know, when push comes to shove they'll figure it out.

SIMON: Does that mean that Democrats have to accept cuts and Republicans have to accept tax increases?

ZANDI: Yeah, I think so. I think we need to find a compromise. I think there's already agreement with respect to sizeable spending cuts. I think the debate right now is with regard to tax revenue increases, whether there will be any and what form they'll take.

SIMON: Mark Zandi, chief economist of Moody's Analytics. Thanks so much for being with us.

ZANDI: Thank you.

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