Discussion of the federal debt ceiling has dominated the front page recently. Several Washington University in St. Louis faculty experts, all members of the Weidenbaum Center on the Economy, Government, and Public Policy, have offered their opinions to the news media on the history of the debt ceiling and what may happen if a deal is not reached.
Steve Fazzari, PhD, professor of economics in Arts & Sciences, told the St. Louis Beacon that he doesn’t think the posturing between the White House and congressional leaders is the best way to make policy.
“The main concern is what happens to the economy if no deal goes through and the government is forced to reduce its spending to the amount of revenue it collects in taxes,” he said. “Will we actually even default? Nobody knows. There’s enough tax revenue coming in to pay interest, so the government can cover the interest, but it would have to cut its spending drastically and abruptly elsewhere. The cuts we’re talking about are huge and would be economically disastrous.”
They would be especially painful, Fazzari says, because the economic recovery is so fragile. Cutting $1 trillion in spending in one year, he explained, would destroy large amounts of personal income for Americans.
“Once you cut,” he said, “you see incomes falling and tax revenues coming down. It would create not just another recession but a pretty nasty recession. We might go into a double-dip recession anyway. Anyone who thinks this would be good for the country would be misguided. I find it very frustrating that this scenario is even out there.”
In Fazzari’s view, the strident political position of Republicans who refuse to vote for a higher debt ceiling is fundamentally destructive. He argues that “our economy simply cannot function in its current state without a large amount of government borrowing. Household incomes and business profits depend on a deficit in these weak economic times. Those who think we can absorb the hit required to balance the federal budget next without greatly magnifying our unemployment problems have their heads in the sand. I hope they do not get the chance to experiment with our economic well-being.”
Murray Weidenbaum, PhD, the Edward Mallinckrodt Distinguished University Professor, told the St. Louis Post-Dispatch he predicts that the government will pay the interest on Treasury bonds no matter what. Defaulting on them would shake the world financial system, which relies on Treasuries as the ultimate safe investment.
The most likely victims of default are government contractors, says Weidenbaum, who was chief economic advisor to then-President Ronald Reagan. “There is historical precedent to slowing payments to government contractors,” he says.
Those hit would range from doctors and hospitals waiting for Medicare payments on up to big defense contractors in St. Louis. Boeing alone employs 15,000 people in St. Louis, mainly on work for the Pentagon. A big company such as Boeing would have lines of credit available to carry it through a payment drought, but smaller companies might not, said Weidenbaum.
Steven S. Smith, Ph.D., the Kate M. Gregg Professor of Social Sciences in Arts & Sciences, sees the showdown over raising the nation’s debt ceiling as a natural byproduct of modern politics combined with the checks and balances afforded by the Constitution.
“With polarized parties plus divided party control in Congress it’s a recipe for deadlock,” Smith said Tuesday in a video interview with KARE 11 News in Minneapolis, Minn. “And we’re getting exactly what the rules of the game in the Constitution would suggest that we should get.”
Smith sees many parallels between the current deadlock in Washington and the stalemate that drove Minnesota into the longest government shutdown in history. In both cases the key players are no longer moderates who can reach across the aisle to forge compromises, but rather true partisans who stay in their own camps philosophically and rhetorically, he said.
“This isn’t just position-taking. It isn’t just politics. These are real differences about the role of government,” said Smith, a nationally recognized congressional expert and director of the Weidenbaum Center.
Smith pointed out that the federal debt ceiling was created by Congress in the World War I era, and has been raised through legislative action more than 100 times. It’s been raised 74 times since 1962, including 17 upward adjustments during Ronald Reagan’s two terms in office.
“The simplest way to solve this problem is to pass a one-sentence bill, that increases the debt limit,” Smith remarked. “This stands as one little line if federal law, and it can be eliminated. It can be amended.”
But Republicans, who control the U.S. House, have decided to use the debt limit debate as leverage to achieve deeper long-term cuts in federal spending. Other Republicans are telling crowds that they will refuse to vote for increasing the debt ceiling no matter what.
“Many Republicans have been elected in office saying they’d never vote to increase the debt limit. Some of them under any circumstances,” Smith explained.