Preet Bharara:
From CAFE and the Vox Media Podcast Network, this is Stay Tuned in Brief. I’m Preet Bharara. If you’ve been following the news, you’ve likely heard about the debt ceiling. It’s the total amount of money that the US government is authorized to borrow to meet its existing legal obligations. This month, the US reached that limit, and Treasury Secretary Janet Yellen warned that the government will have to carry out extraordinary measures to continue paying the nation’s bills beyond January, unless, that is, Congress acts to raise the debt limit. To discuss the debt ceiling and the broader economy, I’m joined by Justin Wolfers. He’s a Professor of Public Policy and Economics at the University of Michigan. Professor, thanks for joining the show.
Justin Wolfers:
Pleasure to be here.
Preet Bharara:
So, I’m going to begin very basically. With respect to the debt ceiling, why do we have debt, and to whom do we owe that debt?
Justin Wolfers:
Good question. So we have debt because the US government has, at various points, both in the present and through our history, decided to spend more money than it takes in. So in a given year, the difference between the money that comes into the treasury and the money that goes out is called our budget balance or, because usually there’s more money going out than going in, we call it the budget deficit. Think about that as the flow. Now the debt is the accumulation of that. So if you think about it as a bathtub, each year there’s more water flowing into the tub. The level of the tub therefore reflects not just this year’s flow, but the flow over the last couple 100 years.
Preet Bharara:
So it’s a pretty disgusting bathtub.
Justin Wolfers:
It’s a pretty deep bathtub.
Preet Bharara:
Deep and disgusting.
Justin Wolfers:
Actually… No, I want to…
Preet Bharara:
No?
Justin Wolfers:
There is an immense confusion because we use a lot of guilt words when we surround things like debt.
Preet Bharara:
Yeah.
Justin Wolfers:
I think that’s crazy.
Preet Bharara:
Can you answer, in connection with this framing, you said we spend more than we take in, some people ask the question when they balance their own budgets in their households, “Well, how can that be?” Is that responsible or not?
Justin Wolfers:
But they don’t. I have a mortgage, and the thing is, therefore I have a debt. You might think that sounds really irresponsible, but guess what? I also have a whole bunch of bricks that are worth a lot of money. So I went into debt, but it bought me something really valuable. So that, I think, is good debt. Let me give you another example, many of your listeners probably have student debt. They probably resent the hell out of it, that’s a different conversation.
Preet Bharara:
They’re trying to get it forgiven as we speak.
Justin Wolfers:
And a lot of… I grew up in Australia with very little student debt because the government paid for most of my education, but when my students complain about their debt, I point out the fact to them, they got something incredibly valuable in return. Now, it’s not as physical as a house, but they got an education, and a typical college graduate over the course of a lifetime will earn more than a million dollars more than someone without a college degree.
Preet Bharara:
Okay, you’ve made a good case. So is the US debt of the quality of student debt, like you’ve described, or home debt?
Justin Wolfers:
That in some sense is the question. Is this, that I went into debt to go to Vegas to blow it all…
Preet Bharara:
Totally worth it. That’s a terrible example because-
Justin Wolfers:
No it’s a good-
Preet Bharara:
… I’m on board with it.
Justin Wolfers:
Well, most people in Washington would not be. Did you go to Vegas and blow it all on… I’m not even going to finish the sentence, or did you invest in our future? So let me give you a really good example of going into debt. We went into bucket loads of debt during World War II. As a result, we, our children and our grandchildren will have a degree of freedom that we would not have had if we hadn’t spent billions of dollars on tanks and the like. That was clearly good debt.
I am sure you can walk into a local government agency that looks kind of inefficient, or you can point to your favorite program that you hate the most and say, “This looks like going to Vegas.” A big part of the recent run-up in debt is of course the government’s massive response to the coronavirus pandemic. That feels a little bit more to me like fighting World War II than it does like going to Vegas. So it’s a mix of all of the above. The other reason we might worry about debt. So one is are we borrowing to buy useful stuff? Another is will we be able to repay it? Because you don’t want to get in over your head, and that does go for governments as it goes for people, there are complexities to be sure.
Preet Bharara:
So if you made a pie chart of our debt, what is it mostly? Who are the creditors?
Justin Wolfers:
Actually other Americans. So most of the US debt is held by Americans.
Preet Bharara:
That’s how we finance things.
Justin Wolfers:
Right. If we want to make it sound terrible, we’ll say, “Isn’t it terrible? We owe so much money to the Chinese?” Because they’re also one of our big creditors, not as big as the American people. To which my answer is, “I don’t know, why? I don’t care who lent me the money. Let’s go back to thinking about my mortgage. I thought my mortgage was good value because I got a good house out of it. I don’t care whether the money for it came from China or the United States.”
Preet Bharara:
So what’s the current amount of debt?
Justin Wolfers:
I believe the technical term is a shit ton. So if you ever want to look it up, there’s a weird thing where it’s actually kind of hard to find the right number. It’s called federal debt held by the public, and so that’s about $24 trillion. Some people will tell you higher numbers, but that’s because they’re including when one part of the government lends to another part of the government, which doesn’t make any sense, but that’s what a lot of the headline numbers are.
Preet Bharara:
So you say $24 trillion. You said earlier that debt is okay if it’s good debt, and if you don’t get in over your head. How do you measure whether the US is getting in over its head or not?
Justin Wolfers:
Right, so more art than science. One way of thinking about this is just thinking about how much we owe relative to our ability to produce. So $24 trillion would be an enormous debt for Australia, which is small, but a much smaller debt for the United States. It’s about 95% of our gross domestic product, which is to say 95% of one year’s total income of all Americans.
Preet Bharara:
Is that the best comparison? Should you keep your debt to within some percentage of GDP?
Justin Wolfers:
No, not necessarily.
Right. So that’s just one measure. So by the way, Japan is up around 200%. So it’s at a level high enough that it’s higher than it’s been in our past. I mean it peaked a little bit higher during COVID, but basically it’s at an historic high for the United States, and it’s at a relatively high level relative to most other industrialized countries, but we have other advanced nations like Japan who’ve gotten out ahead of us and survived. We’ve also seen countries get into terrible problems when their debts got too high, but not really clear examples of big industrialized countries like us. So it’s enough that many people are worried, but if you don’t want to be worried, you can find counterexamples. Let me just add one more thing. You asked a question, which was what are other ways of thinking about it? Another way of thinking about it, whether you’re in over your head, is to think about, “Can I afford the interest payments?” So what’s debt servicing as a share of your income? That’s sort of like with your mortgage, you think about, “What are my mortgage payments relative to my income?”
Preet Bharara:
What’s the cash flow issue?
Justin Wolfers:
Yeah. And the thing to realize is as much as our debt is high, interest rates are really low. And so this alternative approach says, actually when rates are this low, it’s pretty easy to afford the monthly payments. They also say something else, you want to borrow money whenever you have a project that yields a rate of return that is a payoff larger than the extra interest you’ll pay. Well, the lower the interest rate, the lower is the rate of return that you need for an investment to be profitable. And so the entire 2000s has been a period of very low interest rates, and it still is despite what the Fed’s doing, and that suggests there are probably more opportunities for smart investments that yield a positive payoff right now.
Preet Bharara:
So I asked you about debt. Now I want to ask you about the ceiling. Why is it the case that we have a legal ceiling on debt?
Justin Wolfers:
We have a legal ceiling on how much debt the US government can go into because Congress passed that law.
Preet Bharara:
What’s the rationale? What are the pros and cons of having a ceiling at all? Is it to make sure we don’t get in over our head?
Justin Wolfers:
No. So I think the common sense around the kitchen table view of this actually ends up to be being quite mistaken, because the thing is, what does congress do? Congress passes bills. One set of bills is it says, “This is how much money we should spend.” Another set of bills is, “This is how high taxes are going to be, so therefore how much revenue we’re going to get.” Once it’s passed those two bills, it’s therefore decided how much extra debt we’re going to take on. It’s been decided. It then passed a third set of bills called the debt ceiling saying, “But you can’t go into debt above this level.” Well it turns out, you can’t have all three of those bills being met at the same time. So it’s weird. Congress said to the federal government, “Go into all this debt.” And then it said, “But we’re not going to let you go into debt.” That’s Congress telling the Treasury two directly contradictory things.
Preet Bharara:
So was the debt limit irrational?
Justin Wolfers:
It’s insane.
Preet Bharara:
The debt limit is insane. The debt ceiling is insane.
Justin Wolfers:
Yeah.
Preet Bharara:
Is that a majority of you or not?
Justin Wolfers:
Among economists, we understand that you can’t tell someone simultaneously to jump and not jump.
Preet Bharara:
Even economists know that.
Justin Wolfers:
And that is an economic theorem.
Preet Bharara:
As a political matter, how did it come about if smart people like yourself and those in your profession think it’s insanity?
Justin Wolfers:
So it historically was just something where… I actually don’t know the full history of it, but what I do know is that when we’d hit the debt limit, Congress would understand, “Oh wow, we said spend all this money, therefore we need to borrow money, so therefore we’ll pass the limit.” And so the debt limit has been raised dozens of times throughout US history. And then about 10 or 15 years ago, Congress all of a sudden realized that it could hold up the business of government and the minority party could… sorry, the party out of the White House had immense leverage because it could basically say, “We’re not going to raise the debt ceiling unless you do what we want.”
Preet Bharara:
So it becomes a weapon to get rid of certain things-
Justin Wolfers:
It’s a political weapon.
Preet Bharara:
… or to enact certain policies.
Justin Wolfers:
Right.
Preet Bharara:
And in your mind as an economist, it’s nothing beyond a political weapon?
Justin Wolfers:
Well, it’s a political weapon with immense economic consequences, because the point of this weapon is you can point it at someone and you can say, “Hey, we’re not going to pass this, therefore, when the next credit card statement comes, you’re not going to be able to send a check back.” Which is to say they could force the US government to default. And if you’re the most insane person in the room, you might make that threat realizing that the same people in the room would say, “Oh, that’s a bad idea. What have I got to get you to do to drop the weapon?”
Preet Bharara:
So it’s a repeating game of brinkmanship and chicken for political purposes.
Justin Wolfers:
Yes. And the reason economists think it’s crazy is, should you pass a law that makes it easy for Congress, with all its political whims, to suddenly decide to default on the US debt? And the answer’s no.
Preet Bharara:
Because the consequences of a default for average Americans is what?
Justin Wolfers:
The most obvious and most direct one will be… it is actually where if you decide not to pay your credit card bill, what’s going to happen? You are going to find it hard to get credit in the future. Interest rates are going to go up.
Preet Bharara:
Or if I don’t pay the loan on my home, I’ll be kicked out of my home.
Justin Wolfers:
So we’re not going to get kicked out of our home, but what is going to happen is that people will only borrow… sorry, will only lend money to us if we are willing to pay a higher interest rate to offset the risk they don’t get paid. Now remember, the national debt is $24 trillion. If we raise the interest rate by even half a percentage point, that’s a ton of money. That money doesn’t come from some abstract entity called the US government, because that abstract entity is paid by yours and my taxes. So if we default, for sure and for certain, someone’s paying higher taxes. It’s probably not you and I. It’s probably more our children, but to some extent it’s us as well. That’s the first immediate direct effect. And that’s before we then say, “You know what, the global financial system is kind of built around this idea that US government always pays its debts.”
Preet Bharara:
So if it is catastrophic, and as a bipartisan matter, people on both sides of the aisle would view a default as catastrophe, sort of like mutually assured destruction in the nuclear context. Is that pretty good assurance that at the end of the day there will always be a deal and there will not be a default, or not?
Justin Wolfers:
So one view of history is Congress, both sides threaten, threaten, threaten, threaten, and then we get towards midnight on the night that it has to happen, and round about 11 o’clock, the grownups walk into the room and they say, “This has to get worked out,” and they work it out. And this is a view that eventually when the stakes are high enough, Congress figures it out. And historically, that view has been correct. Now, by the same token, historically, it’s also been true that the party with the majority in the House has been able to figure out who they should elect as speaker in the first round.
Preet Bharara:
Yes. That didn’t happen this time.
Justin Wolfers:
This Congress had a speaker running against nobody, and he couldn’t get elected. There was no serious Republican candidate against McCarthy and they couldn’t get it done.
Preet Bharara:
So you’re saying the current dystopian political climate makes a default a little bit more likely.
Justin Wolfers:
Somewhere between a little and a lot, because if you think about the embarrassment that the Republican Party just put its leader through, that wasn’t mutually assured destruction, it was mutually assured destruction between the various wings of the Republican Party. They all looked bad. And so Republicans weren’t able to prevent Republicans from hurting Republicans. What we’re hoping for this time with the debt limit is that Republicans will be able to prevent Republicans from hurting Americans. I kind of think Republicans care more about Republicans than they do about Americans. So that’s got me really worried.
Preet Bharara:
Does a catastrophe commence the moment of the default? In other words, if the default is allowed to happen on Monday and then the grownups get together on Wednesday and try to put Humpty Dumpty back together again, is that doable or are the consequences, in some ways, permanent, even two days after a default?
Justin Wolfers:
So I want to… can I do what an academic will do? I’m sorry, Preet. Which is-
Preet Bharara:
Are you going to give me a test?
Justin Wolfers:
I am. That’s right. And you have to fill it out in a Scantron bubble form.
Preet Bharara:
I’m going to use ChatGPT.
Justin Wolfers:
Oh man, you’re going to get at least a B plus and a Wharton MBA. The word catastrophe I just wanted to get hung up on a little bit. So the thing we know for sure and for certain is interest rates rise because of this nonsense and someone pays that, and that’s you and I. What’s a little more uncertain is this may reveal fragilities in the financial system, or it may be a shock to consumer confidence, or it may lead businesses to stop believing Washington can get things done, or it may lead foreign investors to freak out. And those things are what could cause a catastrophe. So I’m going to say it’s going to cause pain and could cause a catastrophe. And then you should remind me what your question was. Oh, does that happen the moment we hit midnight?
Preet Bharara:
Yeah, like with some things you allow the bad thing to happen, and then you can remediate if you turn around and do the right thing within two days or three days or four days, and some things like the stoppage of your heart, it’s permanent damage and death and fatality if you don’t rectify it within just a few minutes. How does this compare to that?
Justin Wolfers:
So this is good. So I want to structure my answer around what I just said. There will definitely be pain from higher interest rates and there’s the potential for a catastrophe, and how those two different… and those play out quite differently. So pain from higher interest rates, let me actually tell you, the pain from that’s already started, because investors around the world, who’ve always thought that the US would never default on its debt, are watching Washington right now. And at least one side of politics and a large share of it is threatening to default, and they’re trying to convince Democrats that they would do it so they have more leverage, they’re accidentally convincing investors. As a result, we’re probably all paying slightly higher interest rates right now because they can anticipate what’s already happening.
Now, if we actually go ahead and default, there’s probably a couple of days where we could fix it within two days. Congress is very good at the 11 o’clock deal being, “Let’s create a 48-hour fix,” and then 48 hours later they fix it. And then everyone would just say, “Oh few, we got through the dead ceiling one more time, but gee, I worry about next time.” So interest rates would be a little higher. This would cost the American people millions of dollars, maybe not billions of dollars, and we’d all move on. That’s the pain part. Let me come back to the catastrophe. If ever we’re all sitting around at 11 o’clock and the clock’s ticking towards midnight, tick, tick, tick, tick, tick, and then midnight hits and they default, financial markets will be open at that moment. And at that moment, you will know for sure and for certain the grownups aren’t in the room, and you will have learned about a whole new level of congressional dysfunction.
And so at that moment, bond yields will spike. Could that cause a financial crisis right there and then? It could. Could it take longer to play out? And so if they try and put Humpty Dumpty back together again, they can do it before everything breaks, they could. But the thing is financial prices move immediately and they move enormously, and that may cause some particular financial institution to be wildly exposed to a risk it hadn’t foreseen. And then everyone on Wall Street looks around and says, “Hey, are you really exposed to that default thing? Because that’s really bad news if you are.” And then you realize, “I don’t know whether you’re exposed and then I can’t do business with you and you can’t do business with me because you don’t know.” And this is kind of the story of how financial crises start. And so that could happen by 1:00 AM that night.
Preet Bharara:
Can I give a crazy thought?
Justin Wolfers:
Please.
Preet Bharara:
If that were to happen, with all the pain that would accompany it, do you think that might provide the political impetus for Congress to get rid of the debt ceiling altogether?
Justin Wolfers:
Do you mean sort of like when the Republicans failed to elect McCarthy on the fifth ballot? Could the sixth ballot have been the one that would get them to do it and remove the tremendous political cost that they were imposing on themselves? Sure, could happen. Look, the only thing that stops craziest driving us off a cliff is when your listeners, the voters, say to Washington, “Look, this brinkmanship is fine, but I don’t need the ideological win. I just need to wake up tomorrow and know that the banks still work.” And so that’s why I’m thrilled to talk to folks like you because this is a public education campaign. As soon as people understand the madness of this, they don’t want it, and as soon as they don’t want it, the political pressure for it goes away.
Preet Bharara:
Well, I’m glad you came on for precisely that reason because it’s all shrouded in complex acronyms and economic talk, and not that many people take the time to explain and it goes over a lot of people’s heads, including my head. My question at this moment is, we’re recording this on the afternoon of January 25th, this won’t be dropping into the feed until January 30th. What’s the timeline for all this?
Justin Wolfers:
Oh, it’s like six months. So what’s happened is if the federal government ran its finances the way it normally does, we would’ve hit the debt limit a few days ago. And then if you remember, secretary Yellen announced extraordinary measures.
Preet Bharara:
Extraordinary measures.
Justin Wolfers:
What extraordinary measures means is she promises to look down the back of the couch for spare change and use that to meet the outstanding bills, and that as a strategy works for a while. And the Treasury has gotten ridiculously good at this, which is why she can buy so many months of breathing room.
Preet Bharara:
But can you buy a precise… I mean this is coming from a layperson, how do you know when the deadline is then if Janet Yellen is engaging in extraordinary measures so that people know the moment of truth by which they have to come to an agreement? Do you follow?
Justin Wolfers:
Yes. So the question, to rephrase it, how do I know when there’s no more nickels down the back of the couch?
Preet Bharara:
Yes, and will you know in advance so you can come to a deal?
Justin Wolfers:
Right. So that’s a question more of accounting than economics, but at this point, Treasury’s been through this dance half a dozen times in the last decade, and what they’re literally doing is a little bit more sophisticated than looking down the bag of a couch. And so they know which funds they’re raiding, they know how much money is in those funds. There is of course tremendous uncertainty. They don’t know on what day I’m going to send my tax check in and they don’t know on what day they’re going to send you your tax refund. So there is a minimal amount of uncertainty, but because it’s so important that no one screws this up, Treasury tries to be as transparent as it can through this entire process. And hopefully both sides believe them when they say, “This is the date, we absolutely mean it.”
And I think that’s in everyone’s best interest that they continue to play clean and realize that all of this work that Treasury’s doing, moving money around between accounts, people on Wall Street are replicating that work because they also have a great vested interest in trying to bet on these outcomes. And so you and I may not be able to figure this out to the minute, but I think the real political players have a very, very serious, very good, very reliable estimate of when midnight is.
Preet Bharara:
We’re running out of time, but I must ask you about this particular gambit that sounds crazy to people. Some people, I think in your profession, have suggested that all Janet Yellen has to do is mint a platinum coin whose value would be a trillion or more dollars and that would solve the problem. How can that be, and what should we make of that proposal?
Justin Wolfers:
Right. So Congress has said, “It’s up to us when you do or don’t borrow.” But it’s previously said, “It’s up to the Treasury to mint coins,” and that’s not a big deal because coins aren’t worth much. And so this idea was like, “Well, why don’t we just mint a trillion dollars and use that to pay our debt?” And so it’s an end run. So how legal that is, you’re more qualified to answer than I am. Would it solve the problem of getting this idiotic law out of the way and prevent Congress from arbitrarily on some weird date defaulting on the debt? Yes. Is that a good thing? Yes. Will it necessarily work? Janet has pointed to another problem, which is that once she has a trillion dollars in her hand, she can’t just go and hand it to someone in China and say, “Will you take this?” She probably has to go and deposit it at the Fed.
And the Fed might look at it and say, “Hey, wait a minute. I don’t remember there being any trillion dollar coins. I’m not going to accept it.” So there’s some risk around it, but it’s a pretty good end run around an idiotic law. There’s a slightly different way of doing this, which is the way we count our debt is the government usually issues a bond. The government says, “I’m going to give you $100 in 10 years and I’ll also give you maybe $2 every year along the way.” Those are called coupon payments. And then it says to people, “How much would you like to buy that stream of payments, $2 every year and then $100 in the future?” And someone might say, “I’ll buy it for $98,” and it’s less than a hundred because you are lending money and so you deserve to get more at the end than you put in.
It turns out that that $100 and all the $2 payments along the way, as we count it towards the debt, only the hundred counts as debt. The $2 in interest that we pay each year does not. So the government could… another way of doing this is it could, say issue a bond that will be worth $1 in 10 years time and pay $100 interest every year between now and then. And so that is a bond that would probably sell for $1,000, but it has a face value of one. So it would barely raise the debt while getting us a whole ton of money. It’s a different legislative end run.
Preet Bharara:
The fact that serious people can propose the coining of a trillion dollar platinum coin, what does that say about how manufactured a guardrail the debt limit is?
Justin Wolfers:
So it’s a manufactured crisis and here’s a way to manufacture out of it.
Preet Bharara:
Right.
Justin Wolfers:
And I think what I like about the changing the value of bonds version is it actually points out something really deep, which is figuring out what the value of our debt really is is actually an incredibly complex matter. It’s not clear Congress can, does or even knows what it’s doing when it passes a debt limit. A debt limit tied to the face value of the debt makes no sense because there’s also these interest payments called coupon payments along the way.
Also, as we discussed before, limiting the debt makes no sense because what really matters is what you’re spending it on. You’re spending it on good stuff or bad stuff. The debt limit doesn’t ask that question. The whole thing is sort of intellectually incoherent, and I think it makes that point really, really nicely. So I don’t love the platinum coin. It sounds goofy. I’d do it, but I don’t love it. But changing the face value of the bonds you issue is a way of just pointing to the complete incoherence of Congress saying, “Spend this much, take in this much, but don’t borrow anymore.” It’s impossible. It’s incoherent. You can’t legislate that way. This is nonsense.
Preet Bharara:
So speaking of debt limits, we’ve pretty much reached our time limit. I think we’ve broken the record, but this is important, consequential and complicated. Any last word you have to give to the listeners here, who in good faith want the country to operate properly and fiscally responsibly?
Justin Wolfers:
I don’t want to tell anyone what to do, but evaluate the claims that are being made carefully and think whether they make any sense and whether this is the right tool or the right moment to force the changes that you want.
Preet Bharara:
Wise words. Professor Justin Wolfers, thanks for being on the show.
Justin Wolfers:
A great pleasure.
Preet Bharara:
For more analysis of legal and political issues making the headlines, become a member of the CAFE Insider. Members get access to exclusive content, including the weekly podcast I co-host with former US attorney, Joyce Vance. Head to CAFE.com/insider to sign up for a trial. That’s CAFE.com/insider.
If you like what we do, rate and review the show on Apple Podcasts or wherever you listen. Every positive review helps new listeners find the show. Send me your questions about news, politics and justice. Tweet them to me at @PreetBharara with the hashtag ask Preet. Or you can call and leave me a message at 669-247-7338, that’s 669-24-Preet, or you can send an email to letters@CAFE.com. Stay Tuned is presented by CAFE and the Vox Media Podcast Network. The executive producer is Tamara Sepper. The technical director is David Tatasciore. The senior producer is Adam Waller. The editorial producers are Sam Ozer-Staton and Noa Azulai. The audio producer is Nat Wiener, and the CAFE team is Matthew Billy, David Kurlander, Jake Kaplan, Namita Shah and Claudia Hernandez. Our music is by Andrew Dost. I’m your host Preet Bharara. Stay tuned.
