John Donvan:

Hi, everybody, and welcome to Open to Debate. I’m John Donvan, and it seems to happen now every few years, doesn’t it? Congress and the White House get into a game of chicken over something called, drum roll, the debt ceiling. Oh boy, that sounds exciting, but actually, it does get exciting, and not in a good way, because if the two sides cannot reach an agreement on government spending, then all of us just crash into a government that’s running out of money, or has run out of money. So we’re going to debate this debt ceiling thing, but first we want to get clear on what it is we’re talking about. So, of course the government needs money to run, and of course it gets that money from us, the taxpayers, year after year, but year after year, almost always, the money raised from taxes isn’t enough to meet what the government wants to spend. So the US borrows the rest of it.

Now legally, it cannot just keep borrowing endlessly, because Congress puts a ceiling to the amount of debt that the government can pile up, ceiling, debt, debt ceiling, but sometimes, the government needs more than the debt ceiling allows, so what has happened in the past is that Congress ultimately raises the debt ceiling. Sometimes, it’s been just in the nick of time, just before the oncoming financial and possibly social catastrophe. Most critically, the thing that is dreaded but has never happened yet is that the US Treasury would not have the money to pay the interest on the debt it already owes. It’s a default.

A US government default would be a major unprecedented disaster for everybody, and it would lead to a recession. It would be felt globally. It would hurt the dollar. It would hurt all of those people who have lent money to the US. Those are the stakes, so what about that debt ceiling and the role it plays? In this debate, the question we’re asking is whether our debt ceiling, as a thing, makes sense. We have two debaters answering opposite ways, yes and no, to this question, “Should Congress abolish the debt ceiling?” So let’s get into it and meet our debaters. Arguing that the answer to that question is yes, Mark Zandi. Mark is a past debater with our program. It’s great to have you back, Mark, so thanks so much for joining us.

Mark Zandi:

Thanks, John. It’s good to be with you.

John Donvan:

And answering no to the question, “Should Congress abolish the debt ceiling?” Parker Sheppard. Parker, thanks again to you for joining us on Open to Debate.

Parker Sheppard:

Yeah, thanks John. I’m glad to be here.

John Donvan:

So, before we get started, I just want to get a sense from both of you about what motivates you to make this argument, to participate in this debate, to be open to debate, so Mark, w- what’s the seat from which you’re watching all of this go on?

Mark Zandi:

Well, uh, John, I’m the chief economist of Moody’s Analytics, which includes the rating agency, Moody’s Investor Service, and as an economist, uh, clearly, the debt limit, all things federal government budget related, uh, matter significantly to the economy. Um, particularly now, the economy is struggling to avoid recession, and is fragile, and uh, the, uh, debt limit debate is, uh, particularly important in terms of how the economy’s going to perform. And of course, the rating agency rates Treasury debt, uh, and all debt, even, you know, debt of entities, institutions that are backstopped by the federal government, explicitly or implicitly, so a great deal of interest, uh, there on, uh, how this is all going to play out going forward.

John Donvan:

Okay, thanks very much for sharing that insight, Mark, and Parker Sheppard, for you, what’s the seat from which you’re watching all of this go on?

Parker Sheppard:

Well, I, uh, I g- graduated college in 2008, so part of my initial study of economics was watching the last financial crisis unfold real time. And that was a, a huge motivating factor for me in getting into studying economics, um, watching that unfold while I was in graduate school. And so, looking at, at how debt and default drives the economy, um, how we can take steps to avoid that occurring in the US, um, is top of mind right now. As director of the Center for Data Analysis at The Heritage Foundation, we’re primarily concerned about, um, making sure that we’re finding a way for the government to reach a sustainable level, to have an opportunity for the economy to grow, to look at individual prosperity, and make sure that an oversized debt doesn’t threaten the financial future of, of typical American families.

John Donvan:

Well, it’s good to see that both of you have, um, a passion for this topic, and, um, a sense of responsibility for it as well. So let’s go on to our opening statements. Uh, again, our question is, “Should Congress abolish the debt ceiling?” We’re going to ask you, Mark, to go up first. You’re answering yes to that question, and please tell us why.

Mark Zandi:

I think it’s pretty clear I’m not a fan of the debt limit, and I do think it should be abolished. Th- that might be a, uh, a political or legal bridge too far, so barring, uh, abolishment, I would argue that we should work to amend it or effectively neuter it. First, uh, I think the debt limit drama, the political theater that is involved in all debt limit, uh, battles that we’ve experienced, uh, certainly in recent years and decades, is very counterproductive. You know, even if there’s no breach, even if Congress and the administration, at a time, come together, pass legislation to increase or suspend the limit, the drama itself is becoming increasingly corrosive on the economy. You can see it in the current context, of the yield on one-month Treasury securities, that these are securities that will mature on the other side of the, uh, X date, uh, the date when the Treasury runs out of cash to pay everyone on time.

They’ve ris- risen quite considerably over the last, uh, few weeks. They’re up, uh, two percentage points from where they were a month ago. That’s real money, uh, you know, to, to, to taxpayers, and that’s just, uh, you know, indicative of, of the costs. I, I also think, just based on my relationships with my clients, who are large institutions, uh, large banks, financial institutions, and corporations, that they’re spending energy on ti- and time thinking about, uh, what happens if there is a breach. What if funding markets, the sources of their cash, are disrupted, and they’re spending energy and time on that, and working, uh, on those issues as opposed to, uh, the kinds of things that they need to be, like, uh, uh, improving their products and services, and making their businesses more productive and more resilient to the challenges that they face.

And it undermines, uh, confidence. Uh, people are nervous. Uh, you know, people are already crisis fatigued, given everything that we’ve gone through, and this is just one more burden for them to bear. You can see it in many of the consumer sentiment surveys, and that can’t be good, you know, for, for them financially, or for them psychologically.

Um, second reason, uh, is, uh, it raises the odds that there will be a breach, uh, that at some point, lawmakers take this drama too far, uh, and the game of chicken that they play every couple years or so ends in a, in, with a crash, and a breach would, um, I think be very costly, uh, uh, to the, the economy. I mean, obviously, the s- the scenarios here are numerous some m- uh much darker than the others, but uh, under any scenario, if we breach, uh, we got a problem. And the breach could happen just by mistake. And again, you can see that in the current context. We have some lawmakers arguing that, uh, they’re going to do everything they can to slow down the legislative process, to make sure that this doesn’t get through.

John Donvan:

Can I jump in to ask you, just for the general audience, to deter- to define what you mean when you use the term “breach”? Because you’ve used it several times.

Mark Zandi:

Yeah, no, no, absolutely. Breach, in my definition, is, uh, when, uh, we get to the so-called X date, the day when the Treasury doesn’t have enough cash on hand to pay all of the bills on time. That’s a breach. A default is when the, the Treasury decides that it will not pay bondholders. A default is a breach, but it’s a much more serious, uh, uh, breach, and we can talk about all of that.

John Donvan:

Thank you for that, and, and Mark, you’ve hit your four minutes, so I have to break in and, uh, and give Parker his turn, but you can continue your thoughts in our general discussion. Parker, um, Sheppard, you’re answering no in answer to the question, “Should Congress abolish the debt ceiling?” And please tell us why you’re a no.

Parker Sheppard:

I want to start off by remembering that the, the fact that the debt ceiling exists was a way for Congress to introduce it, to make it easier for the federal government to issue debt. Prior to 1917, Congress authorized each individual bond issue every time the, the government needed to issue new debt. So part of the question that we need to talk about when we’re going to answer whether we should abolish the debt ceiling is, is what is the mechanism that’s going to replace it? And we could go back to something that is, uh, that, like what existed before 1917, where Congress needed to authorize each bond issue, and uh, I think Mark is, shares the sentiments of a lot of, of Americans that watch the political theater, that is the buildup every time that we get close to the debt ceiling, and if we had something that, more like the regime prior to 1917, maybe that means that it’s not so much of a big deal. The g- the drawback there is that we would regularly bumping up against the debt ceiling, and it could be, um, could be, uh, a way to introduce this into the debate more frequently.

You know, another alternative would be to go to something like the Gephardt Rule, which said that when Congress passes a budget, it automatically deems for there to be an increase in the ceiling commensurate with it, or some people are just floating, um, what they’ve done in the past couple of years, when they’ve suspended the debt limit for a fi- fixed period of time, or suspending it indefinitely. Now, I think if we did something like that, that would remove the, the benefit of having the government come back to reevaluate the, the fiscal situation that has occurred between when, uh, when the budget was passed and, um, when we’ve reached, uh, a debt limit.

And that’s, that’s necessary, because much of the federal budget is already on autopilot. Uh, mandatory spending is not subject to annual appr- appropriations bills. Um, that’s about 60% of outlays, is mostly major healthcare programs, Social Security, income security, and student loans. So, we have to address the spending that’s already on autopilot. And, and we, uh, the distinction about the, uh, default and breach is actually timely. We can leave the debt ceiling in place and not risk a default, um, because there’s plenty of revenue coming in to make payments on the debt. The interest payments are about 20% of current receipts. Treasury has a separate payment system for debt, so there’s… There is that distinction between missing, uh, a bond payment and missing payment to other ones, and that really seems to be the central point of the, the current debate here.

Uh, and what the current debate really is side-stepping the elephant in the room, that is the unsustainable fiscal path for the federal government. CBO projects that debt held by the public will reach 185% of GDP by 2052. Under current law, Social Security trust funds are expected to be exhausted by 2033, and at that time, the program would only pay 77 cents on the dollar of the scheduled benefits. And so really, the debt limit that we should be concerned about is not the one that Congress imposes on itself, but the one that markets set on Congress when they’re no longer willing to buy Treasury debt.

So all of this, the question about whether we’re going to miss payments is really just about the timing. We need to figure out a way to have a discussion about, um, about how to fix the budget in order to bring debt back down to a sustainable level. And polls show that the public recognizes the problem with the government’s fiscal situation. Uh, in a, in a narrowly divided Congress, the debt limit acts as, as a forcing function, to provide external pressure or a deadline, and this just seems to be the case that, uh, that needs to happen in order to get a narrowly divided Congress to make hard choices.

John Donvan:

Parker Sheppard, I’m sorry, you’ve hit time, so, uh, I wanted to ask you if you can, uh, reserve the rest of your thoughts for our general discussion, which we’re going to resume in just a couple of moments. We’ll be right back, again, with the question, “Should Congress abolish the debt ceiling?” Stay with us.

Welcome back to Open to Debate. We are debating the question, “Should Congress abolish the debt ceiling?” And as you all know, we’ve just recently been living through another round of acrimony related to the debt ceiling.

Karine Jean-Pierre:

A default would have catastrophic impacts in every single part of this country, whether you’re in a red state or in a blue state. It doesn’t matter, every single part of the country. We’re talking about millions of jobs lost, devastated retirement accounts, and a recession. We’re, we’ve also heard some House Republicans refer to preventing default as the only concession they are willing to make, but preventing a catastrophic default is not a concession. It’s their job.

John Donvan:

That was the voice of Karine Jean-Pierre, President Biden’s spokesperson, speaking on this latest round of debt ceiling talks that we’ve seen, the spring 2023 version of this story. And we also heard opening remarks from Mark Zandi and Parker Sheppard, and now we’re going to move into our general discussion, but Mark, I had to cut you off, and um, the, what, what I was going to ask you coming out of, uh, Karine Jean-Pierre’s statement about the consequences and the stakes, you were listing some of the stakes of a debt ceiling breach, as you were calli- calling it, so let’s, let’s resume with where you were there, if you can take one or two more minutes with that, and then let Parker respond to some of what you’re saying.

Mark Zandi:

Uh, yeah, in a breach where the, uh, Treasury can’t come up with the cash to pay everyone on time, uh, it’s got some hard decisions to make. Actually, it’s probably the president of the United States who’s going to make the decision. Uh, do they pay… Who do they pay, and who gets, uh, money first? I mean, uh, the, uh, the Treasury has the ability to pay bondholders ahead of everyone else, because the, those payments are, uh, done on a system called Fedwire, which is independent of the payment system used to pay other bills.

Uh, my guess is that the president would decide to pay the bondholders first, uh, just because if he didn’t, there would be… The Treasury debt would get downgraded, and the, uh, uh, debt of all the institutions that are backstopped by the federal government would also get downgraded. It would be instant chaos, uh, uh, stock prices falling, interest rates rising. Uh, we’d go into recession very, very rapidly, within a few days, and it would a be very dark scenario.

So my, my sense is he’d probably decide to pay the bondholder, and then pay everyone else late, and the way he would do that, the way the Treasury would do that, is they would wait, uh, until they raised enough cash to pay, uh, everyone on a given day. Then they’d go on and r- raise enough cash to pay everyone on the next day, and so forth and so on. And in- the longer the breach goes on, the longer and longer people are going to have to wait to get paid. And that, you know, that means Social Security recipients, that means the military, that means, you know, it could be in the, uh, electric bill for the office building, the federal office building in Omaha, Nebraska.

Uh, that’s not a great scenario either, either, uh, either. Uh, interest rates would still rise, stock prices would still decline. It’d take a little bit more time, because investors who buy the bonds would ask themselves, “Well, how long is it politically viable that I’m going to get paid ahead of the 83-year-old grandma who, uh, requires Social Security assistance? Particularly if I’m a Chinese bond investor, or I’m a, uh, you know, a Japanese or Saudi bond investor?” So, chaos ensues in either way. One other-

John Donvan:

So-

Mark Zandi:

… quick point, John, and then I’ll stop. The president’s going to get sued immediately, right? Because who, who, who, uh, who made, whose decision… Is it his decision to decide who gets paid first and who gets paid l- last? That’s a, that’s a, a very open legal question, that will ultimately have to be decided by the Supreme Court, so in that legal, uh, uncertainty, again, just adds to the chaos, so it would be a complete mess.

John Donvan:

Parker, M- Mark said in his opening that the, the very existence of the debt ceiling has, uh, led to this counterproductive drama, uh, that we’ve, we’ve been coming through in Spring of 2023. So I want to ask you, are, are you defending the debt ceiling mechanism in itself as it is? Is, do you think it’s a good thing? Do you serves… Do you think it serves any useful purpose?

Parker Sheppard:

So the purpose is that it, uh, every time we come close to the debt ceiling, it is an opportunity for Congress to incorporate new information about the state of the economy, adjust plans for spending, and revise them to try to keep, uh, keep debt going back to a sustainable path. Uh, e- even just going back from a few years ago, you can look at CBO estimates for the path of interest rates, for the path of debt, and find that, um, they are continually being revised up the, uh… The Federal Reserve has increased interest rates, uh, faster than most people in the economy thought possible, where they were even giving guidance, forward guidance, uh, that they were intending on keeping, uh, keeping rates low. Um, Ch- Chairman Jerome Powell took three quarters of a point rate increases off the table, and then all throughout last year, the, the FOMC ran off a string of, of increases. That was what led to, um, some of the banking problems earlier in this year, when the value of their assets fell unexpectedly.

John Donvan:

What would be the negative consequences of the debt ceiling being abolished by Congress?

Parker Sheppard:

You lose this, this forcing function to come back and-

John Donvan:

What do you mean by forcing function?

Parker Sheppard:

Uh, the way Congress oper- operates today, they don’t ever pass anything until the last minute. I, I too tire of, uh, the, the brinkmanship, where everything gets pushed up to the last minute. Even outside of the debt ceiling, you can look at it in the regular appropriations cycle, with continuing resolutions, where, um, Congress is continually losing the ability to, to make compromises and pass sustainable things with the majority. It’s just a, um, living day to day, continually kicking the can down the road. And, and that’s where we are. Like, if we don’t ever make any sustainable changes, you can look at the long-term path for debt, and you can see it exploding. We’re heading for a debt crisis, so if not now, when? I we- I guess we don’t want the, um… The immediate short-term problem is, is something that I think both parties in Congress are trying to avoid. No one wants to default, but the question is about what are the reforms going to be to put in place, to get spending on a sustainable path?

John Donvan:

I think what I understand you’re saying is that when you use the word “forcing,” you mean it makes everybody stop and make some hard decisions. Is that… Uh, uh, do I have correctly what your, your argument is right?

Parker Sheppard:

[inaudible

]

John Donvan:

All right, I want to take that to Mark. Mark, the… Uh, again, I th… The g-, I, I, I almost regret using the gun to the head metaphor, so I’ll, I’ll try to think of something else, but let’s just talk about hard deadline that makes everybody make a decision, because the decision has to be made, uh, to avert catastrophe. And, I think I hear Parker saying that’s a function that’s positive, and it might even be one that Washington needs, because otherwise, it would, there would be can-kicking forever.

Mark Zandi:

Yeah, I don’t think it works. Uh, it, it, the history shows us it doesn’t. I mean, look at where we are with our fiscal situation today. Uh, I mean, of course I don’t know what the counterfactual would have been. Maybe debt levels would be higher. I’m not sure. I doubt it. But I don’t think, uh, the debt limit drama and the result of the, that, those negotiations land us in a better plate, and in fact, could land us in a much worse place, because it just creates acrimony, and hard feelings, and bad blood, and you know, these folk, the lawmakers we need to come together are now driven apart. So I just don’t think it results in any meaningful improvement.

And again, you can see it in the current context. I mean, here we are. The negotiations are going to land on some cuts to non-defense, non-VA discretionary spending, but that’s not the problem. And I, you know, I agree with Parker. We’ve got long-term fiscal problems. We’ve got big problems we’ve got to a- address. Their Social Security, their Medicare, their Medicaid. These are things that are very complex, and you’re not going to be able to address and solve those things in the cauldron of the, uh, heightened political debate around a p- around a debt, uh, debt ceiling drama. So, I, I’m totally on board. We got to address these problems. We’re not on a sustainable fiscal path, but the debt limit is not helping.

And by the way, you know, when you hurt the economy, you hurt our fiscal situation, and you make, uh, the ability for us to address our long-term problems even more significant, and if we actually do breach, and again, the odds of that are rising, just given the political discordance that’s, uh, uh, patently evident everywhere. Every time we go down this path, it’s getting worse and worse and worse. Uh, it’s not hard to do a forecast and say, “Hey, two, four years ag- from now, we’re going to breach,” and to think about the economic damage and what that means for our long-term fiscal situation. So it’s, it’s just in, in, just counterproductive. It doesn’t work.

John Donvan:

I want to take one last pass, uh, Parker, at this issue, of whether the debt ceiling really serves the positive function that you’re saying that it does, of forcing people to do something, finally, and Mark fundamentally just says, yeah, he knows that that’s what your ca-, your case for it is. He just says it doesn’t work. It doesn’t, it doesn’t serve that purpose.

Parker Sheppard:

I mean, we, we’re having a conversation right now, aren’t we? Uh, you can go back to the last eight major spending changes, and they were all tied to increases in the debt limit. Um, this is… Like, Social Security is known as the third rail of politics because nobody wants to touch it, and it’s, it’s 10 years down the road where we’re going to exhaust the trust fund, and at least there needs to be some statutory change made to the program, to enable it to continue paying scheduled benefits. But, um, and it would be great if we could start addressing that earlier. We could make smaller changes, um, that would be enacted with, with less of this disruption, again, the same disruption that, that Mark is worried about in the short term, that would come from, um, a, a temporary default, uh, from the self-imposed debt limit.

I think the bigger question is what happens down the road, when the… If the economy continues on its path, and Congress continues on its path, then, um, w- what happens when we hit the actual debt limit imposed by markets, and if Congress can issue debt, and no one wants to buy it, and then, everybody who is expecting payments, um, no longer has, has, um, payments coming in? Like, th- this… Y- y- yeah. I mean, it’s a political question, but the, the question is how do we get a Congress that is divided to come together to actually have a discussion, and at least a, you know, the debt limit may not be perfect, but it’s, it’s serving its purpose. We’re having the discussion right now.

John Donvan:

I, I want to ask you each, if the stakes in this are so high, as has been described, and I don’t think either of you dispute that they are, why does Washington even play this game? And Mark, why don’t you take that first?

Mark Zandi:

Well, I mean, just think about our political, um, uh, environment. I mean, it’s, uh, incredibly highly polarized. Uh, and each side is, uh, using every cudgel they have at their disposal to hit the other, other side. And this is a pretty big cudgel, uh, you know, pretty significant, uh, cudgel, and uh, therefore, you know, uh, they’re using it. Uh, but it goes to, fundamentally, our fractured, uh, politics. Uh, you know, we are a very discordant society, and it’s reflected in, in the debt limit drama and, and the discord that it’s, it’s creating.

John Donvan:

What about you, Parker?

Parker Sheppard:

I think a lot of it has to do with the media environment, where you have… Used to be that you had thousands of newspapers across the country. Most people followed along with their local news, um, and the national, national debate was of less importance. Um, the, the funding for the federal government was smaller. But, we’ve seen increasing centralization, that’s focused on governance at the federal level, and attention that’s focused on the, the federal debate. And that’s kind of sucking the oxygen out of, of governance at, at lower levels. It leads to, uh, a debate by, um, by cable news hits, as opposed to regular order that’s going on in Congress, where, um, you can get amendments, and, and make changes, and find compromises, and, uh, and unlikely coalitions that get formed through the process of regular order.

We’ve seen the breakdown from, um, getting funding by local parties, uh, to bigger machines that have centralized a lot of the, um, the funding and political decision-making behind leadership. So you see the bills, rather than getting go, through regular order, and finding compromises, and something that could be sustainable across Congress, uh, you see the leadership debating changes to the bills behind closed doors. They dump the, the 1,000 pages, and give everybody 48, 72 hours to read it, and then we have a vote at the last minute.

John Donvan:

So let’s talk a little bit about just the history of this, because, uh, as has come up in the conversation so far, it’s happened a bunch of times before.

Jay Carney:

We also believe, quite strongly, that we have to raise the debt ceiling. There is no option to doing that, and that that will happen, because the economic impacts of not voting to raise the debt ceiling would be calamitous.

John Donvan:

So that was Jay Carney, um, in 2011, basically sounding the same signal that we’ve heard sounded by the White House through the spring of 2023 about the debt ceiling needing to be raised, similar sort of argument. And Parker, uh, again, I, I feel that it, in a, in a way, it goes to Mark’s point, that we keep going through this game of chicken over and over again, but it also… I, I, I’m, I suspect you would say, “Yeah, but it got everybody to focus back in 2011. It, it led to, it led to d- some decision-making. It led to some, uh, rethinking about government spending.” So w- w- would you say that the repetition of this kind of kabuki tents around the debt ceiling limit r- r- continues to be a useful function for us, socially, and economically, and financially?

Parker Sheppard:

I mean, the, the exact mechanism of how we’re going through this is, is not desirable, but I don’t know, um, w- what the, the alternative is, where if we, if we get rid of the debt limit, and j- just say we permanently suspend it, where else would, would we come back to having these, these discussions? Nobody wants to touch… No one wants to make difficult decisions. No one wants to be on the record making difficult decisions. Um, Congress has, has advocated a lot of its abil- its influence in setting legislation recently. They’ve, um, they often fill bills with saying, sections where, uh, the secretary shall determine, and they let, uh, vast swaths of the executive branch actually fill in some of the details, which allows them to focus on some of the high-level stuff, but avoid the messy work of actually doing a compromise.

So I think a lot… It was really good to see, um, within the, the drama over determining the speaker earlier this year, that that was one of the points of the, of contention, of reintroducing regular order back into the House, so that, um, amendments could be made, and we could find a way to actually r- uh, find a compromise. It’s, that’s a muscle of actually finding a good compromise that seems to have been lost in Washington.

John Donvan:

Mark, um, Parker’s making the point that, in the absence of the debt ceiling, there would be virtually no functional control of the mounting of the debt, and that it serves, certainly serves that purpose. And it was, and that was the purpose for which it was initially instituted. In addition to allowing for more flexible, uh, borrowing, uh, it was also to allow flexible borrowing with a safeguard that there would be a limit to it. And without that limit, the executive branch would have very little incentive to stop spending.

Mark Zandi:

You know, I think, uh, things do happen, when uh, voters, uh, decide, uh, to put a party in control. You can see that when President Trump was elected, and had both, uh, the House and the Senate, uh, under Republican control. Stuff happened, and when, uh, President Biden was elected with, uh, Democrat control, uh, Democratic control of the Senate and the House. Stuff happened, and voters voted, and showed their preferences, and uh, policy was made. So things do happen without the debt limit. Big things happen with- really big things happen without the debt limit. And they’ve happened historically. Back in the early ’90s, they’ve happened without the debt limit, to good effect.

Here’s a, here’s a, the more narrow thing I’d say, and that is, I, you know, I, if I were king, I’d take that debt limit and I’d say, “I don’t… I’m getting rid of that. But what I’m going to do is say, if…” Uh, this goes back to kind of the PAYGO rules. If you, Congress and the administration, want to pass a piece of legislation that increases, that, uh, increases spending or cuts taxes, you’ve got to pay for that, and if you don’t pay for that, you got to pass a debt ceiling increase at that point, and say, you know, uh, you’ve got to finance the spending that you… and tax cuts you have agreed to right now, at the time of that decision, and then get rid of the, rid of the drama, and then, and then you, uh, you make it a lot more, uh, a much more efficient process, and people really think about these things going forward.

Uh, one other thing I’ll say. Uh, I have faith in, uh… You know, what’s that old Winston Churchill qu- uh, quote. I’m going to butcher it, but he said, “Americans will try everything, and then ultimately do the right thing,” and I believe that to be true. We will try everything, go down every single path (laughs) and that’s what we’re doing on every single issue from climate, to Social Security, to Medicare, to gun control, to everything, but ultimately, we’ll, we will find the right path forward, because we always have, and because our, you know, our system does work. We’ve just got to let it work. We can’t muck it up with things like the debt limit.

John Donvan:

All right, we’re going to wrap up, uh, this part of the discussion right now, and when we come back, we will bring in some more voices here, to move the conversation forward. The question we’re debating, “Should Congress abolish the debt ceiling?” And we’ll be right back.

Welcome back to Open to Debate. I’m joined by Mark Zandi and Parker Sheppard, and we’re debating the question, “Should Congress abolish the debt ceiling?” So, I’d like to bring in some other voices, some journalists who are specialists in, in covering issues like this, and bring them into the conversation, and, uh, ask them to bring some questions with them as well, so I want to start with, uh, Kate Aranoff from The New Republic. Kate, thanks so much for joining us on Open to Debate, and we know you’ve been listening along, and we’d like to get your take on this, with a question to either of the debaters.

Kate Aranoff:

Sure, thanks, thanks so much, uh, for having me. Uh, one thing, uh, that seems like a rare opportunity for some sort of bipartisan agreement over the last several years is some level of anxiety about the United States’ place in the world, uh, vis-a-vis China, but also vis-a-vis other countries who aren’t necessarily aligned with US policy on a number of fronts. And, there have been various sort of policy attempts to either reshore supply chains, to build out key domestic industries, that have gotten votes from the public and some Democrats, the CHIPS Act, uh, the Inflation Reduction Act, although that was more partisan. And part of this anxiety in recent months has been this discussion about dedollarization, and whether or not, in the not-too-distant future, United States will stop having control of the global reserve currency, whether that will be [inaudible

] or something else, um, but there is this really persistent anxiety about this.

And listening to this conversation, I think what, you know, seems important to mention is just the debt limit, the debt ceiling is such a strange American phenomenon. We’re the only country on Earth that has one that actually matters. Denmark has one that’s too, too high to really make a difference, right? And so why, why would any other country on Earth not look to dedollarization as a real option, if every couple of years, Republicans, and it is mostly Republicans who do this, decide to engage in a hostage negotiation over whether the United States, the most important economy on Earth, is going to default on its debt, which would put a sledgehammer to the global economy, not just ours, um, but would undermine US Treasury as maybe the most important factor in the global financial system.

John Donvan:

So Kate, just to help the, the lay-audience understand, your term dedollarization is the notion that, since World War II at least, the dollar has been the, the global currency, and the one in which most international business is done, and puts the US in a fantastic position, and by dedollarization, you’re suggesting the world might say, “You know what? They are so crazy with the way they’re doing it over there. Let’s move on to somebody else’s currency,” which would have disadvantages.

Kate Aranoff:

Yeah, and maybe a simpler way to put it is just why would we choose to endanger institution the US has at its disposal, which is US Treasuries?

John Donvan:

Parker, do you want to take that first?

Parker Sheppard:

Yeah, I can start with it. I think that, um, so there was, in… In 1979, there was like a, a technical glitch, that actually resulted in, uh, a couple of bond payments being technically late, and we still managed to, to continue on with the dollar as the central world reserve currency, with, uh, the Treasury as the, um, uh, as, as the rock-solid, risk-free measure of interest rate. And I think that we, we really want to separate here, the distinction about a short-term disruption and a long-term disruption. And I think that’s really the difference between Mark’s view and my view, is that, I mean, yes, it would be bad if we, uh, if we missed a, a payment briefly here, but uh, again, when Mark keeps talking about the um, the desire to avoid having the default and the continuing negotiations coming up against the deadline, um, I, I think that there will be something that comes through, even if it, even if we brush up against the deadline, and maybe are a, a touch late, where the fundamental problem hasn’t changed. We’re just off by a couple of days.

The bigger issue is what happens if we have l- large, 5% of GDP deficits for years and years, decades into the future, and then the only way to continue to finance those deficits is through printing up new money, because um, that’s what drives the rest of the world to decide that they no longer want to borrow Treasuries. China’s already selling off its Treasury holdings. Uh, other countries are, are already starting to lessen it, but it’s not necessarily because of, um, d- debt brinkmanship on the sh-, in the short term.

John Donvan:

How about you, Mark?

Mark Zandi:

Yes, exactly. Uh, it w- will diminish the geopolitical status of the United States of America. This whole drama is… People are looking at this from all over the world. The only thing that’s saving us, Kate, is where your going to put your money? You know? I mean, uh, Europe has its own problems. Uh, Japan, UK, Australia are too small, and really, Chinese Yuan? I mean, uh, they, you don’t even have, uh, uh… You have a closed capital account, and no property rights, and you know? So, uh, it’s, that’s the only thing that’s (laughs) holding up the dollar as a reserve currency to any significant degree, because there is just no good alternative. But that, that’s not a winning strategy.

John Donvan:

Kate, did you have a follow-up question?

Kate Aranoff:

Well, I, I would, I would just ask… I mean, Parker, you mentioned, um, that this would be a temporary situation, uh, that you know, we, we shouldn’t worry maybe too much about what would happen if we breached that limit. I mean, the, the United States credit rating getting degraded, which is really on the table if that happens, seems like a pretty long-term effect, and I don’t know if, you know, if, if, if United States credibility really recovers. And so I just wonder, you know, what you think happens, right? Is there a long-tail effect, or you know, it seems unlikely to me that we just, you know, snap right back, and everyone looks at the US like they did before we defaulted.

Parker Sheppard:

S- so I think, picture yourself as a lender, and you have, have two potential borrowers that you, um, that you might want to lend to. Would you rather lend to the one that is paying attention to his finances, and, and that has some fits and starts on, on actually making payments on time, but continues to revise his finances and make sure that everything’s good, or would you rather lend to somebody who blows through, uh, missed payments, who, um, isn’t concerned about where the money’s coming from, but is, is papering it over, and borrowing it over, and letting that, uh, uh, accrue, a debt accrue with other bondholders, of which you are one of many. Would you rather lend to someone who is, um, trying to make an effort to revise the, his fiscal situation, or somebody who is just completely letting it go on autopilot, and not, not paying attention? I think the bigger problem is what happens for these other countries if they’re evaluating the fiscal health of the United States, not in the short term, but in the long term.

John Donvan:

Thanks very much, Kate, for um, for your, for your question. I now want to go to, uh, Aiden Quigley, who’s with CQ Roll Call, and he is the r- their reporter for budget and appropriations. Aiden, thanks so much for joining us at Open to Debate, and come on in with your question.

Aiden Quigley:

Yeah. Thanks for, uh, having me on. So, essentially, the 14th Amendment says that the validity of the United States debt shall not be questioned. What that means, uh, has been debated between legal scholars. There’s one train of legal thought that says that means a president can, you know, just continue to pay the president’s debt, even if it, you know, they exceed the debt limit set by Congress. The other side argues that Congress has the power of the purse under the Constitution, and it’s blatantly unconstitutional for the president to just ignore a coequal branch of government, uh, spending limit. Do you think that the president can, uh, you know, continue, order the Treasury to continue to pay the bills, even if it, that exceeds the debt limit? And part two is, uh, do you think that this matter should be litigated whether or not the current Congress decides to raise the debt ceiling?

John Donvan:

Okay, so can the president do an end run around, using the 14th Amendment, and then should that battle be fought? So Mark, why don’t you take that one first?

Mark Zandi:

Well, you know, I’m not a constitutional lawyer. Uh, I can play one, though, so (laughs). And I’ve heard both sides from very smart constitutional lawyers, and they both make strong arguments. But I’m just a simple guy, uh, economist, and I think, “Well, how can it be constitutional for the United States of America not to pay its debts? How can that be constitutional? (laughs) That doesn’t make any sense to me.” So I would think at the end of the day, the Supreme Court would have to rule. It would rule in favor of, uh, the president if he invoked, uh, the 14th Amendment, uh, uh, as a way to, to end the, the… and continue, end the debt limit drama and continue to issue debt.

Now, having said that, that’s going to be very costly. Uh, because as soon as he invokes the 14th Amendment until the time the Supreme Court rules, and who knows when that’s going to be, there’s going to be completely chaos, because bond investors are going to say, “Well, there’s some probability the Supreme Court’s going to say this is unconstitutional. Those bonds, what are they? Are they full faith in credit? I mean, what i-, what are those bonds?” And that, and they’re not going to buy them, and that means you’ve got to pay a much higher interest rate.

And it, it could be serious. It could be busted bond auctions, and if you have a busted bond auction, then you’re in a situation where you can’t potentially even, uh, you know, pay, you roll over the debt that’s rolling over, and pay, pay… You’re going to lose money. You’re going to actually have a, a bigger problem on your hands. And, and then of course, who knows, you know, how the Supreme Court’s going to rule? It’s, like, I, I, it’s a very difficult thing.

So, the only time I would use the 14th Amendment would be in break-glass situation. We’ve breached, uh, things are unraveling rapidly, uh, interest rates are soaring, stock prices are f- caving, layoffs are mounting. It is complete, utter chaos, and then, the, this is… Then you, then the question is which is the least bad course? It’s a Hobson’s choice, which is the least bad, this complete chaos that I’m observing or the 14th Amendment? I’d go 14th Amendment, but you know, that’s a pretty tough decision to make, uh, because it’s not going to be painless. It’s going to be very painful.

John Donvan:

Parker, what is, what is your take on the 14th Amendment end run possibility?

Parker Sheppard:

Uh, I am also not a constitutional lawyer, uh, so this is, this is somewhat outside my wheelhouse. Um, I, I agree with Mark, that there would be lots of chaos, uh, particularly if this gets, if this gets punted and tied up in the courts for a long time, and financial markets need to continue to function. Um, but from my understan- my simple understanding of the actual text, I, I believe Article 1, Section 8 gives Congress the authority to borrow against a credit of the United States, and the text in the 14th Amendment just says that the, the debts shall not be questioned. So, um, yeah, aga- again, i- if the question is, “Should the government continue to repay its debts that have already been incurred?” Well, yes, I don’t think anyone is arguing otherwise. The question is, is what about anticipated obligations for which there has been no borrowing against the credit of the United States? Um, that, would that be valid? Can the president give these, um, create new authorizations to borrow against the credit of the United States, when that Con- that power is, is clearly given to Congress. It, again, I’ll, I’ll let the lawyers actually fight it out in the courts, but, I, I don’t think that the 14th Amendment covers debt that has yet to be issued.

John Donvan:

Aiden, do you have a follow-up question?

Aiden Quigley:

Uh, I do. It, it’s actually tied back to something from Parker’s opening statement, uh, which was essentially that the real debt limit is when markets no longer buy Treasury debt, uh, and you know, we need to get on a sustainable path. Uh, my question is what would be a sustainable level of debt?

Parker Sheppard:

Anything where the, uh, the ratio of debt to GDP is, is stable. And it, what exactly that ratio is is a political question. Uh, I think debt held by the public has typically been in, in the 35 to 40% of GDP average, after World War II. So returning back to something like that, before, where, um, where the, the debt ratio was before the 2008 financial crisis. I think that would be a good goal. The, the things to consider there, and the trade-off, are just the, you, a lower level of debt has a lower level of interest, but you also have to run bigger surpluses for longer. You have to make the, the trade-offs about how to adjust the, the budget in the present, in order to continue to drive the, the debt down to lower levels.

John Donvan:

All right. Um, thank you. I want to thank Aiden and Kate for bringing a different lens to the conversation, and um, we are going to h- head for the home stretch, and our home stretch are our closing statements by each of our debaters in turn. Uh, Parker Sheppard, since Mark went first for our opening statements, you have the floor now going first. Once again on the question, “Should Congress abolish the debt ceiling?” You are saying no, and one last time to explain why.

Parker Sheppard:

So there, there’s a famous quote from Ernest Hemingway s- when he was asked how he went bankrupt. He said, “Gradually, then suddenly,” and that’s how the, uh, default crisis in the United States is going to play out as well. You know, if we get to a real debt crisis, one that’s not, not necessarily coming from a self-imposed limit by Congress, um, it, but one that’s coming from markets, that will happen very quickly. Um, if there are current estimates right now from the IMF, of the amount of fiscal space that the federal government has, effectively how much that debt-to-GDP ratio can continue to climb, um, un- until we reach a point where markets no longer want to buy Treasury debt. And their estimates put it in a range of about 160 to 185%.

Uh, so internationally, there, there are other countries that are still looking at buying lots of Treasury debt, and this came up in the questions. Um, it’s a very real concern, that what happens if other countries want to move away from the dollar? And that’s a, a good portion of, a significant portion of current demand for Treasury debt. If that were to disappear, that would drive up interest rates. Um, that would need, force Congress to find a way to fill the gap, and the way they’re going to do that is through printing money. If they can’t make the changes to the budget to figure out how to fix the deficit, we’re going to see runaway inflation, where the Federal Reserve is effectively buying up all this new debt with brand new money. It would be, uh, just like what we saw after the, the pandemic, but forever.

So, we need to keep the debt limit, because it’s an effective mechanism for Congress to come back and make these difficult fiscal choices to avoid that worst case scenario.

John Donvan:

Thanks very much, Parker Sheppard. You have the final say here, Mark. Um, tell us, again, why you are answering yes to the question, whether or not Congress should abolish the debt ceiling. You are saying yes.

Mark Zandi:

I am, uh, totally on board with, uh, the concern that our nation’s long-term fiscal path is unsustainable. We need to change, uh, policy, both tax policy and spending policy. We need spending restraint, and we need additional tax revenue to make sure that, uh, the nation’s fiscal situation does not continue to erode. It’s not, you know, a cliff event. It’s not that we’re going to, uh, hit a wall here next year, or even the year after, but, you know, uh, anyone who’s doing some prudent budgeting and forecasting, uh, comes to the same conclusion, that uh, we need to do something about this.

Uh, I don’t think the debt limit is the way to do it, and it’s not working, and it, it is actually counterproductive. It’s leading to, uh, increased economic cost. It’s raising the odds that we will breach the debt limit, and if we do breach the debt limit, the costs of doing that are incalculable, and will make it m- even more elusive for us to achieve the goal we’re all striving for, and that’s fiscal sustainability. The debt limit also, uh, is diminishing our status in the rest of the world at a time when our geopolitical position is already under significant pressure from, uh, bi- big, uh, forces, uh, overseas. We have to work to shore up confidence in the United States of America, and that’s certainly not what’s happening in the context of the drama that we’re… the political theater and drama, and performative nature of what’s going on here. It’s not, uh, not helpful.

Uh, there are ways to address this. These are things that we need to discuss as a nation, but the debt limit is not, should not be part of our future budget or, uh, our efforts to address our long-term fiscal situation.

John Donvan:

Thank you very much, Mark, and that concludes our debate, and I want to thank our debaters, Mark and Parker. Thanks so much for approaching this with an open mind and for bringing your thoughtful disagreement to the table, in short for being open to debate. And I want to thank our reporters, Kate and Aiden, as well, for your contributions and taking things in a different direction. And everyone listening, I want to thank you for tuning in to this episode of Open to Debate. As a nonprofit, our work to combat extreme polarization through civil and respectful debate and argument is generously funded by listeners like you, by the Rosenkranz Foundation, and by supporters of Open to Debate. Open to Debate is also made possible by a generous grant from the Laura and Gary Lauder Family Venture Philanthropy Fund.

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