Debt ceiling: Last minute decisions ‘not good for the economy,’ economist says
Yahoo Finance Video
Shai Akabas, director of economic policy at the Bipartisan Policy Center, joins Yahoo Finance Live to discuss the possibility of debt default, solutions for government spending, and what Congress can do to avoid approaching the brink of default.
Video Transcript
RACHELLE AKUFFO: All right, well, now let's turn to what's driving much of the discussion-- when the Treasury will run out of money to pay its debts and whether lawmakers could potentially miss or underestimate that date. Here to discuss is Shai Akabas, Director of Economic Policy at the Bipartisan Policy Center. Thank you for joining me today.
So, Shai, I know that, obviously, Janet Yellen had her prediction-- she put it as Thursday as the so-called x date when that date would be. But what are your models saying? What are your predictions?
SHAI AKABAS: Yeah, so it's an important distinction, Rachelle-- great to be with you-- that tomorrow is when we will actually reach the debt limit, which means that we have come up against that $31.4 trillion that is set in federal law that the Treasury Department is not allowed to borrow beyond. That's a significant date, but it's not the one with the major economic consequences attached.
Related Videos
That's because the Treasury Secretary has some tools at her disposal called extraordinary measures. They're really just accounting maneuvers that are allowed by law to give her some additional breathing room and really give congress some additional breathing room to act.
She will start deploying those measures tomorrow when we run up against the debt limit. And then, we expect that they will last for a period of time, likely several months, until sometime around the middle of the year. We don't know exactly when that x date, as we call it at the Bipartisan Policy Center, which is the date on which the Treasury Department will not be able to pay all of our bills in full and on time-- we don't know exactly when that will arrive because it depends on literally millions of payments that are going in and out of the Treasury Department each day. But we expect it will arrive sometime around the middle of this year, meaning that if congress does not act before, then we would be failing to meet some of our obligations as a country, which would be unprecedented in modern times.
RACHELLE AKUFFO: And, Shai, some of the biggest things that are really shifting the needle here potentially-- what we saw with the student loan debt that President Biden had put forward the relief there, whether that goes in or not, how much does that move the needle on this?
SHAI AKABAS: Yeah, there have been several policy developments over the course of the second half of last year, and economic developments, that have led to an x date that we expect to be somewhat sooner than it otherwise would have been. So, for example, the extension of the student loan pause that has been ongoing since roughly the beginning of the pandemic, that was announced to be extended now until roughly the middle of this year.
That means that student loan payments that would otherwise be coming into the federal government from borrowers are not being received, which means less receipts and more debt that needs to be issued from the Treasury Department. That will accelerate the timing of the debt limit. Similarly, when interest rates are higher, we have higher payments on our government debt that's outstanding. So that will also mean more spending and, thus, more debt, meaning a sooner x date.
So all of these factors are driving the timing a little bit closer. All that said, congress has plenty of time to act on this. They just need to get themselves together, figure out how they're going to proceed, and pass legislation.
They have many months of runway. But often, they leave these decisions until the last minute, which is not good for the economy.
RACHELLE AKUFFO: And, Shai, as part of an effort to really avoid-- keep from coming to this brink every single time, we know that back in 2021, there was a bipartisan bill that offered some additional ways to stop us from getting to this point, giving the president powers to act in certain situations with congress. How far do you think that could get now in this sort of environment? Is there an appetite for some sort of permanent solutions to this?
SHAI AKABAS: There is a growing appetite for that, because both parties are increasingly realizing that the debt limit is serving nobody's purposes in its current form. It is extremely risky and potentially costly if we actually were to go beyond that x date. And it also is not achieving fiscal responsibility, which is at least the stated purpose of what some people believe it should be there for.
In recent debt limit deals, we've actually seen spending go up, not down. It is not serving as that focal point for fiscal responsibility. We need a better paradigm, and this legislation that has been introduced in the House of Representatives on a bipartisan basis represents that change that would de-risk the debt limit, stop us from coming up against it each year in a way that poses this risk and potential harm to the economy, but also forcing a debate in congress, which we don't have often enough, around spending, and taxes, and how we are going to get our fiscal house in order.
RACHELLE AKUFFO: And so for people who are wondering, if they do go beyond this x date, what are some of the most immediate repercussions that your everyday American would see? How would they see this reflected?
SHAI AKABAS: That's the $64,000 or, really, the trillion dollar question, in this case. We don't know, is the honest answer. Because we've never been there before in modern times.
It would be uncharted waters for the United States to not be meeting all of its obligations. We are the bedrock of the global financial and economic system. Anything that turns that on its head is going to be extremely concerning to market participants, investors, other global actors.
It could mean a significant drop in financial markets. It could mean a spike in interest rates. It could mean that we, at some point, no longer are the reserve currency of the world. We have been entrusted with that because of the faith that people have in the US dollar and US Treasury securities.
If that is no longer the case, we could face severe economic consequences. These are all risks. We don't know what that world would look like. But it could impact Americans in their everyday life through higher interest rates, economic pullback, potentially leading to higher unemployment. These are all factors that could come into play if the Treasury Department was unable to meet all of our obligations in full and on time.
RACHELLE AKUFFO: Certainly too much at stake to keep kicking the can down the road. Hopefully we do end up with a more permanent solution. Shai Akabas there, Director of Economic Policy at the Bipartisan Policy Center, thank you for joining me in this morning.