Web Chat: Raising the Debt Limit

Tense negotiations are expected this summer over how and when to raise the nation’s debt limit to prevent the United States from defaulting on its obligations. On June 1, Isabel Sawhill answered your questions on this issue in a live web chat moderated by Seung Min Kim, assistant editor at POLITICO.

The transcript of this chat follows.

12:31 Seung Min Kim: Happy Wednesday everyone, and welcome to our weekly chat. Today, Isabel Sawhill is here to answer your questions on the debt, budget and more. Thanks for joining us.

12:31 Isabel Sawhill: Thanks. Nice to be here.

12:31 [Comment From Arlene: ] What’s the point of having a debt “ceiling” if Congress can simply vote to raise it?

12:32 Isabel Sawhill: We didn’t used to have one but Congress decided it wanted some check on continued borrowing and this year — as in some previous years — they are going to insist on a lot of conditions for raising the ceiling. That’s their prerogative.

12:32 [Comment From Paul Moritz: ] Do you think there’s any reasonable possibility that Congress would vote to NOT raise the debt ceiling? It seems like the consequences would be terrible.

12:35 Isabel Sawhill: I agree the consequences would be terrible. I was just reading that the last time Congress failed to vote for a serious financial bill — the TARP — the stock market average declined by 777 points — the most ever. Failure to raise the ceiling could make even that scenario look tame by comparison.

For these reasons almost everyone thinks we’ll raise the ceiling but at the last minute. The question is whether markets will start to react as we head toward the cliff — something no one should want. In short, we’re playing with fire.

12:35 [Comment From jackson: ] Where do you think a point of compromise might be for democrats and republicans?

12:37 Isabel Sawhill: It’s hard to say given Republican intransigence on taxes and the fact that Democrats won’t agree to a spending-only package. Most likely scenario in my view is that we’ll have some spending cuts but also a target for deficits or debt and an enforcement mechanism that includes some combination of spending and taxes if Congress fails to act.

12:37 [Comment From Kyle: ] Why are Republicans so set on not increasing taxes? It makes no economic sense.

12:39 Isabel Sawhill: Makes no sense to me either. But they’ve found that by playing hard ball, they can get more than half a loaf (sorry for mixed metaphor). Some of them are doing this as a bargaining strategy but some of them are real ideologues who may not give in — this is worrisome to me.

12:39 [Comment From Michael: ] Yesterday’s vote, while only symbolic, failed. If that vote was “real,” what problems would we be dealing with now?

12:41 Isabel Sawhill: Well, I think you’re right about the symbolism and it was meant to send a message that there’s going to be no raising of the ceiling without spending cuts. We will have some cuts, for sure. Whether it will be $2 trillion over 10 years as Republicans seem to want remains to be seen. I think that would be tough for Democrats to swallow although it may be cast in such a way that after the election any damage can be undone.

12:41 [Comment From Mark, Greenbelt: ] I’ve heard reports that all we need to do to bring the deficit largely under control is to allow the Bush-era tax cuts on the wealthy to expire. Is that true, and is it politically possible?

12:44 Isabel Sawhill: It’s not true. Allowing those particular tax cuts to expire brings in about $700 billion over a decade. The gap we face over this period is about $12 trillion. However, that doesn’t mean this wouldn’t contribute something important. In my view, however, we are going to need more of the tax cuts to expire. I’ve argued for all those affecting anyone with incomes above $100,000 (as opposed to Obama’s $250,000.)

12:44 [Comment From Jennifer S.: ] Do we know what the consequences would be? What would happen to the domestic economy? What would happen to out reputation overseas? What does default actually mean?

12:47 Isabel Sawhill: Since we’ve never been there before, we don’t really know what it would mean. But most economists think it would have grave consequences and is unthinkable. Without an increase in the ceiling by Aug. 2, the Treasury could no longer pay all of our bills. Since we’re borrowing 40 cents out of every dollar we spend right now, that would mean possibly not paying interest on the debt, social security, pay for the Armed Forces, etc. It would have huge consequences — so it probably won’t happen.

12:47 [Comment From Gary: ] Can you explain the point of yesterday’s “vote”?

12:48 Isabel Sawhill: I think it was to send a message to the President that the administration’s preference for a clean bill was not supported and to thus put pressure on the negotiations going on under VP Biden.

12:48 [Comment From Bill in Va.: ] Seems reasonable to me to force spending cuts to raise the debt ceiling, again. But realistically, can Congress and the White House agree to ENOUGH cuts to actually prevent us from hitting the debt ceiling again, and soon?

12:50 Isabel Sawhill: Well, it depends on how big the spending cuts are obviously. But you’re right to wonder about this since it’s a lot easier to talk about spending cuts in the abstract than to agree to specific cuts. In fact, as your question suggests, we may just have a series of short-run extensions much like what happened during the government shutdown crisis.

12:50 [Comment From Adrian Rocha: ] Are there any consequences associated with waiting to the ninth hour to raise the debt ceiling? In other words, would it be more beneficial to increase the debt limit now or is punctuality irrelevant so long as it done before the deadline?

12:52 Isabel Sawhill: I think there are. No one knows how financial markets will react as we get closer the cliff. And once they start reacting, there may be no stopping the process; it tends to feed on itself much as it did in 2007-2008. Even if there’s only a modest increase in interest rates as creditors start to ask for a premium given the risks, this will balloon what we have to pay on the debt and possibly abort what is already a very fragile recovery.

12:52 [Comment From R. Iglesias: ] All the experts seem to be saying that you can’t solve the problem without both spending cuts and revenue increases. Yet the GOP leadership seems to be saying revenue is off the table. Can that work?

12:54 Isabel Sawhill: That’s why we’re at an impasse. One has to hope that eventually Republicans will be willing to compromise. But the President may go quite far in their direction since he cares a lot about the recovery and it will affect his reelection prospects. So they kind of have him over a barrel, in my view.

12:55 [Comment From Ron: ] Can you suggest a strategy which will get the annual U.S. budget back to a point where there is an annual surplus — more revenue than outlays — without hurting the needy or sharply raising taxes on some or all groups?

12:58 Isabel Sawhill: Yes, I think I can. Not enough time for full response here but see my piece called Help Wanted: A Left of Obama Voice or some of my other commentary on brookings-edu-2023.go-vip.net. In a nutshell: eliminate or cap a lot of tax deductions, put a tax on carbon and on consumption, put Medicare on a capped trajectory and allow an independent body to suggest ways of keeping it there if Congress can’t, ask more affluent seniors to accept lower growth of benefits in future, scrub the rest of the budget for stuff we can do without (e.g., farm subsidies).

12:59 [Comment From Adrian Rocha: ] Even if the debt ceiling is raised, it does not change the amount of debt already incurred. Is Congress trying to address too much by trying to reign in the debt with a bill that should only focused only on raising the debt limit?

12:59 Isabel Sawhill: Yes. Exactly right. But not where we are politically — unfortunately.

1:00 Seung Min Kim: That’s all the time we have for questions and answers today. Thanks to everyone for all your great questions and a special thanks to Isabel.