Debt ceiling debate: Trump and Warren agree America should get rid of it

Kathleen Day: They’re saying, Oh, we have too much debt. Well, guess what? You help create it without funding it. And that’s actuarially, financially, fiscally irresponsible. Do your job.

Simone Del Rosario: For the umpteenth time in U.S. history, the nation is pushing up against the debt limit. That means Congress is on the clock to raise it.

The Treasury Department is taking “extraordinary measures” to keep from borrowing more than Congress has allowed to date. And how much is that amount? It now exceeds $36 trillion.

Sometime in the next few months, the Treasury will run out of tricks. Congress will either raise the debt ceiling, or the U.S. will default. Those are the two options … or is there a third?

Scott Bessent, Treasury Secretary nominee: If he wants to eliminate the debt limit, I will work with him and you on that.

Sen. Elizabeth Warren, D-MA: Great, great, because I agree with President elect Trump that the debt limit should be repealed.

Kathleen Day: I still don’t think it makes it more likely to happen, and I think it might be a bad thing if it does, because what it’s saying is, we want to tell the voters we want to cut the debt, but let’s hide the fact that we haven’t done it. I’m Kathleen Day. I am a journalist masquerading as an academic. I have been teaching financial crises at Johns Hopkins University Business School for going on 15 years, 13 to 15 years, I’d have to recount, but my expertise is in financial crises.

Simone Del Rosario: Failing to raise, suspend or do away with the debt ceiling would certainly cause one of those. In this interview, we’re going to talk about what function, if any, the debt ceiling serves; where it came from in the first place; and why life gets more expensive for all Americans the longer Congress takes to come to a resolution.

So you don’t think with a Republican president who wants to get rid of the debt ceiling, and Democrats who have been calling to get rid of the debt ceiling, you don’t think that there will be a time soon where they decide to actually do that?

Kathleen Day: I don’t, because I think that there is an entrenched group and in the Republican party that’s very radical and really wants to like, get rid of Social Security, get rid of Medicare, get rid of Medicaid. Social Security in particular, and they look at it as another part of another lever that they can use to try to call attention to the to the to the debt.

Simone Del Rosario: Yeah, we didn’t always have a debt ceiling. How did this come about? And how did we borrow money before it?

Kathleen Day: We’ve always borrowed money. And as Alexander Hamilton and Jefferson agreed, you know, borrowing money can be good, and I’ll just give you this little picture. So Jefferson was kind of against it, but Alexander Hamilton understood, and this is an essential economic truism, if you borrow too much money, it’s bad. Obviously it can sink you, but borrowing money reasonably is helps everybody. For example, if you want to build a factory, you can save up the money to build the factory, and that takes a long time. In the meantime, people aren’t employed, whatever. If you can borrow the money at a reasonable rate, and you can afford it, and you build the factory, and you’re making things, you’re employing people, and you pay back the debt, that’s good for everyone, and it’s good for the economy. So a little bit getting rid of the debt completely, which some people would like, isn’t necessarily a good thing. Too much debt, of course, it can sink us. And I can give you an example, if you remind me later, of when holding too much, when having too much debt and having foreign adversaries hold it can be a national security issue, but we can hold off on that. Yeah, but so we always borrowed money. But in leading in World War starting in World War One. The Constitution gives to the house and gives to Congress the purse strings. Which it which it should it basically says the will of the people. You can’t spend money without you can’t tax without representation, unless you live in the District of Columbia or you can’t and you should not be spending without the the vote of people who’ve been elected by the people of the United States. So this idea of controlling the purse strings from Congress is is a good one, and I don’t, can’t think of a better way to do it. What do you want? You’re not going to give the Supreme Court the right do it, or just let the President spend whatever so it resides there, but going up. Now, there’s several things that happen. You have a budget process and appropriations, and we can go into that, but the bottom line, once the United States has decided what money it’s going to spend, it goes out and borrows. Now, it used to be that the Treasury before it would actually borrow the money, would get approval from Congress. But World War One, it became so frequent. Pretty soon Congress said, you know, we’re going to put you on autopilot a little bit. And then it was loosened more and more. And basically, for the last 100 years, we they you the Treasury. Doesn’t have to go to Congress every time. Instead, they put in a debt ceiling. They say, We don’t, you don’t have to come back to the well every time and put the bucket down and come up with approval. You don’t have to get approval every time, but we’re gonna set a limit on it so that that’s the way in which I think a debt ceiling is appropriate. It reminds everyone that Congress, at the end of the day, does have responsibility for setting this and it does remind people that there is a debt out there now it is not the place to try to reduce the debt, even though hardliners use it that way, extremists do use it that way when they didn’t get what they want earlier in the process, when the budget was set. So we got it because Congress said you don’t have to come to us every two minutes. We’re just gonna put up. We’re gonna put a ceiling there, instead of you having to come to us every time you go to the market to borrow.

Simone Del Rosario: Yeah, but Congress is the one who decides where the money gets spent and how much money gets spent. Anyway, it’s like, it’s like asking Congress for permission twice. It’s actually ask Congress for permission to charge the credit card, and then you have to ask Congress permission to pay that credit card bill when it comes due.

Kathleen Day: Not raising the ceiling when we’re bumping up against it is very much like incurring a debt and then not giving yourself the means to pay it so and that could be disastrous, and that’s a whole nother conversation. What that would do to we already you and me and everyone involved in this show and everyone listening pays more money in taxes, or at least we, we we don’t pay less our taxes. The cost of borrowing for the United States, and therefore for taxpayers, is higher than it would be if we didn’t have this debt ceiling fight all the time. So it’s ironic that the people who are refusing to raise the debt or the debt limit or eliminate it, are are people who are doing that in the name of wanting to lower the nation’s debt, and instead they increase it. Because when you do that, the financial markets say, okay, no one believes the United States is going to default on its debt, although it’s not as remote an idea as it used to be, because we’re so politically crazy right now, but, but death, we have had Moody’s and Fitch. I believe, I think it’s Moody’s, or maybe it’s Moody’s and S and P have lowered the rating of the US debt because of these interminable fights and impasses and games of chicken. So everyone, everyone believes the United States will eventually pay his debt, but there’s no longer this assurance that it will be paid on time. Time is money. If you delay paying a debt you owe, you are deemed a riskier borrower, and so it costs more to borrow money. And so, for example, in 2011 when we became perilously close, it added about $1.3 billion to the cost. This impasse cost added about $1.3 billion by Moody’s or S and P s estimate in raising the cost of borrowing. So the people who are trying to lower the debt by doing it here at the debt ceiling debate, in the stream of funding the US government. When you do it at this stage of the process, in the name of trying to lower the debt, you actually raise the cost. You raise the debt because you raise the cost of borrow.

Simone Del Rosario: And I appreciate you kind of explaining that out, because that was going to be a question of mine, is just, how do people living in this country, you and me, get affected by credit downgrades?

Kathleen Day: And it’s that the US has to pay more for things. It adds to the debt. Because we the government. You know, people get irritated when Washington doesn’t do its job. So when there’s a budget impasse and there’s a threat of government shutdowns, or when we’re up against the ceiling and we don’t raise it, then social security checks aren’t going to go out. Everyone’s affected by all these things. But one, there’s many ways. Number one, it increases the cost of borrowing, and that means taxpayers, more taxpayer money has to go to borrow for so if you were borrowing $1 before and paying three cents to borrow it, you’re not going to pay six cents. That’s a cost. Number two, it erodes. The United States is standing in world markets, for better or worse, we are for all our bickering right now, because of our court system, because, even though this has been tested lately, because we are a democracy and because we are play a government, we are a society that believes no one is above the law against that’s been tested lately, but no one’s above the law. These are the things that make the dollar and our economy so strong. This is why Putin and she like to invest secretly in the United States, because we have a democracy. That is what is backing our dollar. Our dollar is backed by democracy and our our court system, our strong military, all these things that make us a strong, free, law abiding society. That’s what gives us our heft and are paying our bills on time. So if we default, Russia has really never recovered from defaulting on instead. But you know, Russia has many other problems. They’re sort of a one note Johnny on an economy and stuff. We have such a great economy. We have so many things going for us that that, that when you do this, that so those are two ways that you hurt people. You raise the cost of borrowing, you undermine our credibility, and therefore raise our cost of borrowing. And then secondly, if, for example, if, if you don’t raise the debt ceiling, and the Treasury can’t borrow, and social security checks and Social Security is another thing, because the government taxpayers don’t have to borrow to fund social security, but because it’s a government run program, when it hits the debt ceiling, checks can’t get issued. So that’s a confusion. People love to raise. Social Security is raising the debt, and it does not. It may someday, but it does not now and it hasn’t. In fact, the it lowers the cost of borrowing for the US government because it has a surplus that the Treasury borrows from. But in any case, if we hit the debt ceiling and we don’t raise it, and the Treasury everything stops, people aren’t going to get their social security checks, military people aren’t going to get their pay. What? That doesn’t just hurt the people at the end getting those checks that is a ballast for the whole economy. So if, if those checks aren’t sent and that money isn’t spent, that is a drag on the economy, and then that hurts other people, and then they can’t they’re not getting revenue they need, and it’s a reverberation.

Simone Del Rosario: Consumer confidence is one of the most important things we look at in the economy. And it seems silly to say, well, you know, we look at a lot of numbers and cents and everything else like that, but it’s really how people feel about the economy that is a most important driver for what drives the economy. So it’s not just like you just talked about. It’s not just whether you know other investors are willing to buy our debt, and how many and how big that pool is, if they love margins, if Americans aren’t confident that those checks are going to come out regularly, if we prove that that’s not stable and reliable, then that takes a hit to the confidence. And even if that completely then again, people start wondering, well, when’s the next time? What’s going to happen next?

Kathleen Day: When you raise the cost of borrowing, you know, who loves it? Our enemies. So Putin and Xi, they are big investors, big holders, like 30. Percent of US debt, they hold it, and so if the interest rates on that debt goes up, and partly because of the disinformation that they’ve sowed to make us politically immobilized and paralyzed, they love it because they just make more money off us.

Simone Del Rosario: Do you think it matters how much foreign countries own of our debt?

Kathleen Day: It surely does. It absolutely does. And you can have too much debt again, that’s the factory. It’s It’s bankers have a saying, you know, if you borrow, or investors, if you, I am paraphrasing this, it has different incarnations. But if you say, I borrow $100 the bank owns you. If you borrow $100 a bank, if you borrow a million dollars from the bank, you own the bank because they can’t afford to have you fail. So that that that is that’s why, when you see consumers get in trouble, banks are not very keen to help you work it out. But if a company gets in trouble, they’re very keen to do it because they’d rather have a lower interest rate than have the whole loan go up. Let me give you an example. So in the housing crisis of 2007 to 2012. Going into that, one of the things that happened, this is a true story, mortgage backed securities, which are just bonds that are backed by millions of homeowners, home loans. So it’s a, it’s a, it’s a debt on a debt. It’s a, it’s a bond collateralized by yours and my mortgages. And they’re very they’re deemed almost as safe as as US Treasuries, because they’re issued by two government chartered corporations, which we don’t need to get into, Freddie Mac and Fannie Mae. But they’re deemed very safe, but they pay a slightly higher interest rate because they’re not exactly like Uncle Sam. So they get to pay more anyway, the biggest holders of that, of that, of those, those bonds, were China and Russia. Are two of the biggest, the Saudis, Japanese two, but Russia and China owned a lot. And in this, at the start of our crisis, Putin actually approached China and said, Hey, let’s do a coordinated sell off of everything we own. It would have torpedoed our economy. So there’s an example of how well, first of all, the people that made the dumb loans at the root of this are to blame, but and it exposed us, but also just having all that debt, basically the Chinese and the Russians and the Saudis and foreign operations really helped finance America’s housing boom in in the in the last part of the 20th century and into the 21st century, which is great unless you have too much exposure and you do something really dumb, like make loans, start making toxic loans to people that they you know, that’s a whole nother story, but just suffice it to say, Wall Street, by its own admission, made a lot of really stupid loans that looked profitable short term, but were long term, they knew they were going to lose. So the point is that having foreigners hold our debt can be good. They’re giving us money to have a great economy, or they can also now China is was more rational because they realized if they repeated our economy, we really might not repay the loans that they held, so they were more rational. But, you know, Putin has a real bug in his ear about democracy, but so it didn’t happen, but it was a real conversation, and it just highlighted the vulnerability.

Simone Del Rosario: I want to get back to the debt ceiling. Did you catch the back-and-forth between Senator Warren and Scott Bassett during the confirmation hearing? Were they agreed on this, where they talked about the hand break?

Kathleen Day: I didn’t catch that particular one, but there was one where they actually amazingly agreed that we needed to get rid of the debt ceiling.

Scott Bessent, Treasury Secretary nominee: If he wants to eliminate the debt limit, I will work with him and you on that.

Sen. Elizabeth Warren, D-MA: Great, great, because I agree with President elect Trump that the debt limit should be repealed.

Kathleen Day: That’s like, Kumbaya, everybody, but you know, I don’t know. Again, I’m just, I know. I’m a I’m on the I’m an outlier in the sense that I don’t think having a debt ceiling is so bad, even though it’s unique to us. But we’re, we’re unique. We are a unique economy, and, and, and, but so I don’t know, I still don’t think it makes it more likely to happen, and I think it might be a bad thing if it does, because what it’s saying is, we want to tell the voters we want to cut the debt, but let’s hide the fact that we haven’t done it

Simone Del Rosario: On its face, what is the debt ceiling supposed to do?

Kathleen Day: It’s supposed to just make sure that Congress has that authority. It reminds the spenders of the money that the keepers of the purse strings are the people of the United States, the elected officials.

Simone Del Rosario: But the spenders of the money, you know, the Treasury is it’s just doing what it’s told by Congress. So the spenders of the money is Congress.

Kathleen Day: It doesn’t make any sense. So here’s how it works. Congress and the president work for to create a budget every year. And they go back and forth and they do that. Then the next part is, there’s all these parts to it. Then Congress has to take what’s been agreed to and decide how to appropriate money to actually fund the budget. So they decide, this agency gets this much. This agency gets this much. They can do it for this they can do it for the new to maintain the nuclear arsenal, or we’re going to put an extra, you know, $100,000 in DOE to make sure that that that our nuclear weaponry is up to date and doesn’t suddenly go off and fly into the air start dropping bombs because of outdated wiring or whatever. So the point is that they have to, they have to agree on what to spend. They have to appropriate the money, and then they have this debt limit. So when you appropriate money and you agree on a budget, you get there’s only two places you can get money, taxes or borrowing. That’s it. So if you look, I can, I have a chart here. So the person, the president who really raised our debt, the national debt is went up by that 160% is Ronald Reagan, because they lowered taxes without any commensurate increase in funding. People say they hate taxes, but they don’t like it when there’s potholes, so they like if there’s tax funded plan to repair the roads or to make sure that public transportation works on time, or that the military works in case we’re attacked, people then suddenly say we like that. There’s a real disconnect. When people think about who pay they’re paying taxes, or who pays for services they want. There’s a lot of research on this. People want, like a great public education, but hell no, I’m not going to pay any more of my taxes to fund it. So it’s a disconnect. But anyway, back to this. So if you agree to a budget and you don’t appropriate enough and it exceeds tax income, you’re going to have to borrow there. That’s the obligation. You approve it. We’re going to spend this right there. There’s your obligation. People who don’t like the end result of that in any given year and think there’s too much debt, the debt, there’s a there’s a deficit in every budget that there’s not enough taxpayer funding, so you have to borrow. The accumulation of that deficit each year is the national debt. Okay? So it’s an accumulation. So people who were unhappy that they weren’t able to work their will during the budget process try again in saying, okay, but we’re going to come back at you by not allowing you to go above the debt ceiling. So that is how they then use it. But they already lost, and so it I get why they why they want to do it, but whether it’s good for the country or not, is another question.

Simone Del Rosario: When you’re taking action on this debt ceiling more than once a year, why? Why do you still believe that it’s an effective tool?

Kathleen Day: I don’t think it is the most effective tool. I think it’s an ingredient in the overall because it says, Guys, you have not gotten your dot. You have not reached a compromise and really worked together to fix the budget process. So, for example, security, Social Security, very popular. I may be wrong here, but I think if you do away with it, I think I think voters would be unhappy just to guess, just to guess. I think so. But you know, that doesn’t get to whether it’s you should have it or shouldn’t have it. So they should have a discussion about whether they should have it. I think the people who think you should will win out of it. Then you say, how do we fix it? But they won’t come together and do that. So a pox on both their houses, because it’s like, it’s like the border. They finally got together for a border bill, and then, and then it was torpedoed by Trump and friends because they wanted to use it as a political tool. At some point, they’ve got to stop doing that, and they’ve got a deep we have real problems in the United States. We’re a very strong country, but if we keep on kicking the can down the road, we’re going to end up with one crisis after another. Now it is true that sometimes Congress will not act, unless it’s stepping over dead bodies. It has to have a real crisis before it acts. And then then maybe it’ll do something to really fix Social Security, or maybe then it’ll really do something to clean up the Pentagon’s budget, or maybe then it will really do something to secure the borders, but all these sort of made for TV scenarios to do it don’t help anybody, and it really is kicking the can down the road. To use a hackneyed phrase, yes, once a year. But so if you don’t do it once a year, that doesn’t fix the problem. The problem is Congress has not, for a long time, genuinely worked together across the aisle to fix key problems facing the United States. Fixing those problems costs money. When it costs money, you have to think about revenue. You’re going to raise tax. You can’t just keep lower. Donald Trump raised the deficit by $8 trillion because of his tax cut. That which you know is great and popular among really wealthy people. It didn’t help rank and file, people who are the middle class, who are the ballast of the economy, by the way, and retailers know that. So if you don’t deal with these problems, then you’re not doing anyone any good. So just because lifting, lifting the debt ceiling, just because it comes once a year, it’s coming more and more and more frequently because failure to deal with the problem, the car engine just can’t be taped together. The car engine is failing. Analogy, I think of is when Marion Barry was mayor of Washington, DC, it turned out that he had not been using taxpayer allocated funds to maintain the water supply system, and so what he did is he just kept pouring in more and more chlorine. And for those of us who lived here for a while, we turned on the shower and it smelled like a swimming pool, like what’s going on his failure to do what he should have done from the beginning meant that at the end, it was a real crisis, a water crisis, not to mention that he was caught snorting cocaine and he had other problems. But the fact is that that failure to deal with a problem, it’s like pensions in the. Country, state funded or government pensions, state in states in particular, have kicked the ball down the road. They’ve borrowed from their pension funds and said, we’ll pay it back later. But if they never get around to it at some point it you can’t keep doing that. Congress has to get its you know what, together both sides and figure it out. Because if they don’t, there’s going to be, you know what to pay at some point the you know what’s going to hit the fan. Get rid of the debt ceiling. You haven’t fixed the problem. Yeah, there’s an underlying problem.