This month’s State of the State podcast conversation from Michigan State University's Institute for Public Policy and Social Research focuses on the debt limit. Matt Grossmann, Charley Ballard, and Arnold Weinfeld welcome associate professor of economics Antonio Doblas Madrid to the discussion. 

 

Conversation Highlights:

 

(1:46) – “The Federal Reserve has been trying for more than a year to slow things down. They’ve had some success. Inflation is not where it was several months ago, but it’s still above their target. There are a lot of indications that the economy is growing more slowly than it was a year ago, but it’s still growing.”

 

(3:36) – “We’re still at a pretty high level of resources. Compared to the last few years, there is a lot of money and a lot of people asking for that money. The good news about being in the majority during this kind of time is that you can say yes to a lot more people, and that’s usually good for you politically. The bad news is if you say yes with temporary money on a permanent basis, then a few years down the line you have to say no a whole lot more and it can be pretty bad.”

 

(4:45) – “Surpluses tend to disappear.”

 

(6:45) – “The United States is one of a group of privileged countries that has always had healthy enough finances that it has never defaulted on its debt. And the U.S. dollar is the world’s reserve currency. It’s shocking that this debt ceiling situation that keeps coming up over and over threatens to engineer a self-inflicted financial crisis.”

 

(7:45) – “The debt ceiling is a historical oddity of the United States.”

 

(9:30) – “The U.S. dollar and U.S. government debt are considered the safest financial assets. It would be similar to the ground shaking.”

 

(11:26) – “The U.S. Treasury is a whole lot bigger than Lehman Brothers.”

 

(16:34) – “Most countries when they have a default it’s followed by a pretty deep downturn of economic activity.”

 

(17:06) – “These are good reasons why policy makers have strong incentives to avoid the default, but that doesn’t mean that you don’t gain strategically from having the leverage that you have to force your opponents to the table.”

 

(20:55) – “The story was a little bit different in 2010 when Democrats had a big majority and could have gotten rid of the debt limit or extended it. And then there was a sentiment that if Republicans are going to be in charge, they should have ownership of the debt limit. And that was kind of the old politics of the debt limit. ‘I don’t want to vote for it when I’m in the minority so that the other side gets the blame raising the debt limit’ even though it has nothing to do with actually increasing spending. And that was catastrophically dumb.”

 

(21:56) – “None of us is saying the debt should be allowed to grow without any proportion to the country’s ability to repay.”

 

(22:57) – “These are debts for expenditures that were already approved years ago and money that has already been spent. These are bills that are due now and not paying them is literally bankrupting the country.”

 

(30:22) – “There’s not a lot of time unfortunately. The extraordinary measures that Treasury has been taking since 1985 have become par for the course.”

 

(32:00) – “This is an occasion where Democrats and Republicans have to pass something together.”