EXPERTS ADVISORY

University of Michigan experts share insights as the clock ticks down toward a U.S. government default—and whether a deal can keep a financial concern from devolving into a full-blown crisis.

They discuss where things stand with the debt-limit debate between the White House and House Republicans, where it all might be headed, and what it all means for political, financial and economic standing both here and abroad.

Betsey Stevenson is a professor of public policy and economics. She served as the chief economist of the U.S. Labor Department from 2010-11 and a member of President Barack Obama’s Council of Economic Advisers from 2013-15.

“Congress is threatening to undo the strong economic recovery and cause economic mayhem by risking the stability of the financial sector and the incomes of American households and businesses. As we get closer to the date at which the U.S. Treasury does not have enough cash on hand to cover all of the payments, no one can say definitively what will happen.

“Much depends on how markets react as we approach this date and what they expect ultimately will happen. When Congress came close to default in 2011, the Federal Reserve and the Treasury made a plan to service the debt and allow the government to fall behind in paying the everyday bills the Treasury must pay.

“Assuming they choose again to pay debt holders on time, there may not be a catastrophe on the first day that the Treasury is unable to pay all of its bills. However, ultimately the Treasury must be able to issue new debt in order to avoid an economic catastrophe. The sooner this happens, the lower the ultimate costs to American households and businesses.”

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Justin Wolfers is a professor of public policy and economics. He was a member of the Congressional Budget Office Panel of Economic Advisers and an economist with the Reserve Bank of Australia.

“All eyes are focused on the X-date, and the ‘will we or won’t we’ dynamic of whether the U.S. will default. But in fact, the current impasse is already imposing great costs: The inability of Congress—particularly Congressional Republicans—to commit to paying its debts in a timely fashion is already raising interest rates.

“Even a small rise in interest rates—when applied to a very large ($25 trillion) public debt—imposes very large costs. The result: Regular Americans are on the hook for billions of dollars in extra interest rates.

“It’s a cost that necessarily imposes higher taxes, fewer roads, less funding for education and less help for the needy. And the longer the current standoff continues, the more investors will re-evaluate our creditworthiness, leading to even higher rates that will impose even greater costs in the future.”

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Jenna Bednar is a professor of political science and public policy. Her research is on the analysis of institutions, focusing on the theoretical underpinnings of the stability of federal states.

“With the 2024 election season getting underway, it’s not surprising that Republicans would use the debt ceiling as an opportunity to peel back some of the spending commitments that the Democrats made in the prior Congress. What is surprising is that the Democratic side seems to be flat-footed, caught without a clear counter to what should’ve been an expected Republican strategy.

“Both the president and the speaker are striving to project themselves as calm and rational negotiators, but with one hand tied behind their backs by their own party. Essentially, they’re behaving as if they’re in a game of chicken, unable to swerve, as their party’s more extreme members make it impossible for them to compromise.

“Republicans are seeking significant rollbacks in programs and commitments, as well as demanding changes to immigration policy along our southern border. For Democrats, the progressive caucus is urging the president to craft a new interpretation of a clause within the 14th Amendment to bypass the debt ceiling. This constitutional strategy would risk making the Democrats look like they are willing to use the Constitution as a political pawn, and so it’s not surprising the White House press secretary has suggested the 14th Amendment is not a viable solution.

“Americans have grown used to the political theater of stalemate, but the effect of this impasse extends well beyond symbolic position-taking: Downgrades will raise the cost of carrying all debt. The debt crisis shows how political polarization has led to very real costs to the American taxpayer.”

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Daniil Manaenkov is an economic forecaster at the Research Seminar in Quantitative Economics. He worked at the Federal Reserve Bank of Minneapolis, where he managed the bank’s macroeconomic forecasting model.

“As of most recent updates, the negotiating parties remain far apart on topline spending going forward. House Republicans likely believe the recent White House offer of keeping spending flat for fiscal 2024 is far from acceptable. They can effectively achieve the same thing by refusing to pass fiscal 2024 budget and enacting a series of continuing resolution bills that avoid government shutdowns by extending fiscal 2023 funding levels.

“With no deal in sight, and with regular ’emergency’ debt management exhausted soon, it seems likely the U.S. Treasury will have to come up with creative ways to tide the country over for a couple of weeks until quarterly tax payments start rolling in mid-June. The 14th Amendment (already floated as a potential but risky solution to the debt ceiling in general) also likely mandates interest payments to be prioritized over any other payments to avoid questioning the validity of U.S. public debt.

“Delaying payments to some agencies for a week or two will delay the resolution of the debt ceiling until late July or early August. The ultimate deal will still likely have to feature considerable topline nondefense discretionary spending cuts.”

More in U-M’s U.S. Forecast for 2023-24

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