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Julia Coronado: Congress approaches the nation’s debt ceiling

Marketplace Staff Jan 3, 2011

Julia Coronado: Congress approaches the nation’s debt ceiling

Marketplace Staff Jan 3, 2011


JEREMY HOBSON: Now to the economic side of a political story. Yesterday on ABC’s political talk show, “This Week” Obama administration economic adviser Austan Goolsbee warned Congress not to play chicken with the nation’s debt ceiling. It’s currently $14.3 trillion and it’ll need to be raised in a couple months to keep the country from going into default.

Here’s Mr. Goolsbee.

AUSTAN GOOLSBEE: If we hit the debt ceiling, that’s a essentially defaulting on our obligations, which is totally unprecedented in American history, the impact on the economy would be catastrophic. I mean that would be a worse financial and economic crisis than anything we saw in 2008.

Well let’s get an economist’s point of view now with Julia Coronado. She’s chief economist at the investment bank BNP Paribas And she joins us now live. Good morning.

JULIA CORONADO: Good morning.

HOBSON: So is there any chance Congress would actually do what Austan Goolsbee was talking about and not raise the nation’s debt ceiling.

CORONADO: There is literally no chance that they’ll not pass the debt ceiling and enter in the sort of catastrophic scenario that Mr. Goolsbee painted. However, the real question and one that we were certainly tossing around at our morning meeting this morning is how much of a concession will Republicans demand in order to raise the debt ceiling? How much deficit reduction will they want to see, and how much of that deficit reduction will be near-term cuts to spending, verses longer term measures to bring in the deficit?

HOBSON: And that kind of demanding that those cuts that they would want could really impact the recovery, you think?

CORONADO: Absolutely. So we saw at the end of the year that Congress passed the fiscal package that would help the economy by putting more money into consumer’s pockets. Now the question is how much of that will be unwound by cuts to government spending and other programs that do in fact flow into the economy and help economic growth. So, there does seem to be a big push by Republicans to cut spending in the near term, and the question is how much, and how much of an impact will that then have on GDP.

HOBSON: And Julia — just quickly, I mean — how much are we relying right now on government support for this nascent recovery in the economy?

CORONADO: It’s been a pretty significant source of support, both from the Federal government, and from the Federal Reserve. In fact it probably gave the economy more than half of the growth that we saw last year, so looking forward we’re not going to get much of a contribution from either the Federal government or the Fed in 2011. So the private sector really is going to carry all of the burden and that’s a big change from where we’ve been so we really need to see some stronger contributions, stronger hiring in particular coming from the private sector.

HOBSON: Julia Coronado, chief economist at BNP Paribas. Thanks so much.

CORONADO: It’s my pleasure.

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