Overall impact beyond debt ceiling deadline could be long-lasting
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Kai Ryssdal: If — and for now it is still an if — the worst comes to pass on Tuesday, or whenever the latest date for the government running out of money happens to be, the aftereffects are going to linger for a while. And maybe that’s part of what’s going on in the wider discussion about this whole thing. Fear of the economic unknown.
To try to get some idea of what those unknowns might be and what might happen, we’ve called Matthew Slaughter. He’s associate dean at the Tuck School of Business at Dartmouth. Matt, good to talk to you.
Matthew Slaughter: Thank you Kai, it’s good to be here.
Ryssdal: This is a conversation that’s going to be kind of big picture, because nuts and bolts, frankly, they’re changing and we don’t know from day-to-day what’s going to happen. But the question to start with, it seems to me, is what has already happened? Have we done damage to our economic reputation?
Slaughter: I think we have. It’s important to have perspective here, which is for decades, U.S. Treasury securities have been the one asset in the world that investors around the globe have considered to be free of default risk. We earned that because of our ability to make good on our principal and interest payments over many decades. But that special status in global capital markets, that’s not some law of physics. It may be the case that we end up making a set of policy choices — and we’ve already started down that road — that gets investors at some point to decide Treasury securities are not the world risk-free asset. And how exactly that plays out is unknowable, and quite literally could be catastrophic.
Ryssdal: OK, so far you and a lot of other people — including myself on this radio program — have talked in hypotheticals. ‘It will be bad, it could be bad, terrible things may be coming our way.’ What if those who have been saying, ‘you know that Aug. 2nd deadline? It’s not such a big deal, and we’ll just see how things go’ — could it be that this is the financial world’s Y2K?
Slaughter: It could be. Aug. 2nd may come and go. We may miss a couple of, let’s call them small interest payments, in the scheme of world financial markets, and there might not be a calamity. But even if we avoid defaulting, or even if there’s a default that’s, let’s call it small and technical — that doesn’t precipitate a financial crisis — our country still faces the threat of having one or more of these very important rating agencies downgrade their ranking of the safety of U.S. securities. And the impact of that on the health of the U.S. economy will last far longer than beyond Aug. 2nd.
Ryssdal: Is this one of those things — if you roll it into the financial crisis and our role in that — is it one of the things that leads to the end of empire, if you will?
Slaughter: Hindsight is always 20/20. But what has befallen many countries — and before them, empires are different forms historically — is when their economies don’t grow quickly enough to support their military and other broader government goals, and in particular when those governments then end up issuing unsustainable amounts of debt. What credit rating agencies, and more generally what international creditors are looking for for the United States, is whether we can today craft and then implement a credible plan to reduce the size of future U.S. fiscal deficits. This is really a fundamental point in American economic history where if we can’t have leaders that step up and articulate the tradeoffs and create a story and a narrative for how we can address these fiscal problems, the problems would be resolved more on the timetable of international creditors.
Ryssdal: Let me ask you exactly that question, because you have worked in the White House, you’ve been on the Council of Economic Advisers, you’ve done professional time on an economics staff in Washington. I have to believe that learned people are jumping up and down on the desks of politicians on both sides of the aisle saying, ‘What in heaven’s name are you people doing?’
Slaughter: I hope there is that kind of jumping going on. My concern is that’s necessary, but not sufficient to get the policymakers to change the trajectory for America’s fiscal policy. One of the things that’s important to keep in mind about Washington: there’s only a limited amount of time and energy that policymakers will allocate to economic issues. The challenge is, these fiscal issues are really important, but boy, then you’ll have trade agreements, immigration reform, treatment of international investment, our crumbling infrastructure. There’s a bunch of really important economic and kind of socioeconomic challenges that we need folks in Washington D.C. to be addressing.
Ryssdal: Matt Slaughter at the Tuck School of Business at Dartmouth. Matt, thanks a lot.
Slaughter: Thank you, it’s a pleasure to be here.
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