Jared Bernstein on the Phony Debt-Ceiling Debate

Courtesy of the Center for American Progress
Jared Bernstein
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Republicans and Democrats have got to reach an agreement on raising the debt ceiling – the $14 trillion-limit on how much the federal government can borrow to pay its debts and keep itself running – by August 2. If they don't, the U.S. will default on its debt, an outcome Fed Chairman Ben Bernanke has called a "recovery-ending event." The talks aren't going so well. From the get-go, Republicans – suddenly convinced that the long-term deficit is the nation's most urgent problem – have held the debt limit hostage to huge spending cuts (at least $2 trillion), and refused to entertain Democratic measures to shrink the deficit by raising revenues via targeted tax hikes. (The House GOP's go-to guy on the talks, House minority leader Eric Cantor, walked away from the table over this point last week.) There are real questions about whether the two parties can reach a deal in time to avert an economic cataclysm.

Meanwhile, Americans are struggling, squeezed by slow growth and high unemployment, stagnant wages and crippling debt. They – and the U.S. economy – need help now. In this context, Washington's focus on the long-term deficit – and especially Republicans' insistence on spending cuts that will hurt middle-class and poor Americans, and their seeming willingness to court default – is "a deep dereliction of duty." So says Jared Bernstein, until May of this year Chief Economist and Economic Adviser to Vice President Joe Biden and now a senior fellow at the Center on Budget and Policy Priorities. We got him on the phone this week to sound him out on the debt talks, the economy, and what it will take to get America back to work.

The economic recovery has stalled, unemployment is above 9 percent – right now; yet Washington is fixated on the long-term deficit. Doesn't that get things backward?

Our most pressing problem right now has more to do with jobs and economic growth with than debt and deficits. That doesn't mean that the latter aren't a hugely important challenge; they are. But that means it's walk-and-chew-gum time. If we don't wrestle the long-term debt to the ground, it will hurt; it will constrain our economy in a big way. But it's a medium- and long-term challenge. 

And in the short term, what would help?

If our policymakers wanted to help American families right now, they'd be targeting the 9 percent unemployment first. They can’t simply pass the growth baton entirely to the private sector right now; they have to continue to figure out ways to help create jobs in the near-term. That function should be temporary, and it should be pulled back when the unemployment rate starts coming down in earnest, but that hasn't happened yet. The economy has never really achieved escaped velocity from the Great Recession.

Republicans say no dice on the debt ceiling unless they get big spending cuts, and they're ruling out  tax hikes as a way to generate revenues and reduce the debt. This is standard conservative economics, of course – but won't this approach make a bad economic picture worse?

The discussion over tax and spending policy now is frighteningly devoid of evidence. If cutting taxes, especially on wealthy families, were the elixir for strong growth, the 2000s would have been much better for middle-class families than they were. Essentially, the George W. Bush years were a very extensive economic experiment in supply-side economics, and that experiment failed. Yet when you listen to the Republican policy agenda – say, as espoused by the candidates in the debate last week – it's more of the same. And it's not just that those policies failed to deliver in living-standards terms for middle- and low-income families, it's that those policies gave rise to what ultimately became the deepest recession since the Great Depression. So, it's particularly alarming that you have policymakers espousing the very roadmap that got us so terribly lost in the first place.

You've argued on your blog for including revenues in any debt-ceiling/deficit deal. Why is that so important?

Because, if you actually want to make a serious dent in the budget deficit, and you do it all on the spending side, you're going to have to gut government functions to a point where you do much more harm than good. You’ll cut way too deeply into Medicaid, into Medicare potentially, and those cuts will end up significantly reducing the economic security of retirees, and weakening a safety net that's already barely holding it together.

That's the moral case; is there an economic case, too?

Yes. If you implement aggressive spending cuts too soon, you'll turn a frazzled recovery into a double-dip recession. If you implement solely spending cuts as your solution to the budget crunch in the medium- or long-term, you'll end up restructuring programs that vulnerable people depend on, such that you'll worsen our poverty and inequality problems, which are already much too large.

Some Republicans say they're willing to let the Aug. 2 deadline lapse, consequences be damned. Are they serious?

I’m not sure. You definitely hear some Kamikaze kinds of statements out there, but you know, at the end of the day, these folks are elected to represent the nation, not some narrow constituency that lives or dies on cutting taxes for the wealthiest families. So, I don't want to sound naive and argue that, when push come to shove, folks will do the right thing, but I just find it unfathomable that anyone elected to serve in the Congress would entertain the possibility of a default.

How much of this, do you think, is political theater?

I understand that logic isn't exactly ruling the day right now, but consider this: House Republicans voted – unanimously – for Paul Ryan's budget, which they tout as a great savior of fiscal policy. You could not implement that budget plan without lifting the debt ceiling by trillions of dollars, yet they all voted for it! So, yes, this is political theater. There's nothing substantive or serious about this. They are trying to use the threat of default to leverage their political agendas. And, you know, the time for theatrical posturing is long past. At this point, this is pretty deep dereliction of duty.

So here's a complicating factor: The American people tell pollsters don't care too much if Congress fails to raise the debt limit.

I think it's probably pretty hard for people to sort out what's real here, but let's just take it down to basics: if the federal government is not able to fund itself, the kind of thing that will happen will be Social Security checks won't go out, payments to military personnel would stop, veterans' hospitals would close, and frankly, our creditors, both domestically and foreign, would be facing a default kind of situation on their debt. Even to suggest the possibility of that happening could send the interest rates – the rates at which we have to borrow – up considerably. If those rates went up half a percent, you're talking about $50 billion of increased debt service in a year. So these folks are playing with fire.

Progressive economists – like you – say the economy needs stimulus above all. But that's a dirty word in Washington these days.

Well, the idea of stimulus may be locked into people's minds as a large, multi-hundred billion-dollar program. And, sure, that would be an incredibly heavy political lift. On the other hand, there's over 20 million un- and underemployed people out there, and they live all across this land – some are Democrats, some are Republicans, some are Tea Partiers, I'm sure. So there may be a broader constituency for help; but you have to be targeted in what you do.We certainly want to avoid pulling out things that are currently helping.

Like what?

There's a payroll tax holiday in place, and I think there may be appetite for extending that for another year. Extending unemployment insurance benefits is a must when the unemployment rate is as high as it is, particularly long-term unemployment. Our states face a very deep fiscal budget problem, and they have to balance their budgets – they can't deficit-spend, so they're laying off teachers, firefighters and police. These are services that our communities really value. We may disparage community workers, but we kind of like our teachers. Another round of fiscal relief from the federal government would be a very good thing.

And I think the president's agenda is actually a very smart one, which is to invest in some of the sectors of the economy that are facing some credit constraints right now, but could really expand, given the global demand for things like clean energy, advanced batteries, the smart grid… I mean, he's always had a very forward-leaning agenda in areas where industries could really start to create good jobs for middle-class people, if they were given some credit.

You recently suggested a novel way to get people back to work: a national infrastructure program to repair the nation’s public schools. How would that work?

It's called FAST – Fix America's Schools Today. We have about 100,000 school districts across the country, and almost every one of them has some backlog with school repairs, insulation, retrofitting, green investments, maybe solar panels, even replacing a boiler. Maybe it's repainting the place. This is a program that could be stood up quickly, folks can see it when they drop their kids off – it's in their communities. 

You make it sound pretty straightforward.

If you just look at this from the basic perspective of what this economy needs, it's not that complicated. We have to get the debt-ceiling discussion behind us to take that uncertainty off the table, we have to put the budget on a sustainable path, which is well within our means if we're willing to balance spending cuts with some revenue increases. And we have to target our short-term jobs problem, with great urgency, because there are too many people that are facing real hardship. It’s not like this is mysterious or advanced rocket science; it's a matter of political will, and the courage to stand up to a small constituency that is pushing things in a dangerous direction.