The U.S. hit its debt limit last week, which has set off a flurry of negotiations in Washington, D.C., and also a lot of talk about the potentially devastating consequences for the country.
Tim Duy, senior director of the Oregon Economics Forum at the University of Oregon, talked to Geoff Norcross about what could happen here in the Pacific Northwest if Congress fails to raise or suspend the debt limit in the next few months.
Geoff Norcross: Can you first just briefly explain what the debt ceiling is?
Tim Duy: The debt ceiling is the statutory limit to how much debt the U.S. Treasury can issue. And the debt that’s issued is used to essentially finance and support government spending. The government spends more than it takes in in revenue. And the difference has to be made up by issuing new bonds. The debt ceiling actually prevents you from issuing new bonds at a certain point, which we’ve reached.
Norcross: The U.S. has never defaulted on its debt before, and if that happened, the U.S. Treasury would likely have to start making hard decisions about which payments to prioritize. That includes direct payments to people, to us. So what kind of direct payments would we be talking about?
Duy: We’re literally talking about potentially any sort of payments that the Treasury makes. That includes Social Security checks, Medicare payments, contractors, employees. It’s ... a huge part of the economy, is what it amounts to.
Norcross: And of course, during the pandemic, we learned that the government certainly sometimes has to just give people cash, you know, to help them in lean times.
Duy: Yeah, clearly during the pandemic when the government was spending more freely, it wouldn’t have been able to do that in the absence of being able to raise the debt limit substantially.
Norcross: What about payments to programs that are supported by the federal government? What might be on the chopping block there?
Duy: Anything that the federal federal government is sending money to: student aid, housing programs, school lunches. Anything the government is supporting could be potentially affected depending how the Treasury prioritizes payments.
Norcross: A default might also mean the U.S. Treasury would stop making interest payments on loans? How would that impact people?
Duy: That’s where some really very interesting problems arise. You’d essentially have to choose between making those debt payments, making the payments on the interest or suspending programs or cutting programs. And Treasury would be, I think, hard-pressed to decide which one was the worst evil here.
Norcross: When you talk to people at cocktail parties about what is happening in Washington, D.C., with the debt limit right now, what’s the one word you would use to describe it?
Duy: There is certainly a sense of alarm that in this particular episode, that Congress will not be able to find a solution before something much more serious or disaster has happened — that there would be an actual default. I think that there is a sense that this is perhaps the closest we’ve come to this ever. It’s still months away before the Treasury is actually forced to deal with this situation, so there is time to resolve it. But there’s certainly a sense of alarm that it won’t get resolved this time.
Listen to OPB’s conversation with Tim Duy in the audio player at the top of the page.