BILL MOYERS: Welcome. My guest, Martin Wolf, says the US debt ceiling is the legislative equivalent of a nuclear bomb that America has aimed at itself. And because congress refused to permanently defuse it this week, the threat remains and could still detonate early next year.
Take this flashing red alert seriously, because it comes from a man who has been called “the premier financial and economics writer in the world.” Martin Wolf is the chief economics commentator for the influential Financial Times, and he is read by just about anyone who is someone in the stratosphere of high finance.
But he plays no favorites, and confronts the private sector with its failures of principle and mission just as quickly as he does government. His opinions are known to make the mighty listen, and sometimes tremble.
Martin Wolf, welcome.
MARTIN WOLF: Thank you very much.
BILL MOYERS: Well, the bomb didn't go off. What now?
MARTIN WOLF: Well, first of all, I'm not surprised it didn't go off, because in the end the US has always drawn back from the brink. And I'm terribly pleased, because it was so dangerous. What now? That's the really big question, isn't it? They've set themselves the task of preparing a budget by mid-December.
The continuing resolution will run out in January and the debt ceiling issue will rise again in February. I don't see how they're going to agree a budget. We know why it's been so difficult so far. I hope they will. And if they don't, I imagine there must be a possibility that we'll be in the same place again early next year.
BILL MOYERS: So how are the markets likely to handle that uncertainty between now and then and as we get close once again to the brink?
MARTIN WOLF: The interesting thing is that the markets have taken all this in their stride largely. There's been very small tremors in parts of it. But I think the markets still assume that nothing bad is going to happen, that in the end it will be so insane for the US actually to default even for a few hours, that it's not going to happen. It's not a real threat, it's just political theater. And I have to say that's generally been my view. Though this time I was more worried than before.
BILL MOYERS: Why?
MARTIN WOLF: I was more worried because of the tone that one was getting from the Republicans and particularly in the House. There were a remarkable number of people, obviously as it turns out not a majority, but a remarkable number of people saying, "Well, a default will be okay. It wouldn't be a huge problem. We could manage it. It might even be a good thing. It would force the government to live within its means."
Now, if a lot of people really think like that as opposed to saying it in order to be more effective bargainers, because it's obviously an effective bargaining technique, then they might actually live up to it and maybe this time at last they will actually let the bomb go off. It's like crying wolf. In the end, well, there was a wolf.
BILL MOYERS: Well, what's new, it seems to me, that perhaps the markets, especially markets abroad, don't understand is that this minority within a minority is seriously devoted to its ideology and to the struggle for power, and really does believe that a debt ceiling can be used to balance the budget, which is holy grail.
MARTIN WOLF: Yes, well, that is exactly what we learned. Now, the fact is that an instantaneous balancing of the budget, even if we leave aside the terrible possibility of defaulting on debt, would do enormous economic damage, impose an instantaneous and, I think, really very large recession on the US and on the world. Doesn't seem to bother them. Or at least that's what they were saying.
And some of them were even saying, "Well, if we demolish the credit worthiness of the United States, the full faith and credit of the United States, no one will lend to it anymore, it will never be able to borrow again and then we won't have the problem with over mighty government."
Looking at this from outside, what I see is the old American revolutionary tradition if you like, against government, against over mighty government, but now it's your own, not King George. And it seems to recur. And it's fairly scary when it's there.
BILL MOYERS: Let's listen to a couple of members of Congress who were really saying that default, and whatever would follow, it's no big deal. Listen.
SEN. TOM COBURN on CBS This Morning: I would dispel the rumor that is going around that you hear on every newscast that if we don't raise the debt ceiling, we will default on our debt. We won't. We'll continue to pay our interest, we'll continue to redeem bonds and we'll issue new bonds to replace those. So it's not entirely accurate.
REP. DAVID SCHWEIKERT on C-SPAN: We’re never, ever, ever, ever. It’s implausible that we won’t make out interest payments. You have a $3.1 trillion we’re going to take in in tax revenues, we’re going to spend about $3.7 trillion? So using language like, “well, we’re going to default.” Has the left decided that they’re hungry to scare the markets? Hungry to scare the world debt markets? And is this how you leverage politics?
MARTIN WOLF: What they're saying here is, well, the administration could always decide, that's a question that the administration would answer, "Well, it's not so easy," but they would say, the administration can always decide to use its money to pay its interest, to pay the interest, and redemption is not a problem. I agree with that, they can pay the interest. And then they will default on something else. And--
BILL MOYERS: Social Security and Medicare.
MARTIN WOLF: Social Security or Medicare. Now, the administration would say, and I agree with them, that is a default. Let's be quite clear. The United States has a legal obligation to pay those social security checks and Medicare checks. These are legal obligations and not meeting those obligations is itself, in my view, a default. But it's a different sort of default from a financial default.
Then there's a political aspect. Just think of it. Here will be an administration which is paying interest to China and all the other creditors and is not paying its own veterans, and its own pensioners, and its own elderly beneficiaries of Medicare. This would seem to me to be politically virtually impossible situation. And yet they're recommending it.
They are recommending that the United States pay its creditors and default on these legally binding obligations. And so in this situation yes, it might be possible to continue to serve this debt, but it would still be a default. And the default would have moral implications for domestic American politics, which is very clear. You will be defaulting to domestic citizens.
But also it would create an enormous recession because instantaneously, even if they cover their interest obligations, the budget deficit will be closed. It's about a little over four percent of GDP, which is a very big sum, instantaneously that will be taken out of the economy and the economy would just as its beginning to recover reasonably well, collapse again. So in many different levels it seems to me what they're saying is extraordinarily irresponsible. And amazing, even if you accept it, which the administration would deny, that they can and must meet their interest payments.
BILL MOYERS: Yes, President Obama has said he cannot give in to the people threatening default because this would increase their incentive to use it again. Do you agree with that?
MARTIN WOLF: I agree. I recognize that the president was in a very difficult position. And it was obviously scary.
But threatening actually to default on your obligations in this way seems to me to go well beyond normal political life. And any president it seems to me has to defend the political process against that. And I think he's right to say, well, it might not be the Democrats in future, I don't know. That this is not a weapon that should be used.
And my own view is that the debt ceiling should be eliminated. It's a very strange law. It's not constitutional, it's not a constitutional requirement. And it obliges, if it's imposed and if it's actually not lifted, it obliges the president to break the law.
Now, to have a law that obliges the president to break the law, i.e., not to meet the spending commitments that as an executive he's obliged legally to meet, to have such a law seems to me just ruinous. And I think you should get rid of it.
BILL MOYERS: But that's not going to happen--
MARTIN WOLF: Alas, no. So we know that a few weeks from now we'll be back with this circus again.
BILL MOYERS: So what should the president do when the circus comes down the street again?
MARTIN WOLF: Well, I think there are, I think in essence they've taken the right position which is we will not negotiate under the threat of blowing up the solvency, the creditworthiness, of the US government. That's not a reasonable threat. We will not respond to that.
But we will negotiate a long term budget deal. I think the outlines of such a deal have been completely clear for at least since 2011. We all know that it will involve some reductions in long term entitlement spending and some increases in revenue, not necessarily in taxation but reductions in so called tax expenditures, the deductions in the tax system which will raise revenue.
And as a result of those two things, I think the completely manageable US debt, long term debt position, there's a lot of hysteria about it, but I think the US has a completely manageable long term debt position.
The opposition, the Republicans, have said they will not consider any increases of any kind in revenue, even if it means getting rid of deductions or tax reforms which everybody knows are needed. Corporation tax in the US is a terrible mess, just to take one example. If the opposition don't want to negotiate on the only basis you could imagine a negotiation with the Democratic Party which after all really did win the last election, then I don't see how they can proceed.
BILL MOYERS: Well, suppose that Congress does not, hypothetically, does not raise the debt ceiling at the first of the year, the president has to borrow. He has to borrow money to pay those bills, as you say, he owes. But if he does so without congressional approval, aren't we facing a constitutional crisis?
MARTIN WOLF: Yes. If we actually got the situation, the debt ceiling were not raised, the president had to make his decision on what to do, if he were, all the options are very bad, I think the least bad is to continue borrowing. The second least bad is just to cut the domestic spending, but that creates a huge recession. But the worst is actually to default on their debt. So they're all terrible.
If this then ends up in a quasi-judicial process, an impeachment or something of this kind when we're just sort of getting out of the big post crisis malaise, yes, I think it would, could be potentially catastrophic. One never knows, but it would certainly be very bad for the reputation of the United States.
BILL MOYERS: The last time the United States played so fast and loose with the debt ceiling in 2011, Standard & Poors downgraded our debt rating. Was there any, has there been any lasting consequence of that downgrading?
MARTIN WOLF: No. I think, I thought at the time that there probably wouldn't be because actually everybody continues to be confident that in the end the US will serve its, service its debt and meet its debt obligations. There is in the end, as we've already discussed, and you can see that in the markets now, confidence that however messy, complicated and theatrical, the US has a functioning political system in which the necessary compromises will always be reached because the center will hold. And that's what we've just seen. So as long as that's the case, these downgrades I don't think matter much. Now, if we suddenly find that's not the case, then we're in a different world.
BILL MOYERS: But doesn't the world, it seems to me the world understands this is a circus, that this is theater, this is spectacle. And they know in the end the United States will back away from the brink, so they sort of shrug as you indicated earlier in the discussion and say, "Well, they'll get through this and we'll go on." And the markets don't rattle very hard.
MARTIN WOLF: That’s exactly right. What I think is the bigger cost if the theater goes on is simply that the government of the United States is distracted. Obviously if it's going to now have a rolling every couple of months crisis and a rolling discussion of these issues, it can't do any of the other things that the world would like the US to do, perhaps too much. So the president for example because of the shutdown couldn't go to the meeting that he called in east Asia--
BILL MOYERS: Was that an embarrassment?
MARTIN WOLF: It was clearly an embarrassment. Obviously, you know, the US president suddenly can't go because he's got to deal with what seems an absurd domestic problem to the rest of the world. So it does distract the US in a profound way from its own role in the world. But that's, I think, very sad because I think the world needs American leadership, but it's not a catastrophe. That's not a catastrophe, it's a nuisance. But the nuisance it seems is likely to continue.
BILL MOYERS: Well, so much of the world owns our treasury bills. That has to influence their response to crises like this and no doubt their wish that we'd settle down and be a little more adult when it comes to facing issues like that.
MARTIN WOLF: Well, yes but again they do trust that it will continue to be serviced. Remember, they have very few alternatives. If you, the US really has such a strong position in many ways in the world that only its own foolish folly could really damage it. The US provides the most liquid securities in the world. They're backed by the full faith and credit of the world's largest economy.
One of its most stable democracies, that's how people see it. There are no alternatives. People don't want to hold renminbi debt in huge quantities, even if it existed, they don't know the future of China, there are exchange controls so you can't convert it easily. There are no financial markets.
The euro zone has been a mess in itself. So in the end people are very happy to hold US treasuries as long as they see the US is continuing basically to be a stable place. The deal that has just been reached will confirm their view, I think, that in the end the US pulls back from the brink. And so the confidence will remain until that ceases to be true.
BILL MOYERS: Looking at the economy, how do you see the US economy five years after the great crash?
MARTIN WOLF: Well, I think it's actually largely healed. The evidence we have from previous studies of crises tends to take five to seven years to get through the process of deleveraging and so forth. Now the US economy clearly has some very, very big issues, some problems. I think rising inequality and the plight of the middle class are the most important structural problems.
The long term trend growth issue, how fast will the economy grow in the longer term that's, I think, a very, very big issue. But in terms of dealing with a crisis the US is clearly ahead of anywhere else. The deleveraging has been very substantial, there's been a big reduction in household debt in default which is sad, but it's happened.
The financial sector is clearly healthier. There are lots of problems in it, we can see this with JPMorgan for example. But the financial sector is clearly much, much healthier. The housing market has corrected. You've got a big energy boom, energy prices here are lower than in any other developed country and you're becoming largely energy self-sufficient.
There's still a very powerful innovative engine here though you need to continue to fund research, which has been the basis of this. And that's a government function, a fundamental government function. But innovation is still there. So, and you survived really quite well this year, a massive fiscal tightening. We've had an enormous fiscal tightening, about 3 percent of GDP--
BILL MOYERS: With the sequester --
MARTIN WOLF: The sequester-- that's the sequester and--
BILL MOYERS: Which is really budget cutting.
MARTIN WOLF: And, exactly, and it's too much. And it should've been done in a different way. I think the tightening's been far too much. You could've had a much stronger economy, a much lower unemployment if you hadn't tightened the fiscal position by about three percent of GDP.
And now the fiscal deficit is four percent of GDP, it's fallen by about seven percentage points in the last three years. So it's a massive shift. The, and yet the economy's growing. So I actually am quite confident, you know, if nothing disastrous happens in this sort of area that we might see two or three years, maybe longer, of really strong growth in the US. And it will look a very, very good post crisis recovery.
BILL MOYERS: But the sequester, which began earlier this year, is supposed to deepen in the new year in 2014. That's not promising.
MARTIN WOLF: Well, this is where the budget discussions go. I don't know what deal they will do, but I would hope that they would focus on where the issue really lies which is the very long term, way into a 2020s and 2030s, focusing particularly on the health costs issue which is the core fiscal issue in the US and not tighten the sequester. Indeed they should get rid of it, they should have a more rational budget process.
I think actually the US is clearly cutting the economic functions of the government too far, it's basically being reduced to just defense interests, social security and Medicare. There are other things government needs to do which are shrinking dramatically to a tiny proportion of national income. I think it's a tremendous mistake. So I think you should relax budget, not tighten further. So there is a worry there.
BILL MOYERS: Would you agree that despite what happened this week and the political victory that President Obama seems to have won, would you agree that the conservatives have really won the argument about government?
MARTIN WOLF: I think that is true. What has surprised me is how little pushback there has been from the Democrat side in arguing that the government really did have a very strong role in supporting the economy during the post crisis recession, almost depression, that the stimulus argument was completely lost though the economics of it were quite clearly right, they needed a bigger stimulus, not a smaller one.
It helped, but it didn't help enough because it wasn't big enough. And they're not making the argument that government has essential functions which everybody needs in the short run. Well, we can see that with the national parks. But also in the long run the strength of America has been built, in my perspective, particularly in the post war period, since the Second World War on the way that actually the public and private sectors have worked together with the government providing enormous support for research and development.
It's been the basic support of America's unique position in scientific research. You look at the National Institutes of Health which are the most important medical research institutions in the world, these are all products of the willingness of the United States to invest in the long term interest. Then there's the infrastructure, think of the highway program, which was the most important infrastructure project under the Republicans interestingly.
And those arguments seem to have been lost. So I am concerned that the government that I think Grover Norquist once said he wants to drown in the bath. If you drown your government in the bath in the modern world, we don't live in the early 19th century, it's a different world, that the long term health of the United States will be very badly affected.
It's strange to me that a government which has obviously achieved very important things, think of the role of the Defense Department in the internet, has achieved such important things, that's just one of many examples, it should be now regarded as nothing more than a complete nuisance. And the only thing you need to do is to cut it back to nothing.
And it does seem to me that the Democrats have, for reasons I don't fully understand, basically given up on making this argument. And so in a way the conservatives, the extreme conservative position has won, because nobody is actually combating it. So it's only a question of how much you cut and how you cut it rather than, "Well, what do we want government for? What are the good things about it? What are the bad things about it? How do we make it effective? And how do we ensure that it's properly financed?"
BILL MOYERS: Martin Wolf, thank you very much for joining me.
MARTIN WOLF: It's a great pleasure.