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Congress may be nearing a last-minute deal to avert default, but the budget standoff’s effects already may be rippling across the economy. Thousands of federal employees and contractors have lost paychecks and businesses have been tightening their belts to prepare for the worst-case scenarios. We explore the what it means for the economic picture going forward.
- Jim Tankersley Economic Policy Correspondent, The Washington Post
MR. KOJO NNAMDIFrom WAMU 88.5 at American University in Washington, welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. Later in the broadcast, Food Wednesday, the garden in your liquor cabinet, the plants, herbs, and essential oils that give your cocktails their unique tastes. But first, Congress may be nearing a last-minute deal to avert default.
MR. KOJO NNAMDIBut even if we aren't looking at a worst-case scenario, ripple effects from the shutdown and weeks of uncertainty are still likely to be felt across the economy with thousands of federal employees and contractors having lost paychecks and a contraction in government spending. Joining us to discuss what this means for the economy is Jim Tankersley. He is an economics reporter for The Washington Post. He joins us by phone from Northern Virginia. Jim Tankersley, thank you for joining us.
MR. JIM TANKERSLEYOh, my pleasure. Thanks for having me.
NNAMDIIt looks as if a deal could be near. The Senate has already reached a deal. It is my understanding that it will be called for. It will be, I guess, followed by a vote in the House. The vote will take place in the House first, and then it will go to the Senate for a vote. Is that your understanding of what's happening now?
TANKERSLEYThat's my understanding. I haven't been up on the Hill today. But from reading my sharp colleague's (word?), that's my understanding. And if that happens, that would appear to be a case for celebration, that we are going to avert the worst of what could happen with this scenario, which would be the United States running out of its borrowing authority and having all the problems of a debt ceiling breach, so to speak.
NNAMDIWell, let's talk about that worst-case scenario for a minute. Because even though a deal has been reached in the Senate, the deal has not, so to speak, been sealed. So in the worst-case scenario, if we did default on -- if we didn't vote to raise the debt ceiling and we did default on our debt, what would happen at that point in terms of the government's financial obligations?
TANKERSLEYWell, if we defaulted, it would be probably financial chaos, which is why most economists in concocting their nightmare scenarios for what happens if we hit the debt limit aren't even thinking about what default would look like. That would be we don't make interest payments to people we owe money to, or we don't make payments to our creditors.
TANKERSLEYSo assuming that the government would have -- 'cause there will still be money coming in every day from tax receipts, so the government would have enough money to keep paying its creditors, assuming that they prioritize that. What would happen then is that a whole bunch of other things the government pays would either not get paid or would get paid in several days' time or several months' time, depending on how long the stretch is.
TANKERSLEYEventually, government spending would pile up. The bills would pile up, and we would pay them off. Either we would choose some to pay and others not to pay or we would pay them whenever the money came in the door to pay them, and either of those would be a very bad thing throughout the economy.
NNAMDIThe Obama Administration would have to decide which payments to make and which to miss in the event that no deal was reached. Beyond the political difficulty of doing that, what kind of legal authority's there to make those kinds of decisions?
TANKERSLEYWell, we don't know. We've never tried this. And hopefully, knock wood, if this deal goes through, we still won't try it. But the question is, if it's the law that you need to pay everybody what they're owed and yet you don't have enough money to pay everybody what they're owed 'cause you can't borrow anymore, what do you do?
TANKERSLEYDo you -- for example, do you just decide that everybody gets paid late, in which case literally everyone -- veterans benefit recipients, Social Security recipients, everybody federal, you know, federal workers waiting to get their paychecks -- get paid a little bit later than they would and then a lot later the longer it stretches on?
TANKERSLEYOr do you simply announce, look, sorry, we're shutting down the FBI, we're shutting down the EPA, we're shutting down a bunch of other functions of government so that these other things that we've determined to be more important can get paid?
NNAMDIIn case you're just joining us, we're talking with Jim Tankersley. He's an economics reporter for The Washington Post. You can join the conversation by calling 800-433-8850. Has the shutdown hit your pocketbook? Do you rely on a federal payment such as Social Security or veterans benefits? Are you concerned about the government coming so close to default? 800-433-8850. You can send email to email@example.com, or send us a tweet, @kojoshow. Jim, so far, Wall Street has not been shaken by the political crisis despite the uncertainty. Why do you think it hasn't yet hit the markets?
TANKERSLEYWell, it hasn't hit the stock market. There's been some reactions in the bond markets, particularly it's getting more expensive for the government to borrow in really, really short terms. And that's people kind of freaking out about whether or not those would be repaid right away. But I think what you're seeing from the markets is this basic fool me once, fool me twice, don't fool me again in that we seem to come to the brink a lot all of a sudden in this country.
TANKERSLEYAnd they always seem to work it out in the very end. Now, that's always true until it's not. And that moment that it's not could be catastrophic. And the markets could react catastrophically. But so far the view on Wall Street's been they'll get this. They will figure -- they always wait till the very last second, and then they do it. And that appears to be what's happening.
NNAMDIAny other economic indicators you're keeping your eye on right now given that there's no government data coming out?
TANKERSLEYThat's a great question...
TANKERSLEY...because really it's like operating in the dark, or it's like someone has taken away all my lifelines. But, no, I think what we're looking at now are the private sector sources of data, and there's some bad stuff out there. Consumer confidence has just fallen off a cliff, which is people expressing real doubt in the shape of the economy because of what's happening in Washington.
TANKERSLEYBut also we saw applications for mortgages fall, and we're seeing slowdowns in other sectors, slowdowns -- warnings of slowdowns in consumer expectations for how much they'll spend on holiday shopping. So these are real things. This is money being pulled out of the economy already in a reaction to both the actual physical, mechanical effects of government workers not having money from the shutdown but also worries by everybody across the economy that they might not have as much money to spend in the event that we hit the debt ceiling.
NNAMDIWell, in 2011, a last-minute deal to lift the debt limit still resulted in a credit downgrade of U.S. debt. How damaging do you think this will be to the U.S. economy even if that deal is reached and signed off on before the government defaults?
TANKERSLEYWell, there's not great -- on the positive possibility is there's not great evidence that the credit downgrades really hurt America yet or hurt the economy yet. The downside of it is there -- clearly there were confidence effects last time around. And there have been confidence effects this time around. And there's a real possibility that hurts consumer spending, and this is a bad time to be hurting consumer spending.
TANKERSLEYRetailers really depend on the next couple of months to make a lot of their money for the year. So if people are nervous about spending money because of what's just gone down in Washington, in the lingering effects of it, then you could see a much more dampened holiday shopping season. And that wouldn't be great. The other thing that I would worry a lot about is -- and I worry constantly about it is we have almost 12 million unemployed people in America still, people who are looking for work and can't find a job and a lot of millions more who have given up looking for work.
TANKERSLEYThe job creation machine, I think it's safe to say, has not been running as fast as it could be if this huge amount of uncertainty from Washington wasn't, you know, being pumped into it. So those people are going to have to wait longer to get jobs, and that's just -- the longer they have to wait, the worse it is for everybody.
NNAMDIWe're taking your calls at 800-433-8850. Here is Ben in Lovettsville, Va. Ben, you're on the air. Go ahead, please.
BENWell, thank you very much for taking my call. It's my understanding that even with the "government shutdown," we're still spending more than we're taking in. And, you know, so that means Social Security, Medicare, and Medicaid and defense are what's driving the debt, like they've been saying for years.
BENAnd if we're going to have to prioritize, we can't not pay doctors because then they won't see Medicare patients. We can't not pay soldiers in the field. So it seems the only thing we've got left to do is to trim -- is to cut down on Social Security benefits. That's the only way -- if we're going to hit this debt ceiling -- we're going to be able to pay our debts. And I don't know why nobody's saying that.
NNAMDIYou're suggesting that we should simply stop sending out Social Security checks in order not to go over the debt ceiling?
BENNo. I'm not saying that at all. I just don't understand how else we can pay the interest on the debt and not -- and how we're supposed to pay the bills we have to pay. Social Security is a government program, and it can be stopped on a dime. And there's no right to benefits. There's no...
BEN...constitutional amendment requiring Social Security. It's a government program.
NNAMDIWell, allow me to have Jim Tankersley respond. Jim Tankersley, what do you think would happen if we, as our caller says, stopped Social Security on a dime?
TANKERSLEYWell, I have to tell you, I get more email and calls from readers about Social Security on this topic than anything else combined. People are really, really worried about it because there's this feeling, you know, hey, I paid payroll taxes, I paid into the program, I expect it to be there for me. Macroeconomically, what would happen is if we cut off all Social Security checks tomorrow, we would pull a huge amount of spending power out of the economy.
TANKERSLEYIt would almost certainly push us right into a recession because people who get Social Security checks tend to spend that money, and they tend to spend it fairly quickly. And so if you took that all away, it's not clear that they could, you know, go to their bank and get a loan to pay their nursing home bills this month. They just wouldn't be able to pay, and so there would be just massive consequences.
TANKERSLEYIf you're going to change Social Security, I think most people who are even talking about changing the program talk about doing it gradually over time. An abrupt halt like that -- and it's true from most parts of what the government spends on, that abrupt halt to that spending absolutely throws a wrench in the gears.
NNAMDIThank you very much for your call, Ben. Jim, we were in the midst of a modest economic recovery. Do you see that threatened by the events of the past few weeks?
TANKERSLEYI think we'll probably still be in a modest economic recovery. We still have a lot of good fundamentals. It's just we keep hoping that that modest recovery, which has lasted several years now -- and we keep waiting for it to blossom into something better. We keep hoping that that's going to happen tomorrow or right around the corner.
TANKERSLEYAnd there keeps being something, often from Washington, that slows it down. This is another thing that slowed it down. So maybe hopefully the first half of next year will be better than the last half of this year. Maybe we can start getting some momentum. It would be great if we don't just pump this into a whole other batch of uncertainty, you know, six months down the line.
NNAMDIWell, just how far, Jim Tankersley, have we reached towards a deal? We have House -- I mean, Senate Majority Leader Harry Reid talking about the deal that was apparently reached just this morning. Here he is.
SENATE MAJORITY LEADER HARRY REIDWe'll set our country on a long term path to fiscal sustainability. And I present know that some say that's going to be hard. But what we do is hard here, and this is really hard. But I think we can get it done. The committee members selected must have open minds, be willing to (word?) every option, no matter how painful to their own political ideas and even their own political parties.
SENATE MAJORITY LEADER HARRY REIDThis conference committee led by Chairman Murray and Chairman Ryan, which will produce its negotiated budget resolution in December, is the appropriate place to discuss our different views of the best way to chart a course for economic growth. This legislation also funds the government through Jan. 15 and averts default through Feb. 7, during which time we can work toward a long term budget agreement that prevents these frequent crises.
SENATE MAJORITY LEADER HARRY REIDAnd perhaps most importantly, this legislation ends a standoff to ground the work of Washington to a halt this fall. Madame President, this is not a time for pointing fingers or blame. This is a time of reconciliation. I look forward to working with my colleagues on both sides of this great Capitol to pass this remarkable agreement which will protect the long term health of our economy and averting -- I'm sorry, and avert a default on our nation's debt.
NNAMDISenate Majority Harry -- Majority Leader Harry Reid speaking live on the Senate floor. Jim Tankersley, what do you make of what you just heard?
TANKERSLEYI think what he just told us, to decode it, is that we're not going to have a meltdown right now in the economy, that we are going to cross our fingers and hope that negotiations in December will succeed where previous negotiations have failed, bring Democrats and Republicans together to actually agree on a budget that could pass both Houses of Congress and be signed by the president, and double-cross your fingers that if that fails, we don't end up right back in the same position several months from now where we're running up against the debt limits and threatening default.
NNAMDIWell, what will happen next is that the House of Representatives will vote. We're going to stay tuned and keep you abreast of what's happening with that as it progresses. On now to John in Silver Spring, Md. John, you're on the air. Go ahead, please.
JOHNAll right. Thank you. I think it's distressing to hear what Ben was saying. You know, to me to hear him talk, the only people who deserve a job are those who are ready to kill someone. I mean evidently. Right? I mean, no one else has the right to anything.
NNAMDIYou mean except people in the military? You're implying or inferring, from what Ben was saying, is that people who are on social security don't need to get paid, government employees don't need to get paid, only members of the military need to get paid. What is your own suggestion about how to solve this?
JOHNWell, I think there has to be a lot more willingness for everyone to do the right thing and work things out and a lot less saying no and I'm right. You know, that has to stop being a first resort. We have to cut any number of things. You know, we can't afford to eliminate all risks from life. We have to cut DEA, get rid of it, cut it, NSA, military. So, you know, but those are my ideas. And, you know, I'm not an idiot…
NNAMDIWell, there are a whole lot of ideas making the rounds right now, John. And we're running out of time. But it would appear, Jim Tankersley, that we may be on the road to a deal that can be signed off on. What kind of time frame are you putting on that?
TANKERSLEYOh, I think everybody would hope that it would get done as fast as possible, but it's probably not -- doesn't have to get done, for example, by midnight tonight. So long as everyone is pretty well convinced that the government's going to continue to be able to borrow and that the ink will be dried on it sometime before the end of the week, I think markets are going to react favorably. And, you know, now would be a bad time for a last minute hitch to make the market think that maybe it's not going to happen at the last second. But so long as it looks on track I think we're okay right now with the timeline.
NNAMDIJim Tankersley, thank you for joining us.
TANKERSLEYMy pleasure. Thanks for having me.
NNAMDIJim Tankersley is an economics reporter for the Washington Post. Later in the broadcast, the garden in your liquor cabinet, the plants, herbs and essential oils that give our cocktails their unique taste. We're going to take a short break and when we come back, a reminder that this is the fifth day of our fall membership campaign. I'm Kojo Nnamdi.
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