The debt ceiling deal that was passed last week poses new challenges for the economy

Transcript

SCOTT SIMON, HOST:

**** Negotiations went down to the wire, but last week, President Biden and Congress finally made a deal to raise the nation's borrowing limit. President and many experts said the deal prevented economic collapse. However, it could still come at a high cost. We're joined now by economist Betsey Stevenson. She served on the Council of Economic Advisers during the Obama administration and now teaches at the University of Michigan. Professor Stevenson, thanks so much for being with us.

BETSEY STEVENSON: It's great to talk with you.

SIMON: Let's begin with the crisis just averted. Debt ceiling has lifted, but are there lingering effects from, I guess, what I'll refer to as the brinksmanship (ph)?

STEVENSON: Absolutely. I mean, the first and most obvious is just that when you threaten to default on your debt, people want to be paid more when they loan you money. So a lot of people in financial markets are looking at what's happening, and they're saying, I don't want to be holding Treasury bills that are going to come due right around the time the debt ceiling gets breached. And, you know, it may even be that demand all along the sort of - what they call the yield curve could be impacted. There are studies from the 2011 brinksmanship that showed that, basically, we just paid more for our debt because of the fact that there was this new potential threat.

SIMON: And what about the fact that Treasury's going to be flooding the markets with bonds to try and build up its cash again?

STEVENSON: All of these things start to have a potential impact and cost to taxpayers in terms of servicing the debt. But I think if you really want to think about the - what is the biggest cost of this brinksmanship, it's that it's a repeated game. I feel pretty confident that everybody in Congress now knows that this is a game worth playing. You get something for it. The Republicans got something. So I think we're going to see brinksmanship go on and on and on because we now know that this is a valuable leverage that can be used to negotiate.

SIMON: Why isn't inflation going down more quickly?

STEVENSON: I think inflation is hard to get down really quickly. One reason why inflation can linger is - you know, let's imagine you're a restaurant, and you start seeing all of the cost of your ingredients going up. And you're like, I'm really having a hard time staying in business with these higher costs, but I'm afraid if I pass some of these costs on to my customers, that maybe I'll lose business. And you take your time to sort of feel out where people are at, or you wait until it's a more natural time for you to raise your prices.

SIMON: Or I mean - I will just point out, 'cause I'm sure we've both seen cities with a lot of shuttered storefronts. Or you decide you can't go on.

STEVENSON: Or you decide you can't go on. And so eventually, something comes in to replace you, and that thing might come in with slightly higher prices. We've seen a lot of workers who - their wages just have not kept up with inflation. Some of them are going to continue to get raises to make them whole, to make their wages keep up with inflation. And some of their employers may end up needing to increase their prices a little bit. The issue is whether that's accelerating - so it's driving further inflation - or whether it's just slowing the process of bringing inflation down. And, you know, I think there's a lot of people who are very concerned that getting inflation from 4% to 2% is much more costly than bringing it down to where we've currently brought it down.

SIMON: Some commentators have been predicting a recession for a while now. What's your sense?

STEVENSON: I think that the recession fears have been incredibly overblown. In fact, some people have been calling it a vibecession (ph) because what we're seeing is, like, skyrocketing numbers of people Googling recession. So sort of they feel like maybe we're in a recession. But the reality is that the economy is expanding, and jobs are being added. That's also economic growth. The folks at the Federal Reserve are more worried that it's too strong, not that it's too low. Of course, there's always a threat of a recession. And, you know, the Fed could push us into a recession through overtightening. But so far, there's no signs of a recession. And I think it's becoming increasingly unlikely that we get a recession in 2023. But you want to never say never.

SIMON: Betsey Stevenson, who's a professor of public policy and economics, University of Michigan, thanks so much for being with us.

STEVENSON: It was great talking with you.

(SOUNDBITE OF ULY'S "COLD MOUNTAIN AIR")

STEVENSON: ** Transcript provided by NPR, Copyright NPR.