Last week’s debt ceiling deal creates new challenges for the economy: NPR

NPR’s Scott Simon talks with University of Michigan economist Betty Stevenson about the challenges facing the economy following last week’s debt ceiling deal.

Scott Simon, host:

**** Negotiations have come down to the wire, but last week, President Biden and Congress reached an agreement to raise the nation’s debt ceiling. The president and many experts say the deal will prevent an economic downturn. However, it can still come at a high cost. We’re joined now by economist Betty Stevenson. She served as a member of the Obama administration’s Council of Economic Advisers and currently teaches at the University of Michigan. Professor Stevenson, thank you very much for being with us.

Betty Stevenson: It’s great talking to you.

Simon: Let’s start with the current crisis. The debt ceiling has been raised, but I think, what do I refer to as the brink (ph)?

Stevenson: Absolutely. The first and most obvious one I’d say is that when you threaten to pay off your debt, people want to be paid more when they lend you money. So a lot of people in the financial markets are watching what’s going on, and they’re saying, I don’t want to hold the Treasury bills that come in when the debt ceiling is breached. And, you know, maybe the demand is the same – it can be influenced by what you call the yield curve. There are studies that come out of the boom in 2011, basically, we paid more for our debt because there was this new risk.

SIMON: And what about the Treasury flooding the markets with bonds to rebuild and rebuild the currency?

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 it – what’s the big value of this crap, it’s a repetitive game. I feel confident that everyone in Congress knows this is a game worth playing. You will find something for him. Republicans have found something. So now that we know that this is a useful leverage for negotiation, I think we’re going to see corruption continue.

Simon: Why isn’t inflation coming down sooner?

Stevenson: I think inflation will be hard to come down too quickly. One of the reasons why inflation can lag is — you know, let’s say you’re a restaurant, and you start looking at all the costs of your ingredients. And you’re like, I have a hard time staying in business with these high costs, but if I pass some of these costs on to my customers, I’m afraid I might lose business. And you take your time to feel where people are, or wait until it’s a more natural time to add value to you.

SIMON: Or I mean – I’m just pointing it out, because I’m sure we’ve both seen a lot of towns with closed storefronts. Or you decide you can’t go on.

STEVENSON: Or you decide you can’t go on. And so eventually, something will come along to replace you, and that thing might come at a slightly higher price. We see many workers whose wages do not keep pace with inflation. Some will continue to raise wages to keep pace with inflation. And some of their employers may need to raise their prices a bit. The issue is whether this is accelerating – thus causing more inflation – or slowing down the process of deflation. And, you know, I think there’s a lot of people who are concerned that getting inflation from 4% to 2% is going to cost more than getting it to where we’re at now.

SIMON: Some analysts have been predicting a recession for some time now. what’s your feeling

Stevenson: I think recession fears are incredibly overblown. In fact, some people call it a vibecession (ph) because what we’re seeing is, like a Googling recession, the number of people is going up. So maybe they feel we are in a recession. The reality is that the economy is expanding, and jobs are being added. And that is economic growth. People at the Federal Reserve are worried about too strong, not too low. Of course, there is always the risk of a recession. And, you know, the Fed could tighten too much and push us into recession. But there are no signs of recession yet. And I think it’s becoming very unlikely that we’ll have a recession in 2023. But you don’t want to say never.

SIMON: Betty Stevenson, professor of public policy and economics at the University of Michigan, thanks so much for being with us.

Stevenson: It was nice talking to you.

(Uli’s “Sound of Cold Mountain Air”)

Stevenson: **

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