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U.S. Debt Default Looms as Talks Stall on Deficit Reduction: “We Are Playing with Fire”

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Discussion on a deficit reduction deal has stalled after five consecutive days of negotiations between Republicans and Democrats. In order to borrow beyond August 2, the United States must raise its $14.3 trillion debt ceiling. This week, Standard & Poor’s became the second of the major credit rating agencies to place U.S. debt under review, citing an increasing risk of a payment default. Republicans are pushing for massive spending cuts, many of which Obama has agreed to, even as Democrats say they want to raise taxes on corporations and wealthy households. We speak with Jeff Madrick, director of policy research at the Schwartz Center for Economic Policy Analysis at The New School and author of “Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present.” [includes rush transcript]

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This is a rush transcript. Copy may not be in its final form.

JUAN GONZALEZ: U.S. lawmakers have failed to reach an agreement on a deficit reduction deal after five consecutive days of negotiations. According to Republican and Democratic aides, President Obama concluded Thursday’s discussions by saying he wants an agreement within 24 to 36 hours. The President plans to hold a news conference to discuss the status of the debt talks today at 11:00 a.m. The talks have so far been acrimonious, with Republican lawmakers blaming President Obama for the impasse.

SPEAKER JOHN BOEHNER: The fact is, is that House Republicans have a plan. We passed our budget back in the spring, outlined our priorities. Where’s the budgets—where’s the President’s plan? When’s he going to lay his cards on the table? This debt limit increase is his problem, and I think it’s time for him to lead by putting his plan on the table—something that the Congress can pass.

JUAN GONZALEZ: That was House Speaker John Boehner. Earlier in the negotiations, Boehner said that he and President Obama had reached a deal, but he then backed off as House Majority Leader Eric Cantor stepped in to lead the negotiations.

The U.S. must raise its $14.3 trillion debt ceiling to borrow beyond August 2nd. Yesterday, Standard & Poor’s became the second of the major credit-rating agencies to place U.S. debt under review, citing an increasing risk of a payment default. Another ratings agency, Moody’s, warned a day earlier that it might cut Washington’s triple-A debt rating.

Republicans are pushing for massive spending cuts while rejecting Democratic calls to increase revenues in part by raising taxes on corporations and wealthy households. Republican leaders have also begun internal debate over a proposal from Senate Minority Leader Mitch McConnell to raise the debt ceiling by requiring President Obama to seek congressional approval for up to $2.5 trillion in three installments. House Republicans say the plan would erode their leverage to ensure spending cuts, while supporters say it would spare Republicans blame for a perilous credit default before the 2012 elections.

Senate Minority Leader Mitch McConnell also holds President Obama responsible for the lack of progress in the talks.

SEN. MITCH McCONNELL: I hope the economists are wrong and that our economy will continue to grow over the next year and a half to buy us time to tackle the problems we face. But after years of discussions and months of negotiations, I have little question that as long as this president is in the Oval Office, a real solution is probably unattainable.

AMY GOODMAN: Well, for more on the talks, we’re joined now by Jeff Madrick, senior fellow at the Roosevelt Institute, director of policy research at the Schwartz Center for Economic Policy Analysis at The New School. He’s editor of the longstanding economics magazine Challenge and has just written a new book, which is called Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present. He is a regular contributor to the New York Review of Books.

What about this whole debate over the debt and lifting the ceiling?

JEFF MADRICK: Well, it’s remarkable and potentially tragic. I did not believe it would get even this far, because the consequences—people have to understand the consequences if we don’t raise the debt limit. Interest rates will go up, because people won’t want our bonds. The dollar will go down, because foreign money will leave the country. To some degree, the dollar going down is necessary, but it could go down rapidly. And the government won’t be able to meet its—spend, won’t be able to meet its social obligations, won’t even be able to spend—it will be able to spend on the military, but it won’t be able to spend on many of its social programs.

That will mean probably a recession. This could lead to a serious recession at a time when we have nine percent unemployment. I didn’t think Congress would go this far. To me, it says, basically, and frankly, to be totally frank about it, the Tea Party Republicans are out for blood. They want—they are willing to test the President to see whether he will go this far. And “this far” could mean a recession for the American people. And I’m beginning to think some of those Tea Party people would like to see that.

JUAN GONZALEZ: And the picture that you paint of what might happen is—would this happen immediately afterwards? In other words, even if the deadline came, and then a week later or two weeks later there was some kind of a compromise reached, what would happen the day after, let’s say, if August 2nd comes and nothing happens?

JEFF MADRICK: You know, interest rates—all of this will start happening before August 2nd. If it looks like there won’t be an agreement before August 2nd, interest rates will start going up. The stock market will fall rapidly. Probably world stock markets will fall. That should put pressure on Congress to come to some kind of deal before August 2nd. If there is no deal, I think there will be something of a calamity, unless it looks likely to people that it’s forcing realistic talks at some bargaining table.

It’s very hard for me to believe the Republicans, which, after all, is the party of business, is going to allow this to happen, even the Tea Party people, because their corporate minders are going to get hurt very badly in this. It’s hard for me to believe their campaign donors are not going to start knocking very hard on their doors and say, “You’ve got to come to some agreement.” And it’s not Obama who is holding them up. It’s not Obama who doesn’t have a plan. It’s the very right wing of the Republican Party, and that’s very clear.

AMY GOODMAN: Earlier this week, President Obama increased pressure on Republican lawmakers to make concessions for a deal to avoid an August 2nd debt default. He dismissed the possibility of postponing an agreement on the deficit reduction deal, warning any agreement would be more difficult in the future.

PRESIDENT BARACK OBAMA: I will not sign a 30-day or a 60-day or a 90-day extension. That is just not an acceptable approach. And if we think it’s going to be hard—if we think it’s hard now, imagine how these guys are going to be thinking six months from now in the middle of election season, when they’re all up. It’s not going to get easier; it’s going to get harder. So, we might as well do it now, pull off the band-aid, eat our peas. You know, now is the time to do it. If not now, when? We keep on talking about this stuff, and, you know, we have these high-minded pronouncements about how we’ve got to get control of the deficit and how we owe it to our children and our grandchildren. Well, let’s step up. Let’s do it. I’m prepared to do it. I’m prepared to take on significant heat from my party to get something done. And I expect the other side should be willing to do the same thing, if they mean what they say, that this is important.

AMY GOODMAN: So, Jeff Madrick, your comments, and what the deal will mean, what President Obama has said he is willing to give up?

JEFF MADRICK: In my view, he’s already given up too much. He’s already talking about cuts in healthcare spending, maybe even putting Social Security on the table. This nation is not in a situation—and I do think the President bears a lot of this blame—is not in a situation where it needs a budget-balancing plan today. It is certainly not in a situation where we should be cutting government spending, when we are not creating any jobs. Even if we don’t get to showdown, we could fall back into a recession. This is going to be seen as one of the great historical follies, I think, of all time. And the President gave in on it early on, when he started talking about balancing the budget.

JUAN GONZALEZ: And what about the various scenarios that have been laid out for some kind of a deal—some that would call for a sort of a three-stage approach to dealing with the deficit reduction, where it would come back to Congress over three different periods, others talking about basically a deal that would kick the whole thing up into the future without any real significant changes in either the increased taxes or reductions in spending?

JEFF MADRICK: Well, the danger in that is pretty clear. We continue—we have continued uncertainty about the economy. It could be that Moody’s and Standard & Poor’s, the rating agencies, could begin to talk about cutting the credit rating anyway. I think people will begin to lose confidence in the debt. We really do need a deal soon. I think this idea that McConnell came up with—to let the President propose the debt ceiling increase, let the Republicans vote against it, and then let the President veto that—could be the way to solve the problem. But we’re playing with fire here, and it seems like people don’t understand there’s fire. And I think maybe the American people don’t understand how hot it could get.

JUAN GONZALEZ: And recently China, the country’s largest creditor—


JUAN GONZALEZ: —basically warned the United States government that it needs to get its house in order?

JEFF MADRICK: Yeah. You know, I think we should take that seriously, but, you know, in some sense, that’s China’s problem. It becomes our problem when China stops buying our debt, and our interest—or starts selling dollar debt, and our interest rates soar.

AMY GOODMAN: I remember, what was it, something like 15 years ago, Yitzhak Rabin’s funeral, Clinton and Newt Gingrich on the plane. They’re in the midst of budget negotiations. Gingrich feels disrespected. He had to walk up the back stairs of the plane.

JEFF MADRICK: Ah, right, I remember that.

AMY GOODMAN: Your newspaper, Juan, when they come back, there’s a big picture of Gingrich on a baby, and it says, “Cry Baby,” as he shuts down the federal government, and they say simply because he was miffed. But it did not work in his favor, let’s put it that way.

JEFF MADRICK: It didn’t work in his favor. I think the Obama team, many of whom who are there now were there, were around there then, remember that very well. And I think that’s partly the game of chicken they want to play.

AMY GOODMAN: So what is Cantor doing then?

JEFF MADRICK: I think Cantor is probably a naive ideologue playing to his immediate constituency. I think these people have gotten very bold and very irrational.

AMY GOODMAN: How did he trump Boehner?

JEFF MADRICK: I think that he has enough power there. I don’t know how he trumped Boehner. Boehner may not be as strong a leader as we think he is. He seems to be—as we see, he’s been very flexible, let’s say, and fluctuating. But let’s keep in mind, when Clinton was doing this, the economy was not in as bad shape as it is today. Clinton—when Clinton—it wasn’t as in such bad shape. He had more cards to deal. Obama doesn’t have that many cards to deal. He allowed himself to get trapped, because this is a weak and somewhat frightening—I don’t know why I say “somewhat.” It’s a frightening economy.

JUAN GONZALEZ: And yet, the impact of the extreme right wing of the Republican Party on the Republican presidential candidates is astounding, in terms—I think almost all except Jon Huntsman have signed onto a pledge of no new taxes, cuts, and support for a balanced budget amendment to the Constitution.

JEFF MADRICK: Well, when I allow myself to get cynical enough, I say, “Well, that’s the good news.” That may assure Obama’s reelection. And I think Obama is playing to the center for that very reason. He thinks that Republican candidates could be too far right and seen as extremists. And so far, they are. Who knows who will arise in the midst of all this, however, before the election. And I think Obama will be running for reelection with a very high unemployment rate, historically high for a November presidential election.

AMY GOODMAN: And what about these deep cuts to Social Security and Medicare? How do you think this can be solved?

JEFF MADRICK: I find it tragic that we’re talking about cutting Medicare and Social Security in this environment, when we, first of all, don’t really need a budget-balancing plan right now. The budget-balancing plan we need in the future is really related to the rise in healthcare costs. Healthcare costs will drive up Medicare most. And I read in the newspapers again today analyses about long-term budget deficits ignoring the fact that it’s basically all Medicare and Medicaid driven by rising healthcare costs in general. The problem is very clear: we’ve got to reform the healthcare system. That is America’s major domestic problem.

AMY GOODMAN: There was just a law passed.

JEFF MADRICK: And the idea of taking it out on people over 65, Medicare, or very poor people getting Medicaid, or Social Security, which in many minds is inadequate to begin with—I mean, there’s some nonsense around that we have a generous public retirement plan—it’s very disturbing. America has lost its way.

AMY GOODMAN: And what about healthcare? How does it have to be reformed?

JEFF MADRICK: Well, I’m always—and I did some stuff with Senator Kennedy—I’ve always been in favor of Medicare for all. People love Medicare. You know, one of the other ironies in this is that Medicare is excoriated by the Republicans and the right wing. And you ask people whether they want to lose their Medicare, no way. Medicare could work very well. And a nation—Medicare for all could work very well. A Medicare operation that began to negotiate on budget—on drug costs and on the kinds of services they pay for in a rational way could make this healthcare system work. We’ve got to deal with that, and we’re simply not. I don’t think Obamacare is enough. Not bad, but not enough.

JUAN GONZALEZ: And, of course, there’s never any discussion of the level to which U.S. military wars abroad have created so much a part of the huge deficit, and now the Republicans are complaining about it. But 10 years of war has to be paid for, but no one wants to talk about that expenditure.

JEFF MADRICK: Well, I think people are talking about cutting defense, but a little bit. You know, it’s the first time they talk about it at all. But I totally agree with you. We just can’t go on fighting wars as if it’s costless to us, and we seem to think it is.

AMY GOODMAN: And how does the theme of your book, Age of Greed: The Triumph of Finance and the Decline of America, fit into explaining this story and what you feel needs to be done?

JEFF MADRICK: Well, I think the age of America begins in the 1970s. Our problem began in the 1970s. We had an ideological shift in America back then. And I explain why in this book, through the people who were involved. All the way up to the present, we had financial crisis after financial crisis since then. But I think this ideological shift continues. Usually, many people think—and Arthur Schlesinger, Jr., used to write about this—the pendulum swings back, from right to left. I never believed that was real history. This pendulum swung back very slightly in late 2008, 2009, and the country has gone right again, swung back to the right again.

I think this ideology, which I begin to explain in Age of Greed, became so fundamental in the 1970s, basically an anti-government ideology, which is not consistent with American history—certainly wasn’t consistent with the Progressive period, that didn’t only begin in the New Deal, but in the late 1800s—has turned America into a place that is very close to the precipice, very close to serious decline. Nations do decline. We have a long history of declining nations in the history of humanity. America is not immune to that decline. And unless it deals with its problems, it will be in trouble. I think we are in trouble, frankly. Sorry to sound alarmist, but I think alarm is probably the best message I can send the American people. We won’t just muddle through. Our future is not guaranteed. We’ve got to take it in our hands.

JUAN GONZALEZ: But how do you account, then, for the reality that in so many places around the country, efforts to rein in this boom among the wealthy, in terms of tax cuts, have been defeated? You saw it in New York state, where even a Democratic governor would not raise taxes on the wealthy. Minnesota, the governor there apparently has agreed to a deal where he won’t raise taxes in order to get the state back.

JEFF MADRICK: Well, this is how I explain that.

AMY GOODMAN: And Obama is having the same problem in Washington.

JEFF MADRICK: We developed an anti-tax ideology, an anti-government ideology, in the 1970s. I never believed it would have staying power. It’s partly had staying power because business and powerful vested interests have supported it through lobbying and through well-financed think tanks. It’s somewhat tragic. We have a low-tax country, relatively speaking. We can afford what we have to do, which includes social programs and public investments. It doesn’t mean we don’t get better at government. It doesn’t mean some things don’t have to be pruned. But we do have the resources to handle our problems. We have a serious ideology that’s getting in the way.

If I just can take one more minute—in early 1973, Ronald Reagan, when he was governor of the state of California, tried to get an amendment passed to his constitution to cut state income taxes. It was called Proposition 1. And it was soundly defeated by the Californians in early 1973. They said, “No, we don’t want to cut our income taxes. And in fact, we believe in government.” Five years later, 1978, Proposition 13—we all know about it—led to a tax revolt in America. In my view, in those five years, Americans changed. I always thought we would change back. We haven’t.

AMY GOODMAN: We want to thank you for being with us, and we’re going to go in our next segment, looking at one of these think tanks, one of these organizations that is shaping America. Jeff Madrick has been our guest. Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present is his new book, a regular contributor to the New York Review of Books and fellow at the Roosevelt Institute and head of the policy research at the Schwartz Center for Economic Policy at The New School.

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