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Debt Ceiling: Economist James K. Galbraith Warns GOP Proposal Would Gut Social Safety Net

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U.S. Treasury Secretary Janet Yellen has warned Congress that the United States could run out of money to pay its bills by June 1 unless lawmakers raise the debt ceiling. House Republicans last week narrowly passed a bill to raise the debt ceiling, but only in exchange for sweeping spending cuts to numerous programs, including student debt relief, food assistance, Medicaid and renewable energy. Democrats, meanwhile, are pushing for a vote to raise the debt ceiling without imposing cuts, even as the constitutionality of the debt ceiling has been questioned by some legal scholars. For more on the debt ceiling, recent bank failures and other economic news, we speak with James Galbraith, economist and professor at the University of Texas at Austin.

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

AMY GOODMAN: This is Democracy Now!, democracynow.org, The War and Peace Report. I’m Amy Goodman.

We turn now to look at the fight over raising the debt ceiling. On Monday, Treasury Secretary Janet Yellen warned the United States could default on its debts as early as June 1st unless the Biden administration and Congress reach a deal. Last week, House Republicans approved raising the debt limit, but only in exchange for sweeping spending cuts to numerous programs, including student debt relief, food assistance, Medicaid and renewable energy. House Democrats are now attempting to force a full House vote on raising the debt ceiling without imposing the cuts, but the move will only succeed with the support of five Republicans.

Meanwhile, the very constitutionality of the debt ceiling is coming into question, as some legal scholars point out the 14th Amendment mandates that all the government’s financial obligations be met, regardless of whether Congress authorizes lifting the debt ceiling.

To talk about the debt ceiling and other economic issues, we’re joined by James K. Galbraith, professor at the Lyndon Baines Johnson School of Public Affairs, University of Texas at Austin. He’s a former executive director of the Joint Economic Committee in the U.S. Congress. His piece for The Nation about this is headlined “The Debt Ceiling Explained. Once More, With Feeling…”

Professor Galbraith, welcome back to Democracy Now! It’s great to have you with us. Why don’t you lay out what this whole debate is about and the dangers involved?

JAMES GALBRAITH: Well, the debate is about the future of the United States economy. And the chief danger is that a program — that in exchange for extending the debt ceiling, which has always happened in the past, that the Congress will enact and the president will approve, sign off on, a program of swindging spending cuts that will be very bad for people who are dependent on the programs that will be affected, mainly poor people but also people who depend on federal functions in all kinds of areas, and, secondly, for the economy as a whole, because the spending flows from the federal government are fundamental to the functioning of the economy. So, that’s where the fundamental danger is.

The debt ceiling is a — to take a phrase from the current television situation, it’s a rerun. It’s a show we’ve been through many times before. And, I mean, it could conceivably not be resolved, but it’s very hard to believe that it would take long to resolve it if they went over the deadline.

AMY GOODMAN: So, talk about the Republican threats and the linking of the lifting of the debt ceiling with the cuts to social spending and safety net programs.

JAMES GALBRAITH: Yes, that is the direction that we are moving in, is to have a — I don’t think we will — I think the president’s laid out a very clear red line that he would not support or sign an extension of the debt ceiling that was explicitly linked to those cuts, but that doesn’t mean that the administration won’t agree to those cuts as a separate political bargain as the debt ceiling is extended. And that’s where the danger to the economy lies, the main danger, in my view.

AMY GOODMAN: I want to turn to President Donald Trump speaking in 2019.

PRESIDENT DONALD TRUMP: I can’t imagine anybody ever even thinking of using the debt ceiling as a negotiating wedge. When I first came into office, I asked about the debt ceiling. And I understand debt ceilings, and I certainly understand the highest-rated credit ever in history and a debt ceiling. And I said, I remember, to Senator Schumer and to Nancy Pelosi, “Would anybody ever use that to negotiate with?” They said, “Absolutely not.” That’s a sacred element of our country. They can’t use the debt ceiling to negotiate.

AMY GOODMAN: So, Professor Galbraith, can you respond to what Trump said then, and also the throughline from Trump to the House speaker, Kevin McCarthy?

JAMES GALBRAITH: Well, you’ve put me in an uncomfortable position of associating myself with President Trump, but I didn’t hear anything in what he just said to object to.

AMY GOODMAN: But what is the position that they are all taking now?

JAMES GALBRAITH: Well, it’s clearly — clearly, they would amend what President Trump said to say that it applies only when there’s a president of their own party, and when the president is from a different party, then they adopt a different strategy.

AMY GOODMAN: So, talk about the social programs that we’re talking about here and why this is such a danger to Americans.

JAMES GALBRAITH: Well, it’s a danger to people who depend upon food assistance, who depend on Medicaid, who depend on anything that’s being threatened in this so far not fully specified program of spending cuts. That’s the first thing.

The second thing is that the economy itself is in very fragile condition. And if you go into an election year on a program of austerity and you’re already hovering on the brink of a recession, or perhaps moving into one, you’re going to compound that problem. Now, it’s, I think, pretty easy to see, if you are a strategist for the Republican Party, that this is a winning strategy. The president is a Democrat. The Senate is in Democratic hands. And so far as the voters are concerned, they react when the economy turns, moves — turns toward recession, when unemployment starts going up. So you have a lot of forces moving in that direction. This simply adds another one to that, to that situation.

AMY GOODMAN: Professor Galbraith, can you talk about the failure of the banks, from SVB, the Silicon Valley Bank, to Signature and now Chase Morgan buying up most of First Republic?

JAMES GALBRAITH: Well, we are seeing two things happening. One of them is the — both of them are the consequence of the policy of raising interest rates, which has been moved very rapidly over the last year from very low interest rates to now above 5% on the very short-term end of the spectrum. One of them is that the banks which were exposed in one way or another because they had deposits that were largely, in large quantities, not insured by the — not fully insured by the Federal Deposit Insurance Corporation have seen deposit outflows. They’ve seen a fall in the value of portfolios that were heavily invested in long-term government bonds, which lose value in that situation. This is a consequence of the Federal Reserve’s monetary policy, and it’s affecting a large swath of the banking system in the United States. So, that’s one thing, is you have something which could develop into a fairly widespread set of banking problems.

And the second is that the consequence of this is the increasing concentration of the banking sector. You see that First Republic was taken over by JPMorgan Chase. We’re seeing, effectively, consolidation of the banking sector in the hands of the largest and most powerful banks.

AMY GOODMAN: And what’s the danger of that?

JAMES GALBRAITH: The danger of that is the danger of concentrated corporate power, particularly in the hands of a handful of bankers. I mean, after all, it was only a little more than a century ago that J.P. Morgan himself had a very high degree of control over the financial system of the country. We’re now moving back toward a system in which the bank that bears his name is in practically similar position.

AMY GOODMAN: Professor Galbraith, you recently wrote a working paper titled “The Gift of Sanctions: An Analysis of Assessments of the Russian Economy, 2022-2023.” Can you talk about the impact of U.S. sanctions against Russia following its invasion of Ukraine?

JAMES GALBRAITH: Yeah, it’s a very interesting set of issues, because there is, I think, very general agreement amongst the analysts in the West, and also a certain number of them who are writing from inside Russia itself, that these sanctions did have a very, very substantial impact. The question is: What was the nature of that impact? And the Western analysts, the ones that I read and assessed, argued that the effect was — effectively, it was to destroy the Russian economy, was to render it irrelevant, it was to — that the Russian economy was imploding.

Well, it is true that in the first part of 2022 there were substantial — there were very major impacts on production of automobiles, appliances, all kinds of things, in Russia. The question is whether the Russian economy had the capacity to adapt. And the evidence is, at this stage, that it’s adapting quite well to the sanctions, and that, in fact, what the sanctions did was to open up for Russian companies, essentially, to take the place of the Western ones that previously held dominant positions inside the Russian economy, and that process is underway.

So, it would appear, in some respects, that the sanctions have imposed policies on Russia which are increasing the independence of the Russian economy from the West, opening up, as I say, profit opportunities for Russian businesses, and, generally speaking, doing things which Russia could never have done on its own. They also fostered the creation of an alternative payment system, working on the financing of Russia’s international trade independently of the Western banking system and of the dollar reserve. So, in some sense, a zone is being created, which is — which would not have happened without the sanctions, been facilitated by the sanctions.

AMY GOODMAN: So, what do you think should happen now?

JAMES GALBRAITH: I’m sorry. I lost the audio here. Yeah.

AMY GOODMAN: So, what do you think should happen now? Can you —

JAMES GALBRAITH: Well, the problem here is the way in which Western economic analysts approach these questions, the kinds of tools they bring to bear. They have the facts, I think. They apply an analytical framework which leads to the wrong conclusions. So, what should happen, first of all, foremost, which is necessary in a number of areas, is to change the way we think about these questions, to reexamine our own assumptions, our own theoretical frameworks. That’s, first and foremost, what we should do.

AMY GOODMAN: Well, James Galbraith, I want to thank you so much for being with us, professor at the Lyndon B. Johnson School of Public Affairs, University of Texas at Austin, former executive director of the Joint Economic Committee in the U.S. Congress. We will link to the piece you wrote, “The Debt Ceiling Explained. Once More, With Feeling…”

This is Democracy Now!, democracynow.org, The War and Peace Report. When we come back, the mass shooting in Texas. Authorities have caught the man accused of using the AR-15 to shoot dead five people. The Texas Governor Greg Abbott tweeted that the victims were “illegal immigrants.” Stay with us.

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