A Conversation With Dr. Mark Zandi
If Congress does not raise the U.S. debt ceiling, the federal government could default on its debt as early as June 1. An overwhelming majority of economists have said such an event would have significant consequences on the entire economy, including Main Streets across the country.
Mark Zandi, PhD, chief economist of Moody’s Analytics, warns this would send the economy spiraling when it is currently in position to avoid a recession. In this interview, he lays out the reasons why we may have already seen the worst of inflation, how defaulting on the debt could erase this progress, and why he would be optimistic if he were a small business owner.
Dr. Zandi directs economic research for Moody’s and is the lead director of Reinvestment Fund, one of the nation’s largest community development financial institutions, He is also a cofounder of Economy.com, which Moody’s purchased in 2005.
I recently spoke with Dr. Zandi on the economy, the debt ceiling, and the resiliency of small businesses. Below is our conversation, edited for clarity.
Rhett Buttle: How would you describe the current state of the economy, particularly how things are faring for the private sector and business owners?
Mark Zandi: The Federal Reserve has pushed up interest rates very aggressively over the past year to slow growth and quell wage and price pressures and that has resulted in some stresses throughout the economy and financial system. The most obvious is the recent banking crisis where several banks failed and there was a deposit run on the banking system. The economy is still growing, and unemployment is extraordinarily low, but as long as inflation is as high as it is and interest rates are as high as they are, it is going to be a struggle for the economy and for small business owners. They are already having difficulty now with weaker sales, rising cost of labor, and greater difficulty in getting financing. If they are lucky enough to get financing, they need to pay a higher interest rate.
Rhett Buttle: Despite some of these challenges, you have said the economy is in a strong position to avoid a recession. Why do you feel that way?
Mark Zandi: I do think there are reasons to be optimistic that the economy can navigate through without suffering an outright economic downturn with lots of lost jobs and significant increases in unemployment. First, while inflation is high, it is moderating, and all signs are that it will continue and the Fed’s efforts are becoming successful. I also think by this time next year, inflation will be back close enough to the Fed’s target, and they can start lowering interest rates. I think the worst of the rate hikes are over we’re now in what is called the terminal rate, which is the highest the rate will get in this particular cycle.
The other very important reason for optimism is that the economy is showing a really quite startling resilience for reasons that are unique to this period and different from other times. For example, consumer households have a lot of excess savings that they built up during the pandemic when they were sheltering in place and could not go out and spend. Now lower income households have worked down their excess savings, but middle income and particularly high-income households have plenty of cash still sitting in the bank and are willing to use it to supplement their purchasing power to maintain their spending. As long as consumers hang tough – because they are such a big piece of the economic pie – the economy should be able to make its way through without an economic downturn.
In addition, businesses are very reluctant to lay off workers. Layoffs have picked up a bit, particularly in the tech sector, financial services, and housing, but they generally remained very low. That goes to the fact that businesses have had a very difficult time finding and retaining workers even going back before the pandemic. They know that is going to continue to be the case given demographics aging out of the workforce of Baby Boomers and weak foreign immigration. I don’t think we can have a recession without layoffs because they are the catalyst for undermining consumer confidence and for consumers pulling back. So without those layoffs rising to a significant degree, I think that the economy will be resilient enough to make its way through without recession.
Rhett Buttle: What do you think is the impact of the economic programs (Bipartisan Infrastructure Law, Chips and Science Act, Inflation Reduction Act, and American Rescue Plan) the federal government has put into place the past two years?
Mark Zandi: The American Rescue Plan (ARP) was successful in that it got the economy back to an unemployment rate in the mid-three percent range very quickly. It was critical to helping the economy make its way through the worst of the pandemic and was passed in a time when it was still very unclear how the pandemic was going to play out and what kind of damage it was going to do. The pandemic actually started to fade away relatively quickly because the vaccines were quite effective in other mitigation efforts but no one knew that at the time. Ultimately, the administration and lawmakers passed a much larger package of support than was probably ultimately needed, but it got the economy back to full employment here very quickly. The ARP has come under a lot of criticism for causing the currently high inflation, but I don’t think that is the case. I do think it added to inflation back when it was introduced in the spring of 2021, but at that point, inflation had been too low for too long and the inflation at that time was deemed to be good inflation. The inflation we’re experiencing now has nothing to do in my view with the American Rescue Plan so that criticism feels hollow to me at this point.
The other big pieces of economic legislation that were passed, including the infrastructure law, Chips Act, and Inflation Reduction Act, will be highly supportive to the economy. The infrastructure law is just starting to get going. The Chips Act’s impact is only starting to become evident in terms of chip manufacturers in bringing production back home. The Inflation Reduction Act is going to play out over a long period of time because it will have benefits in terms of lower carbon dioxide emissions and help address our long-term climate issues. I think in totality they will all be very helpful in supporting our economy’s long term economic growth, improving competitiveness, and making our supply chains more resilient to things like a pandemic. Given our increased tensions with China, it helps address the concerns about what would happen if that relationship went South.
Rhett Buttle: The discussion on the debt ceiling has dominated recent financial headlines. What is the importance of the current discussion about the debt ceiling and why does it have such an impact on the economy?
Mark Zandi: The debt ceiling is a limit on the amount of cash that the U.S. government can raise to pay its bills and that would not be an issue if the government was taking in enough tax revenue to pay all the bills, but that is not the case. Tax revenues are less than the amount of spending the government does. We are running budget deficits and have been since the last time we had surplus for one year back in 2000. Running deficits by itself is not a problem, but when the deficit gets too large and our debt load rises too quickly, that’s an issue. And it becomes an even bigger issue if you decide that you’re not going to pay the bills. So, lawmakers have passed legislation in the past on taxes and on spending and we run these deficits and need to issue more debt to fill that hole and pay those bills on time. The limit precludes the ability of lawmakers to do that if the debt hits a certain level and we’re at that limit. The U.S. Treasury Department cannot issue any more debt and the date when it won’t have enough cash to pay all the bills on time is approaching very rapidly. The earliest would probably be June 1, or most likely by my calculation, June 8. If lawmakers don’t increase or suspend the debt limit before then and the government doesn’t pay everyone on time, the economy will not avoid an economic downturn. We will go into a recession and the longer it takes for lawmakers to increase or suspend the debt limit, it will cause more damage and make the recession last longer.
Rhett Buttle: What will be the immediate impact on the business community specifically if Congress fails to raise the debt limit?
Mark Zandi: The first thing that would happen is financial markets would falter so that means lower stock prices and a higher interest rate. If you are a small business owner, stock prices do not mean anything directly unless you have a 401k or a pension plan. If you do, then the value of those assets will be lower. However, many small business owners need credit and the banking system even before this debt limit drama was struggling, especially the small, mid-size banks that cater to small business owners. So it’s going to be really hard to get a loan if you need it and if you do get a loan, you are going to have to pay a much higher interest rate for it. The terms are also going to be much more onerous.
Many small businesses rely on the government as a source of sales and if the government cannot pay the bills, they are not going to be paid on time. That will be a very significant hardship for a lot of small businesses because they don’t have a lot of extra cash sitting in the bank to make payroll. If a debt default lasts for a week or longer, small business owners are going to really have a problem.
Sales will also weaken because consumers who are now less wealthy and have higher interest rates are going to pull back. That will force small businesses to start laying off workers, wiping out that source of resilience. Then you get into a kind of a self-reinforcing negative cycle. Consumers pull back causing businesses to lay people off and you get into this dark vicious cycle of a recession and then everyone gets hit one way or the other.
Rhett Buttle: How should business owners be feeling about the future of the economy?
Mark Zandi: I think small business owners are inherently optimistic. You don’t become a small business owner unless you’re optimistic about what you are doing and I’m speaking from experience. I started a small business back in 1990, which I sold to Moody’s about 18 years ago, so I know how difficult it is getting a loan when you are just starting out and how difficult it is to manage cash flow and make sure that you are meeting payroll. We have had debt limit dramas before in the past and we have had many challenges over the years from the pandemic to the banking crisis. But the American economy is incredibly resilient and adjusts and adapts and I think it is our small businesses that make our economy unique. A very large share of our economy comes from small businesses in all industries and that’s very different than in many other parts of the world, particularly the developed world. So I would be optimistic if I were a small business owner.
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I work at the intersection of the private and public sector. I am the founder of Public Private Strategies, Executive Director of the Small Business Roundtable, Founder of the NextGen Chamber of Commerce, and a Senior Fellow at The Aspen Institute. Over the course of my career, I have worked to engage business leaders – from the small business community to the Fortune 100 – to help solve the most pressing issues of our time. Previously, I served as private sector advisor on The White House Business Council, at the US Department of Health and Human Services, and for the Governor of California. I also have had the opportunity to serve on several presidential, state, and local campaigns.
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