2011-8-2-3Qs--Despite-debt-deal-damage-done

Larger Issues in Debt-​​Limit Debate

3Qs with Associate Professor of Economics Kamran Dadkhah
May 18th, 2011

On Monday, Trea­sury Sec­re­tary Tim­othy Gei­thner told Con­gress the U.S. has reached its debt ceiling — the limit on how much money the gov­ern­ment can borrow. Not only has raising this limit been at times a con­tentious polit­ical issue, it also raises larger issues related to the U.S. economy’s long-​​term health, says Kamran Dad­khah, asso­ciate pro­fessor of eco­nomics at North­eastern University.

What is the impact of the U.S. reaching its debt limit?

When the gov­ern­ment has a deficit, it needs to borrow to con­tinue paying its bills and to func­tion. By reaching the debt limit, the gov­ern­ment cannot borrow any­more. Given the budget deficit of $1.6 tril­lion for the cur­rent year and $1.1 tril­lion for 2012, the ceiling has to be raised from the present $14.294 tril­lion. There is no ques­tion the debt limit will be raised, although politi­cians will haggle over it. Given fore­casts of deficit for the coming years, we will revisit this problem in the near future. In the long-​​term, the huge budget deficit and the bal­looning U.S. debt affect the health of the U.S. dollar and U.S. economy. The dollar has been the inter­na­tional cur­rency, and the U.S. has long ben­e­fitted from that. It is both a reflec­tion and an instru­ment of the Amer­ican eco­nomic might. The U.S. cannot go on with such a budget deficit and keep its inter­na­tional posi­tion and sus­tain the dollar as the inter­na­tional currency.

What can be done to reverse course?

Def­i­nitely the gov­ern­ment needs to rein in its expen­di­tures. Some have sug­gested raising taxes. I believe the worst thing a gov­ern­ment can do is to raise taxes in a slump and before the economy has fully recov­ered. Indeed, reducing taxes would be ben­e­fi­cial for the deficit reduc­tion; on this I can even borrow from Pres­i­dent John F. Kennedy, who sug­gested low­ering taxes to reduce the budget deficit. Once the economy is fully recov­ered, tax rev­enues will increase. This is not to deny that we need an over­haul of the tax system to a sim­pler, more effi­cient, and more equi­table one.

When the U.S. hit its debt limit Monday, the Treasury halted investments into the Civil Service Retirement and Disability Fund and the Government Securities Investment Fund. What is the future of these types of programs? What about the effect of budget deficit on programs such as Social Security and Medicare, and how might the public react?

Trea­sury Sec­re­tary Gei­thner has taken these accounting mea­sures to keep the gov­ern­ment run­ning until August 2. Once the debt ceiling is raised, the funds will be made whole. These are com­par­a­tively small funds, and fed­eral employees would not be affected by this tem­po­rary action. The issue of Social Secu­rity and Medicare, how­ever, is quite serious. Steps should be taken to ensure their long-​​​​term health. The age of retire­ment might have to be increased. Changes to these pro­grams may upset the elderly because they’ve paid for these pro­grams already, as well as younger people, who may feel like they’re car­rying the burden of others with nothing in return. There has to be greater national dis­cus­sion on this.


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