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.