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Thursday, June 30, 2011 01:41 am

The real problem beyond the debt ceiling dilemma

J. Fred Giertz is a University of Illinois professor of economics and member of the Institute of Government and Public Affairs at Illinois. In an interview with News Bureau Business and Law editor Phil Ciciora, he discusses the economics of the debt ceiling debate.

How worried should we be about hitting the debt ceiling?

I would say don’t worry about the debt ceiling – worry about the real thing, which is how we get back to long-term economic stability. That doesn’t require reducing our debt to zero overnight. It just requires us not to grow it as fast as it has been growing recently.

How did we get to this point, and has raising the debt ceiling always been this contentious?

For many years, the federal government has had a rule whereby it has to approve increases in borrowing once it surpasses a certain level. Now we’re at the point where we’ve exhausted the amount of borrowing that has been authorized. To continue borrowing, we have to raise the debt ceiling. Usually, that’s done more or less automatically with a little bit of complaining. But now, with the Republicans in control of the House, there’s a threat to actually not approve the debt ceiling.

So you have an odd situation where Congress has approved spending a trillion dollars more than it takes in and the only way to finance that is to borrow money. On the one hand, Congress has approved that money, but on the other it’s saying we’re not going to raise the debt ceiling to allow us to do that borrowing. It simply doesn’t make any sense.

Is it a good idea for Republicans to use the debt ceiling for political purposes, as a means of extracting some kind of deal?

It’s not a good strategy because it risks our credit rating, and it’s probably not going to be successful anyway because everyone thinks they’re bluffing.

It’s playing games with a serious situation and it could cause problems in terms of international financial markets.

To keep our current situation stable, we need people to keep buying our debt. Keeping people guessing as to whether we’ll be able to pay off our bonds is not a good strategy.

Do you think the Republicans will eventually fold in this game of brinksmanship?

I hope they will, because it certainly doesn’t accomplish anything in terms of addressing the real problem.

What can be done to avoid a similar showdown in the future?

The situation is one where we have to reduce our borrowing. We’re spending up to a trillion and a half more than what we’re taking in; that’s obviously not a sustainable path. The way you deal with that is to do one of two things: Find more revenue, or think of ways to reduce the growth in spending. We need to start doing this now, and even more seriously over the course of the next decade.

Hypothetically speaking, one way to do it – but one that we’re absolutely not about to do – is to cut spending by a trillion dollars. Stop and think about that for a moment: You’re talking about cutting 7 to 8 percent of the amount we’re spending in the whole country. That would be a catastrophic situation. Eventually, we have to get back into harmony with spending and taxation, but it’s not something we can do instantaneously.

To take a less extreme approach, people have said we could do some ad hoc  measures – we could pay the bondholders first to keep our credit rating high and not cause a credit crisis, and then we could start selling assets and not pay our bills on time, things of that nature. Well, that’s the strategy the state of Illinois has been using for decades, and look at where it’s gotten us. So it’s not a reasonable long-term strategy.

The debt ceiling is a symptom of the problem, but it’s not the problem itself. If you want to really address the issue, you need to get at the cause, which is either spending or taxation. But it has to be done in a measured way over a period of time, not cold turkey.

To contact J. Fred Giertz, call 217-840-9148; email jgiertz@illinois.edu.

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