With the current deficit, the U.S. government simply cannot pay back everyone to whom it owes money. On August 2, however, Congress might pass a bill that would raise the debt ceiling, which would allow the government to pay the money. The Chronicle’s Melissa Dalis spoke to Connel Fullenkamp, director of undergraduate studies and professor of economics, about why the government should raise the debt ceiling and what this means for us as Duke students.
The Chronicle: Can you first give me an overview of your argument about why Congress should vote to raise the debt ceiling?
Connel Fullenkamp: If the government doesn’t decide to lift the debt ceiling on August 2, then they technically won’t even be authorized to borrow anymore to pay the new bills that they have to pay…. What we’d expect to happen is that the government will pay the people the government thinks it absolutely has to pay—the holders of U.S. government bonds—and then they’ll set priorities and go down that list and pay other bills they have to pay, depending on the ones they think are the most important. If they can’t pay everybody, then they’re in default—they have obligations that they can’t pay. So the news is going to affect everybody that has loaned money to the government. The idea is that the credit markets will react by increasing the amount of interest that the government has to pay on any new borrowing.
TC: So how does this affect foreign markets?
CF: The foreigners are one of the bigger sources of lending to the U.S. government. Right now the credit markets all over the world are nervous because there are similar problems happening in Europe—the Greeks, the Portuguese, the Italians and the Spanish—they’re also in similar problems. In fact right now they’re in worse shape, especially the Greeks and the Portuguese. The credit markets are already nervous, and if the U.S. has problems on top of that, then [the foreign investors] are going to react very badly.... Foreign governments buy bonds, foreign citizens buy bonds, foreign business buy bonds—it’s a conventional place for people to park their money in short term and even long term saving
TC: Given the current state of the economy, how is our bond market doing compared to other countries’ bond markets?
CF: Were selling a lot more because we need to borrow a lot more—our budget deficit is in the trillions. We’ve got so much borrowing to do, and there are only so many lenders in the world. [U.S. bonds] are safe, and, relative to other government bonds, they have higher returns. [Investors] are betting on the ability of the government to pay back the money.
TC: How high would we ideally want to raise the debt ceiling?
CF: Well the answer is really, how long do you want to go before doing this again? The debt ceiling has been raised several times, and basically the Congress raises the debt ceiling and gives the government room so they don’t continually have to keep paying these bills again…. My standpoint is that we should get some kind of a deal on the debt ceiling. I think that the idea that we have to cut government spending is correct, but there’s also a need to make the tax code simpler.
TC: Which political parties’ standpoint aligns closest with yours?
CF: The Democrats were closer to that ideal until recently. The Republicans want to do it 100 percent on spending cuts and none on tax increases, [and the] Democrats won’t vote for anything that cuts entitlement spending. [President Barack] Obama was proposing a mix of spending cuts and tax increases, so his plan was fairly close to other successful plans in the past. He was advocating some tax increases on some high-income individuals. The majority of Republicans seem to be behind an idea that we don’t have any tax increases—they want all the tax reduction to come from spending cuts, and the Democrats won’t go along with that.
TC: Since our debt is already so high, wouldn’t raising the debt even higher be a pretty big risk?
CF: There’s always a risk that we’ll run into the bigger problems that the other countries are having: that nobody can see any conceivable way that they’ll be able to pay them back. We’re not close to that, but if we keep going down this path, then yes that could happen. I don’t think it would happen soon, but yes it could happen eventually.
TC: How does this bill to raise the debt ceiling apply to Duke students?
CF: Duke students [who] have to, say, borrow for their education will find that their payments are going to go up—that’s for new borrowing, of course. People under old borrowing contracts won’t be affected that much. So if I’m a Duke senior, and I’m finishing up and going off, I have to do things like a buy a car, and I’m going to have a whole bunch of credit card bills. When I get out of Duke, I might be paying a lot more interest on those than Duke students who graduated last year would have to pay.
TC: Any last things you want to say?
CF: I think most people are confident that we’ll get some kind of resolution by August 2, but we may be back to the same situation. We may get a very small increase in the debt ceiling or something that only postpones the problem. The really unfortunate thing would be if we can’t agree on a real solution that solves the underlying problem. The fundamental problem is that the government spends too much—it spends more than its income. We have to address that problem somehow, and we should address it sooner than later.
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