Despite Debt Deal, Damage Done
3Qs with Kamrah Dadkhah, an associate professor of economics
August 1st, 2011
Congress and President Obama reached a last-minute agreement on Tuesday to raise the nation’s debt ceiling, and avoid default. However, the crisis has damaged the United States’ standing in the world’s economy, according to Kamran Dadkhah, an associate professor of economics at Northeastern University.
Will this debt crisis have a negative impact on the American economy, even though Congress passed an agreement to raise the debt ceiling before a default occurred?
Yes. It displayed discord among leaders at a time of crisis. There was already an aura of pessimism among investors, consumers and workers. Such discord reinforced it. Many economists and politicians, when talking about Keynesian economics, emphasize Keynes’s idea of increasing government expenditures to combat recession, but Keynes’s emphasis was on optimism among investors. A criticism of President Obama is that he does not create optimism as President Reagan did in the 1980s. To be sure, in the short run, people and the economy will get over the effects of this discord.For the long run, however, damage is being done to the United States’ standing in the world economy. Here is the largest economy and the greatest nation in the world facing default on its debt and downgrade of its bond rating. The world economy is dependent on the U.S. dollar and on confidence in the health and soundness of the U.S. financial system. This is an important issue that needs to be addressed.
With the debt ceiling raised, what needs to be done to ensure a fight like this does not occur again?
Nothing can be done; there is a potential for this to happen again. Some have suggested a balanced budget amendment to the Constitution to avoid the problem altogether. This is not a good idea for at least two reasons: First, the Constitution is not the place for specific economic rules. Second, and more important, there are times when, for economic or political reasons, there is a need for deficit spending.
Another suggestion has been to dispense with debt ceiling altogether. The argument is that, when the time comes, the government raises the ceiling anyway. The point is well taken, but dispensing with the debt ceiling is to dismantle an important part of the system of checks and balances. Yes, there will be a lot of politicking, but it also gives a chance for the public to observe when the government is spending well beyond its means.
Of course, we should note that the crisis happened at a most inopportune time. The economy, while officially out of recession, is still anemic. Furthermore, the employment situation is discouraging. The next crisis may not be as severe.
This plan reduced spending but did not raise taxes — was that the best choice for lawmakers?
Not to raise taxes in the first stage was the right thing to do. The economy is not doing well, especially with regard to employment. Raising taxes at this stage would have killed more investment projects. In the second stage, when the bipartisan committee is formed, some believe raising taxes will be an option. But I believe raising taxes will not reduce the budget deficit. Governments spend whatever money they have and then some. The best way to reduce the budget deficit is to starve the government and force it to curb expenditures. Furthermore, lower taxes stimulate the economy and will increase overall tax revenues, reducing the budget deficit.
- by Matt Collette