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The deficit dilemma

How big is our nation’s debt? What does it mean for our economy? Faculty members weigh in on how to tame America’s fiscal beast.

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In two short years, the $1.6 trillion federal deficit and the $14.2 trillion national debt — and the debt ceiling — have moved from the wonk rooms to the front pages. Americans have awakened to the idea that skyrocketing debt might be as great a threat to national security as a terrorist plot.

Illustration of debt ceiling

Illustration by Jamie Appel 

Unfortunately, the nation’s credit crunch has generated a surplus of heat and a deficit of light, more polarized sound bites than economic analysis. How big is our debt? What does it mean for our economy? How drastic are the solutions?

“We’re not going to solve this in a partisan fashion,” said Tom Gilligan, dean of the McCombs School of Business and an economist who is an expert on deficits.

McCombs Professor Lew Spellman has been writing about the European debt crisis and the spread of the problem worldwide (can you say, “contagion“?) for Texas Enterprise and for The Alcalde.

And in the four-part Texas Enterprise series Deflating the Deficit: How to Tame America’s Fiscal Beast, reporter Steve Brooks talks to University of Texas at Austin faculty members to get the scoop on the government’s shortfalls. He discovers that the red ink might be even deeper than you thought. He traces the bipartisan history of the crisis and details how government debt is starting to affect American business.

He concludes with some good news: The deficit is deflatable, and UT professors have good ideas on how it can be done.

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Part 1: Measuring our nation’s debt

In early August, America will max out its credit card. In May, the U.S. national debt hit the $14.3 trillion allowed under current law, and about Aug. 2, Treasury Secretary Geithner will run out of options for shifting money around to keep the federal government’s balance sheet under the current debt ceiling. However, unlike you and me, the federal government gets to raise its own credit limit — the debt ceiling. Congress has been playing a high-stakes game of chicken over whether to allow it again. But to Michael Granof, accounting professor at the McCombs School of Business, that $14.3 trillion is just a drop in a bucket of red ink. “The real debt,” he said, “is that number on the balance sheet — plus $43 trillion.” How big are our federal deficit and our national debt, really? Economists use more than one yardstick to measure them. The federal budget uses the shortest yardstick, but to Granof, it’s not necessarily the most accurate one. Continue reading Part 1 …

Part 2: How Washington learned how to embrace the deficit

What a difference a decade makes. Eleven years ago, the budget of the U.S. government was $236 billion in the black. Today, it’s $1.6 trillion in the red, and the national debt has nearly tripled. How did it climb so far, so fast? Call it Deficit Attention Disorder: an irresistible urge to cut taxes and increase spending, whether or not the nation can afford it. It afflicts both major political parties, said faculty at the McCombs School of Business. Over the past 80 years, each party has relaxed standards and upped antes, making the national debt perhaps the most bipartisan program ever to come out of Washington. “The parties keep fighting over it, but nothing’s getting done,” said Jim Nolen, senior lecturer in finance at McCombs. “Republicans were supposed to be fiscally conservative, but when they have no checks and balances, they like to spend as much as the Democrats.” It wasn’t always so. Continue reading Part 2 …

Part 3: The deficit takes a big bite out of our economy

When the world’s largest bond fund dumps the world’s safest bonds, the investment world takes notice. That happened over the past year, as the PIMCO Total Return Fund reduced its hoard of U.S. Treasury securities from $147 billion to zero. The culprit, said manager Bill Gross, was the national debt. To date, America’s mounting deficits have been an abstraction, a threat a couple of generations down the line. But there’s evidence, according to faculty at the McCombs School of Business, that they’re starting to take a toll on the U.S. economy. “We’re getting close to the tipping point,” said McCombs finance professor Lewis Spellman. One closely watched indicator is the ratio of the nation’s debt to its Gross Domestic Product. Four years ago, it stood at 64 percent. At the end of 2010, it hit 93 percent. That figure sets off alarm bells for some economists. Continue reading Part 3 …

Part 4: Solving the deficit step by step

Your doctor sounds the alarm: Your weight has hit the danger zone. You ask for a miracle drug that could slim you down overnight. His matter-of-fact reply: Eat less and exercise more. Like losing weight, the steps needed to deflate the federal deficit are not drastic, according to faculty at the McCombs School of Business. The chief obstacle is not economic practicality but political willpower. “We’re a wealthy country with a solid central bank,” said Dean Thomas Gilligan. “We can work through this.” How much should America restrict its fiscal calorie intake? A reasonable target, say many economists, is to maintain publicly held national debt at its current 62 percent of Gross Domestic Product. With no change in current policies, that number would top 350 percent in 75 years. To bridge that gap, calculates the Treasury Department, will take spending cuts and revenue hikes that add up to 2.4 percent of GDP. That would amount to $360 billion this year, and larger amounts as the economy grows.  “That’s what it needs to add up to immediately, and it needs to be lasting,” said McCombs senior lecturer Sandy Leeds. “If we can keep our debt-to-GDP ratio constant over 75 years, it would be an amazing feat.” Continue reading Part 4 …

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