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Q&A: Deficit plan needed, but crisis years away

Barack Obama and John Boehner

Barack Obama and John Boehner Photo Credit: Getty

Gus Faucher, director of macroeconomics at Moody’s Analytics, spoke with amNewYork about the negotiations to raise the federal government’s debt ceiling:

Is there any chance that a deal to increase the debt limit won’t be reached?
“Yes, I think there’s a small chance. … If they didn’t reach a deal by the deadline, you’d see complete chaos in financial markets, and then they’d have to come back and do something. But the damage I think would already be done at that point.”

Would a deal to raise the debt limit be a short-term fix?

Yeah, presumably the federal government is going to continue to run large budget deficits. … This is a periodic thing, and we see the Congress voting to raise the debt ceiling every few years. The partisan rancor has been much deeper this time around, but it’s an ongoing issue. The only way to prevent an increase in the debt ceiling is to balance the budget, but that isn’t going to happen anytime soon.

What will it take to turn the tide?

We do need to reduce the budget deficit at some point. It’s not vital that we do it today or this year or even next year. … (but we need) a plan so that we can basically pay for the retirement of the baby boomers. So we have to have a credible plan that financial markets believe the U.S. is willing to follow that would result in smaller budget deficits five, 10, 15 years from now.

The U.S. is inching towards a 100 percent debt-to-GDP ratio. Are we on a dangerous path akin to Greece? 
Japan’s debt-to-GDP ratio is absolutely enormous. According to the IMF, Japan is at about 225 percent of GDP. And they don’t seem to be having too many financial problems, and they can borrow. I think it’s a question of, what are your economic prospects? We are not anywhere close to a Greece-type situation.

What is the worst-case scenario?
I think the worst-case scenario is that Congress doesn’t raise the debt limit. Beyond that, if we get to the situation where Congress refuses to raise taxes, and yet at the same time Congress refuses to cut spending, I think we’ll see fiscal problems start to impinge on economic growth if we don’t do anything about it sometime over the next four or five years. And then financial markets will start to react negatively. We’ll start to see interest rates move higher; that’s going to weigh on business investment.

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