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How would you solve the federal debt issue?

How would you solve the federal debt issue?

The economy might be booming, but so is the federal debt.

While the economy has been steaming along with a record economic expansion, so has the federal debt. The federal debt has reached record levels at approximately $22 trillion with no sign of it subsiding. For many, the high level of debt is a concern for several reasons. A rise in interest rates, China deciding not to fund the U.S. debt, lower tax revenues due to a recession, or a combination of all these factors could be the gut punch that could result in unintended consequences for the United States.

Dr. Tom Payne, Dean of the College of Business at Tennessee Tech University, and I teach the senior level Interpreting Economic Change course at the Graduate School of Banking at Louisiana State University. Utilizing clicker technology for anonymous responses, our class had the ball in their court concerning possible solutions to the federal debt issue. The following is how this group of bankers would resolve this growing problem at the federal government level.

There are three primary ways to resolve the government debt issue. First, grow the economy and the ability to service the debt. The second option is to file bankruptcy and write down the debt. Examples of this strategy have come out of South American countries over the past decades. Finally, the third option is to cut budgets.

Approximately one-third of the bankers responded that they would implement fiscal and monetary policies designed to grow the economy. This response certainly has credence. Interestingly enough, cutting budgets was the second most popular option amongst the class including cutting some of the entitlement programs. The next most popular option was to both raise taxes and cut budgets in a combination approach. Surprisingly, the options to raise taxes and cut taxes were not popular, registering with less than two percent of the responses.

The federal debt is definitely an issue in the U.S., Europe, and China. Dr. Payne and I discussed with the class that a sound plan for resolving the federal debt issue was developed about eight years ago, but it was ignored. The plan, known as the Simpson-Bowles Budget Plan, was bipartisan in nature and was worked on by the “Gang of Six” with members representing both political parties.

This plan was very simplistic: three dollars of budget cuts for every dollar of tax increase. The plan, while logical in nature, gained little steam and momentum at that particular time. Perhaps this plan needs to be dusted off? If no action is taken, future generations could pay the price.

P.S.

For your reference, the students at the Graduate School of Banking represented 22 states and Mexico. The bankers had a broad profile with various years of experience.

The opinions of Dr. David Kohl are not necessarily those of Corn and Soybean Digest or Farm Progress.

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