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Debt Ceiling 'SmackDown'

A staged crisis ends with a bad deal, say Duke faculty

Political theater and "a big fat loss" is how a
sampling of Duke faculty on Monday characterized Congress' and the White
House's handling of the debt ceiling issue.

A deal is anticipated by Tuesday, but "I think that a
default would have been a far better outcome," said Campbell Harvey, the
J. Paul Sticht Professor of International Business at Duke's Fuqua School of

"The entire crisis was staged, no more real than a WWE 'SmackDown'
in Las Vegas," added Michael Munger, professor of political science.
"The difference is that it matters for our nation and the world economy. But
financial indicators clearly showed that no one believed there would be
anything but a last-minute agreement."

The legislation Congress was dissecting on Monday would cut more
than $2 trillion from federal spending over a decade. The deal also would permit
the United States to raise by $2.4 trillion its borrowing limit of $14.3
trillion. News
said that was enough to keep the federal government operating
through the 2012 elections.

Harvey said a crisis -- the likely outcome if no deal were
reached before Aug. 2 -- was necessary to get U.S. spending on a solid track.

"The Congressional Budget Office (CBO) estimates the federal
government deficit in 2011 will be close to $1.5 trillion, about 10 percent of
GDP. Read the fine print of the Budget Control Act of 2011. The CBO estimates
the impact in 2011 will be only $25 billion of savings in discretionary
spending. Big deal. The deficit goes from $1.5 trillion to $1.475 trillion.

"We need a crisis like a default to force our
politicians to put our house in order. A win for the economy and budget discipline'?
No, it is a loss -- a big, fat loss."

News of a pending deal caused some relief Monday in global
financial markets. That was a modest prize from the pending deal, said Connel
, director of undergraduate studies and professor of the practice in
Duke's Department of Economics.

"The markets are heaving a sigh of relief that we
avoided default, but this is still a disappointing deal," he said. "Cutting
deficits by only $2.4 trillion over 10 years isn't enough to convince the
markets that the U.S. is truly serious about getting its borrowing under
control. Unless the economy experiences a surge of growth -- and where
that would come from is anybody's guess -- we'll have to face the same problem
again in one or two years. Congress still hasn't addressed the underlying
causes of the deficit problem."

On the bright side, Fullenkamp said the debate put serious
tax reform back on the agenda.

"A simpler tax system with lower rates would help
support economic growth, and should be part of the overall deficit
solution," he said. "But the only lasting solution is for Congress to
recognize that there's a limit to the revenues it can take in, about 20 percent
of GDP.  We have to live within that limit."

Donald Taylor, associate
professor of public policy at the Sanford School of Public Policy, called for
the elimination of the debt ceiling altogether.

"Since World War II, the debt ceiling has been raised
dozens of times," Taylor said. "Typically the out-of-power party
laments our nation's indebtedness, blaming all the debt since 1790 on the
current president and voting against the raising of the debt ceiling -- after
making sure that it would pass without their vote. After all, raising the debt
ceiling does nothing more than say that we will pay for the spending that
Congress and the president already agreed to.

"This time, the Republican Party successfully used
brinksmanship and the potential economic suicide that not raising the ceiling
would portend to obtain a policy outcome they would not otherwise have been
able to achieve. The first thing the super committee should do is end the debt

President Obama has been damaged by the debate, added David
, associate professor of the
practice for public policy at Sanford.

has the sense to know that his standing with independents will plummet if he is
seen as a bitter partisan," Schanzer said. "But his problem right now
is that his luster as an outsider ready to take on the establishment has been
tarnished since 2008. And over the past year he has been unable to break away
from the rolling set of crises the Tea Party conservatives have been triggering
on the budget.

"This is probably what made increasing the debt limit
past the election Obama's highest priority in these negotiations. But he is
hardly out of the woods. The fiscal year ends on Sept. 30 and Congress has not
enacted a single appropriations bill to fund the government beyond that date."