WASHINGTON — Congress is weighing a $700 billion plan that would rescue financial institutions and, ultimately, the flagging economy. Under the plan, the federal government would buy up devalued securities tied to bad mortgages, giving banks greater authority and confidence to lend money to individuals and businesses.
But the federal government, already saddled with a national debt approaching $10 trillion, could go deeper into the red to pay for the plan.
Juergen Fleck, an economics professor at Hollins College in Roanoke, Va., talked with Gannett News Service about what that means for average Americans.
What is the national debt?
It's the accumulation of all the budget deficits that we ran in the past. Every year the government runs a new deficit, it adds to the debt. It took us 200 years — until 1976 — to amass $1 trillion in national debt. Since 1976, we've added $8 trillion to it.
So the United States has carried debt for decades. Even if the bailout under consideration in Congress adds hundreds of billions to that debt, why should anyone care?
The problem is that the government needs to borrow money from somewhere, so the question is where. We can borrow from the domestic public or we can borrow from the foreign public. The fear is, what happens if all those foreigners want their money back. What would happen if China cashed in all their Treasury bills? That would create severe problems. We would have to borrow from the domestic public and that would drive up interest rates.
Why would interest rates rise?
Think about it in terms of supply and demand. If the government borrows heavily, the demand for money goes up, and that raises the price of the funds, which is the interest rate.
So how would this affect consumers?
That means higher car loans, mortgages and so on. This whole financial crisis is about lending drying up. And if the government has to borrow more, it will drive interest rates higher and make credit that much tougher to get. We don't want higher interest rates.
How much debt is too much?
What matters is not the size of the deficit, it is the debt-income ratio — the national debt compared to the Gross Domestic Product. If the GDP grows faster than the debt ratio, that's not so bad. We'll have an easier time of paying it back. But given the current crisis, the economy will be going into a recession, and that means GDP will actually go down and lead to an increase in interest rates.
How might this affect the next president's economic plans?
The government has to pay interest on the debt. Let's assume that the debt is $10 trillion. If the government pays 2 percent interest a year, that's $200 billion in payments. That's $200 billion that won't go for roads or for education. It just pays interest.
Do you have much hope that either presidential candidate would be able to reduce the debt if elected?
You can only reduce the national debt by running budget surpluses, and only one president (Bill Clinton) in recent history has done it. People generally get elected by promising tax cuts or more spending, and that's not a way to get a budget surplus.
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