What’s Eating Our Economy?

Brian Peterson, associate professor of economics, sat down with Dr. Bob Leonard of KNIA/KRLS to talk about how we can get out of debt. Read an excerpt below…

Q&A with Brian Peterson

What’s the current state of the American economy?

Troubled. That’s the short version. The longer version is: We have issues that need to be addressed. We have short-term issues that deal with unemployment, job growth and things like that, and then we have long-term issues that deal with the national debt … We are at a point now where we have to make some serious decisions.

What are the different ideas out there to fix it — both short term and long term?

One of the things we saw in the conversation over raising the debt ceiling is the need to reduce the annual deficit and the overall national debt by either spending cuts or tax revenue increases or a combination of the two.

Long term, we need to think about scaling back the debt. You do that by a variety of spending cuts and revenue increases … On the spending side, we need to look at what are being referred to as entitlement programs — things like Social Security, Medicaid, Medicare — in the context of what can be done to make things more efficient without favoring one over another.

In terms of tax revenue, you can’t get away from the fact that we’ve put ourselves in this position. We’re not going to be able to get out of this hole without some revenue increases … Maybe we focus on closing loopholes in the tax code, by reducing things like the mortgage interest deduction on home ownership, health care deductions, all sorts of things that we’re able to back out of our taxable income.

But that would take money out of the hands of the consumer?

Yes and no. Economists argue that any time you engage in a movement away from the market, in terms of a subsidy or in terms of a tax or a mortgage interest deduction, you distort behavior. If I’m given a deduction for the mortgage interest that I pay, I have an incentive to buy more house than I need because that gives me a greater deduction … It doesn’t necessarily take income out of my hands because as I’m losing the interest deduction, I have an incentive to purchase a smaller house and therefore I’m paying less.

If we think about closing those kinds of inefficiencies, we potentially can increase the amount of revenue the government is taking in but not necessarily make consumers worse off.

Does what you’re proposing sit well with the Obama administration? And does it sit well with the Republicans and the Tea Party?

This is the problem with incorporating politics into economics. In terms of economics, I think most people would understand what we need to do. We have a massive debt that is projected to increase over time. By 2015, somewhere around 110% of GDP will be our national debt. It’s unsustainable … A lot of economists believe that our debt has grown to the point where simple economic growth — increasing the tax base — is insufficient to pay down the debt, which is why they’re arguing that we’ve got to increase the income tax rate …. We can talk about letting the Bush tax cuts sunset again. We could talk about, as Warren Buffett argued in his New York Times article, raising tax rates on those earning $1 million a year or more or $10 million a year or more.

I think that what the super committee [the group in Congress charged with coming up with additional sources of spending cuts] has to do (and I have to admit that I’m very concerned it’s not going to happen) is come up with a series of short-term changes as well as long-term changes. The long-term changes have to come in the context of compromise from the left in terms of entitlement changes and have to come from the right in the context of revenue increases. If we’re serious about getting it done, if we’re serious about pushing the economy forward, if we’re serious about regaining that AAA status from S&P, somewhere in the middle is going to be the solution.

Hear the full interview with Brian Peterson.