Clock Ticks on Federal Debt Ceiling Limit

The summer humidity hangs over Washington – along with another hot and sticky issue: What to do about the federal budget and the looming legally limited ceiling on how much money our nation can borrow. With a fast-approaching Aug. 2 deadline, lawmakers have spent months squabbling about the problem, which could have big impacts on the global economy.

“The answer is clear – we have to raise the ceiling. And we need to get serious about reducing the long-term deficit,” says Curt Grimm, dean’s professor of supply chain and strategy. “There are plenty of ways to do this.”

The U.S. has been racking up debt at an alarming rate. In the past several years, the country has been embroiled in military operations in Iraq and Afghanistan, pumped money into a federal stimulus program to recharge the economy, continued expensive benefits programs (Medicare, Medicaid, Social Security), and extended tax cuts, all throughout an economic decline.

But solving the problems depends on the political parties coming together – which neither side has been willing to do thus far.

Even still, Grimm doesn’t think the U.S. government will actually default. If it did, the crisis would potentially be much more serious than the economic aftermath of the subprime mortgage crisis, he said. [See Washington Post: Debt ceiling doomsday scenario: What happens if Congress fails to raise the debt limit and the U.S. can no longer make payments on its obligations?]

It is especially critical that business students understand the economic implications of the debt crisis and the factors leading up to it, as well as the global forces at play.

“Students need to have a sense of where the economy is going,” said Charles Olson, Professor of the Practice in Logistics, Business and Public Policy. “When it’s a lousy economy, goods and services aren’t going to sell. This is very closely linked to the debt crisis because a lot spending in the economy is government spending. If the ceiling isn’t raised, government spending will slow down and therefore the economy is going to slow down.”

Olson and Grimm both teach the MBA core course on the global economic environment. Olson is teaching this in the part-time MBA program this summer (Grimm will teach the course in the executive MBA program this fall), where a lot of the discussion revolves around current events and cases. He wants students to understand the business implications beyond the political fight of the debt crisis.

“Many of our students work for large government contractors and other big corporations in the Washington metro region that do a lot of work closely tied to the federal government’s budget,” Olson said. “A cut in government spending will really hit the Washington economy hard and have big impacts on the firms where our students work.”

Olson is surprised that there hasn’t been a big reaction in the bond market to the debt talks. But then again, he points out that many large companies seem increasingly immune to fluctuations in the U.S. economy. Students, too, have a much more global view of business.

“All business schools preach globalization and we certainly want students to have a global view, but we also want them to understand the economy in their own country, too,” Olson said. He makes sure his weekly class discussions cover the debt crisis options and outcomes.

“You need a large area to cut from – I don’t see how it could be anything other than Social Security. There’s not much room in the budget to cut anywhere else,” Olson said.

“I think in the end – whatever happens -- this is going to slow the economy down further,” he said.

As for the standoff in Washington, “it’s going to get very ugly,” Olson says, expecting the squabbling to continue up until an eleventh-hour deal. Many would agree it already has.