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George Vlahakis
University Communications

Steve Hinnefeld
University Communications

IU expert available to discuss debt ceiling deadline and proposed solutions

July 25, 2011

BLOOMINGTON, Ind. -- Congress has until next Monday (Aug. 2) to raise the legal limit the U.S. is allowed to borrow. Many experts have warned that if the debt ceiling isn't raised by then, the U.S. and other nations worldwide would risk catastrophic economic consequences. An expert from Indiana University's College of Arts and Sciences can offer perspectives and is available to speak with reporters.

Todd B. Walker, an assistant professor of economics, noted that the economy remains weak and is vulnerable, even though the country is no longer officially in a recession. He cited as an example the labor market. At the peak of the recession, the economy was shedding close to a million jobs a month.

Walker noted that last month, private employment increased by only 57,000. "The anemic job growth is the reason for the sustained high unemployment rate (currently at 9.2 percent)," he said.

"There is tremendous uncertainty surrounding the ramifications of not extending the debt ceiling," Walker said. "No one knows who will get paid and who will not (for example, government programs, including those affecting businesses)."

He cited media reports that some states, including California and Maryland, already have been hurt by this uncertainty. Both states have had to postpone bond sales or seek alternative funding sources because of fear of a credit rating downgrade.

"The debt ceiling issue is a dangerous political ploy that could have real economic consequences," said Walker, an expert on fiscal and monetary policies. "The debt ceiling has been increased repeatedly in the past with little or no fanfare . . . There seems to be plenty of short-run demand for U.S. Treasuries despite our long-run fiscal issues. U.S. Treasuries have long been considered risk-free investments.

"Merely raising the issue of not extending the debt ceiling may drive investors to demand a risk premium on U.S. debt securities due to the threat of default," he said. "This is unprecedented and would do much harm to the current economy."

Like others, Walker is concerned that the United States has a large projected fiscal imbalance over the next several decades due primarily to projected growth in entitlement programs, especially Medicare. Fiscal reforms must address entitlements on some level, he said.

"Current fiscal policies are unsustainable," Walker said. "While much of the imbalance occurs gradually over several decades, it is better to address these issues sooner rather than 'kicking the can down the road.' However, the fiscal adjustments would most likely entail a substantial redistribution of wealth and in democratic societies, such policy reforms behoove the participation of the general public."

Walker can be reached at 812-856-2892 or