September 29, 2011

Associate Professor of Economics Greg Krohn

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LEWISBURG, Pa. — Greg Krohn, associate professor of economics, talks about the recent controversy over the national debt ceiling, foreign aid and sports economics.

Q: President Barack Obama and Congress recently engaged in a heated debate about the so-called debt ceiling. What exactly is the debt ceiling and why is it important?

A: The debt ceiling is the legal limit on the amount the government can borrow and is set by Congress. When the government spends more than it takes in, it has to borrow. What happened recently was we were coming up against the debt ceiling, so we couldn't borrow more without exceeding the limit. The debt ceiling needed to be raised or there would have been some immediate curtailment of government spending, resulting in serious consequences. If, for example, we didn't make payments to our creditors, that would harm the good faith and credit of the United States and cause interest rates to go up not only for the government, but for mortgages and other investments tied to government securities. Even if those payments were protected, if other obligations weren't met, it could have raised a credibility problem. And if government expenditures were sharply cut back to equal tax revenues, it would have had a very negative effect on income and production  which would have made the recession worse.

Q: The United States carries more than $14.7 trillion in debt, and the amount is increasing every day. Who exactly do we owe and will we ever be out of debt? Should we be worried?

A: There are a couple of groups that own part of the debt that are worth noting. One is the Social Security Trust Fund, which holds about a third. About a fourth is owed to foreign investors. The amount of foreign-held debt could be seen as the biggest concern because payments on the debt go outside the country. One way large ongoing budget deficits serve as a drag on our national income is that even though we might be producing more goods and services, more of the income that's generated gets paid to foreign creditors. So there's a gap in what we're producing and what the income of the nation is — a widening gap — due to the extent that foreigners are acquiring our debt. Whether or not the holdings of government agencies like the Social Security Trust Fund should be counted or not is somewhat controversial. A lot of times you will see figures about debt held by the public which subtract the amounts held by the government agencies from the total. Some argue that we should include debt from the Social Security Trust Fund because it represents liabilities we have for the future.

The reason there's concern is not so much the level of the debt per se but whether or not it will continue to grow faster than the size of the economy. That could lead to financial disruptions due to sharply rising interest rates, which could cause asset prices to fall and the economy to slow. So there is kind of a financial panic that could be associated with rising debt levels, especially when it gets up to the size of the economy and beyond. Right now, we have about a $15 trillion economy, and the total debt measured is getting up to that point. Back after World War II, the debt was a little higher than the size of the economy, but it was gradually eroded over the years because the economy grew and the deficits were relatively small. One concern looking ahead is that the Baby Boomer generation is aging, and that's going to create upward pressure on Social Security and Medicare payments. When you couple that with rising healthcare costs, the projections are for government spending to be growing faster than the size of the economy.

Q: How can we as a country in debt offer aid to developing and disaster-stricken countries?

A: This really is a value judgment. Any time you have a budget for the country, an organization or a family, it reflects the priorities you have for spending. What you have in your budget reflects what you think is important and what your aims are. How you finance spending is another issue. For the federal government, there is tax revenue, but they can also borrow. There is economically a third way to raise revenue, and that is to "print" money. That is done indirectly by issuing a debt and having the Federal Reserve buy it up. Asking the question of whether there should there be foreign aid when times are tough at home gets back to the purpose of the aid and how those purposes measure up to the aims. If you look at it in a humanistic way, it might be that human needs are great, and maybe one of the values of the United States is to try to help meet human needs abroad. We have a priority on the needs of our citizens and also citizens of the world. There also is a self-interest perspective that providing aid abroad can help situations from getting worse and prevent greater costs for the United States down the road.

Q: Cities are often eager to host sports teams or build stadiums, thinking it will be an economic boon, but often, these ventures are costly and slow to offer a return on the investment.  When is it a good idea to invest in a sports team and which ventures are most lucrative?

A: The weight of the economic evidence suggests that attracting professional sports teams by subsidizing stadiums is not an effective economic development tool. People wonder how that can be, because you build the stadium and hire a lot of people. The studies that claim stadiums create larger economic benefits typically miss a couple of things — one being substitution; that is, when people spend money at a stadium, they are not spending that money at other local businesses. These studies also often use a multiplier analysis, saying that if you put a dollar of spending into the economy it creates income for somebody and that money gets spent again. Well, the multipliers get smaller the more that money leaks out and is spent outside of the city. This is particularly relevant for major league sports teams, because the big beneficiaries are the owners and the players, and they may live elsewhere. Or, even if they live locally, they spend a lot of their money on things produced elsewhere. This is a particular problem when a small political unit like a city finances a stadium because typically the revenue gets dispersed outside of that taxing unit.

Having said that, communities still want sports teams and facilities. There are benefits that are non-economic such as the social cohesion of having the hometown team to root for and having something to talk about when you interact with people at work or in social gatherings. In addition to the social or psychological benefits of a sports team, cities that have professional sports teams sometimes have higher property values than cities that don't have professional sports teams, controlling for other things. But my reading of the evidence is that to the extent that subsidizing professional sports teams is justifiable, it's justifiable on non-economic grounds. There doesn't seem to be much evidence at all that bringing in a professional sports team is a good economic development strategy. Economists that do a more thorough analysis on the effects on local economies just don't find much positive benefit from an economic perspective. Even with one-time events like the Super Bowl, people talk about all these people coming in to the host city, but they don't talk about the people who don't come in because it's Super Bowl weekend and it's crowded.

Interviewed by Julia Ferrante

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