US Government Debt – Non-Debate of Know Nothings

One of the most frustrating things about the US government, at least to anyone who actually tries to pay attention, is that there is never any debate and the statements made by the opposite parties seem to all be made without any attempt to actually understand the issues at hand.

If you have an interest in being informed about the US Government debt situation and the alternate courses of action for resolving the situation, there is now an alternative for you to listening to the non-debate by know nothing politicians.

Wharton is making a set of 15 essays from scholars in law and economics about the US debt history, applicable laws and the potential consequences of alternate strategies for resolution available.

This 250 page book is available free here.

These essays come from a conference hosted by Wharton in 2012.  Here is the introduction to the book describing the conference and the resulting essays.

The opening panel explored the functions of U.S. Treasury instruments and the Treasury market in the United States and beyond.  U.S. Treasuries play a unique role in the national and global economy. Richard Sylla put their current role in historical perspective,  observing that U.S. government debt obligations from their birth in  the revolutionary days have been much more than another means to finance the government: they cemented the political union, served  as a currency, backed the banking system, and helped attract foreign  capital.  William Bratton,  Richard Herring, and  Zoltan Pozsar then discussed the Treasuries’ role in the modern financial system,  including corporate finance, banking and shadow banking in the  United States and around the globe. While other reserve currencies and assets may eventually displace the U.S. dollar and the U.S. Treasuries, none are readily available at this time, and some that have  served as substitutes in the past (notably agency securities) ultimately rely on the credit of the United States.

The second panel considered constitutional, statutory, and contractual dimensions of U.S. government debt.  Michael McConnell opened with an examination of the U.S. Constitution as a fiscal  framework based on legislative control of taxing, spending, and borrowing. Howell Jackson then returned to the statutory debt ceiling  controversy, lifting the curtain on a plausible sequence of events had  the President and the Congress failed to compromise as they did at  the eleventh hour in the summer of 2011. In addition to Jackson’s  essay, this volume contains a policy brief by Jeremy Kreisberg and  Kelley O’Mara detailing the Executive’s options for honoring U.S.  government payment obligations with the debt ceiling unchanged. Richard Squire  concluded with thoughts on the market in credit  default swaps on U.S. government debt.

Peter Fisher gave the luncheon keynote, where he brought his perspective as former U.S. government debt manager, central bank official, and market participant to bear on the themes of the conference. Echoing the first panel, his remarks urged closer attention to the  sources of demand for U.S. Treasuries both at home and abroad. He  surveyed the experience of Britain in the 19th century and Japan in  the late 20th to identify some of the demand factors that help account for the ability of countries with very high debt burdens to avoid default.  The focus on demand in the U.S. banking, shadow banking,  and global financial systems suggests cautious optimism about the Treasuries’ prospects going forward.

The first afternoon panel revisited the questions of U.S. ability and willingness to pay, which has been debated heavily in policy and academic circles. A sovereign’s ability to pay is a function of its ability to generate revenues, which depends, among other things, on  the economy’s capacity to grow and on the government’s political  capacity to collect taxes. The line between ability and willingness to pay can be notoriously fuzzy. Deborah Lucas examined the structural sources and magnitudes of U.S. fiscal imbalances and the policy  changes needed to avoid them. While conceivable, default remains unlikely; however, risks from rising healthcare costs, slow productivity growth, a spike in interest rates, and contingent liabilities can tip  the outcome.  James Hines observed that while the United States imposes a smaller tax burden than other large wealthy economies,  its greatest unused tax capacity is in expenditure taxation that would  alter the current distributional bargain.  James Kwak put the U.S. fiscal challenge in historical and political perspectives, analyzing the  structural and policy steps needed to address the debt problem, and  the political capacity of the U.S. government to take these steps.

James Millstein suggested that asset sales—such as sales of mineral  rights—merit serious consideration as part of a package of debt reduction measures. His contribution drew on the history of sovereign asset sales, adapting it to the current needs of the United States.

The conference culminated in a panel discussion of a “thought experiment” laid out in Charles Mooney’s contribution: what if the  United States decided that it was in its interest to restructure U.S. Treasury debt? How might it go about it? What legal and policy options would the U.S. government have, what are the pros, cons, and  likely consequences of taking any of these steps?  His paper considers constitutional, statutory, market and transactional challenges to default and restructuring, and presents three options for a hypothetical  operation. At the conference, he laid out the strategy for across-the-board and selective exchanges of outstanding U.S. Treasuries for new  obligations, including the possible issuance of “Prosperity Shares,”  non-debt securities giving creditors a stake in future growth.  Donald Bernstein and Steven Schwarcz offered comments on the paper.  Bernstein was skeptical of recourse to the bankruptcy powers, and  pointed to the many hard policy challenges, including loss distribution and policy reform, that would remain unsolved even with  recourse to bankruptcy. Schwarcz noted further possibilities for restructuring, and obstacles to selective default. In addition, his contribution explored the problem of government financing through special purpose entities, and urged oversight to improve accountability.

Throughout the day, conference participants from different academic  disciplines and backgrounds engaged in lively discussion. We did not  strive for a policy consensus, nor did we achieve one. Our purpose in the volume, as it was in the conference, is to start a conversation  long overdue. We hope it will continue. If the conference convinced us of one thing, it is that the stakes in the future of U.S. government debt are too high to confine serious analysis and informed debate to legislative back-rooms and disciplinary silos.

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