Why Long-term Debt Solutions Require a Break from Sequestered Thinking
U.S. policymakers now seem compelled to make dramatic budget cuts that many have pushed for, but also avoided. Political skirmishes have played out over fiscal cliffs, debt ceilings and the so-called sequester -- an automatic budget-slashing regime. As political theatrics take center stage, it's worth pausing to ask: How can the U.S. solve long-term debt issues given daunting economic, social and Constitutional restraints?
To dig into this, Knowledge@Wharton spoke with Wharton finance professor Franklin Allen, co-editor -- along with Anna Gelpern, Charles Mooney and David Skeel -- of a new book titled, Is U.S. Government Debt Different?, published by the Wharton Financial Institutions Center.
The book, which is available free on the WFI website, is a collection of 15 articles based on a conference at the University of Pennsylvania in 2012. A key theme: If there is any potential silver bullet out there, it may be value added taxes, a strategy followed by many other countries.
An edited transcript of the conversation appears below.
Knowledge@Wharton: The topic of the book you have co-edited -- Is U.S. Government Debt Different? -- is timely. We see recurring talk of debt ceiling and forced spending cuts through [so-called] sequestering, and also the on-going debt crisis in Europe. Please tell us about the major themes in the book.
Franklin Allen: This book arose as a result of the problems that we had with raising the debt ceiling in July and August of 2011. One of the things that episode underlined was that there was very little knowledge about what would happen if they didn't raise the debt ceiling and how that would play out. Would there be a default as many people were claiming? What would that mean? The Wharton Financial Institutions Center, in conjunction with the [University of Pennsylvania] law school, decided [to] hold a conference and have a range of disciplines included to look in general [at the question]: Is U.S. government debt different? It certainly plays a very important role in the global economy. Because of the nature of our Constitution, a lot of issues are different than in other countries.
We talked about the debt ceiling, but there are real issues about whether it's possible for the U.S. to default or not. The 14th Amendment has a section which states that the validity of the U.S. debt shall not be questioned. There's a real issue as to what exactly that means. Does that mean that we're constitutionally prohibited from defaulting? Or, does it mean that we can push payments into the future? One of the main issues discussed was what would happen if we hit the debt ceiling.
Two interesting articles by legal experts looked at that. [Michael W.] McConnell from Stanford University had an interesting history of how that clause got into the Constitution and how it would be interpreted. [Howell E.] Jackson from Harvard University has an interesting essay and a detailed appendix done by two of his JD students, looking at how the Treasury would likely react if we did hit the debt ceiling for prolonged [periods.] The book has many other themes to it, such as: What's the historical background? How did U.S. debt get its special characteristics? We start with an historical description of Alexander Hamilton (U.S. founding father who served in the George Washington administration).
We also looked at the long-run problem in the U.S. that we are spending -- and are likely to go on spending as we get into the baby boom retirement years -- much more on Social Security, but particularly on Medicare and Medicaid, than we're raising in taxes. We have to do something about that. That is what much of the negotiations this year are going to be about. We start with the sequestering on March 1 and then we have a whole sequence of events, [including] the run-out of spending authority for the large parts of the federal budget in March. We then have the debt ceiling coming up again. The book tries to give a broad view of the U.S. debt situation....MUCH MORE
