Deprecated: Function spacious_options is deprecated since version 2.5.0! Use get_theme_mod instead. in /home/clos/public_html/ on line 5379
Current template: single.php

John Merrifield and Barry Poulson

The U.S. responded to the financial crisis with an aggressive Keynesian fiscal stimulus, and emerged as one of the most indebted nations in the world, gross debt now exceeds Gross Domestic Product (GDP). The Congressional Budget Office, CBO, projects that the debt to GDP ratio will continue to increase to 150% over the next three decades. In a forthcoming book, ‘Restoring America’s Fiscal Constitution’ (Lexington Press) we estimate that this debt overhang now limits the fiscal space required to pursue a discretionary fiscal policy.

Many studies conclude that countries with debt overhang of this magnitude are caught in a vicious cycle. Debt overhang is accompanied by retardation and stagnation in economic growth; slower growth, in turn, makes it more difficult to reduce debt burdens. High debtor countries have little or no fiscal space to pursue countercyclical fiscal policies in response to financial crisis and external shocks. As credit markets perceive increased risk of default, the default risk requires higher interest rates, which makes it even harder to reduce debt burdens. In the long run, high debtor countries do not have the fiscal space to meet the demands for pension and health care benefits of an aging population.

The U.S. now exhibits all of the symptoms of debt overhang, and faces a major challenge in curing this problem. Unfortunately elected officials are focused on the immediate problem of passing a budget, and increasing the statutory debt limit. Congress has increased the debt limit many times over the past century, without significantly impacting the accumulation of debt in the long term. Increasing the debt limit has become a meaningless exercise.

To cure debt overhang, the U.S. must follow the precedent set by other OECD countries, enacting effective fiscal rules to balance the budget and reduce the debt to GDP ratio below tolerance levels. The most effective fiscal rules mandate a cyclically balanced budget, and limit spending anytime that deficits and debt approach tolerance levels.

We have evidence from more than two decades of experience with these fiscal rules in European countries, reducing and eliminating debt overhang. Countries such as Sweden and Switzerland have reduced debt to GDP well below the 60 percent tolerance level set in their statutory and constitutional fiscal rules. They reduced their debt burden even during the recent financial crisis. In the long term expanded fiscal space has enabled them to reform their entitlement programs and adjust fiscal policies to meet the demands of an aging population.

In our book ‘Restoring America’s Fiscal Constitution’ we use a dynamic simulation model to analyze the impact of these fiscal rules in the U.S., using CBO Long term forecast data. The simulation analysis reveals that the U.S. could cure debt overhang over the next two decades with these rules in place. But, this will require more stringent fiscal policies than any of those proposed in Congress. Discretionary spending growth would have to be capped at less than one percent per year for two decades. Congress would have to generate about $600 billion in savings each year from entitlement reform and sale of government assets, earmarked for debt reduction.

Critics question whether Congress would ever enact these fiscal rules, given the limited success in enforcing the fiscal rules now in place. The Republican leadership in Congress is committed to balancing the budget and eliminating debt overhang. However, if they are not successful, we do not think that citizens will allow the federal government to continue to muddle along incurring deficits and accumulating debt as it has for half a century. Long before the nation approaches bankruptcy and default on the public debt citizens will demand that the government pursue a sustainable fiscal policy. An Article V amendment convention would give citizens an opportunity to impose new fiscal rules on the federal government, incorporating a balanced budget amendment and spending limits in the Constitution.


DOWNLOAD: Curing Debt Overhang Eight Years after the Financial Crisis

Curing Debt Overhang Eight Years after the Financial Crisis

3 thoughts on “Curing Debt Overhang Eight Years after the Financial Crisis

  • April 7, 2022 at 5:47 AM

    Definitely, what a fantastic website and revealing posts, I surely will bookmark your blog.Best Regards!

  • April 17, 2022 at 9:51 PM

    I抦 not sure where you are getting your info, but good topic. I needs to spend some time learning more or understanding more. Thanks for magnificent info I was looking for this information for my mission.

  • May 3, 2022 at 4:56 PM

    Hi everyone, it’s my first pay a visit at this web page, and
    piece of writing is truly fruitful for me, keep up posting these types
    of articles.


Leave a Reply

Your email address will not be published.