Ok, this might be a bit wonky and theoretical, fair warning...
I've been thinking some about the problem with long-term government debt, and how to prevent government entities from mortgaging the future to fulfill current spending desires. In essence, this is the #1 long-term problem with government debt: it's not that debt is bad, it's just that the accumulation of debt, combined with compounding interest payments, eventually leads to default or inflation, or both. The same is true for everyone else's debt too, of course, although normal people cannot typically print money to paper over the problems and reduce the debt by devaluing the currency. But I digress.
Consider if, instead of being allowed to roll over debt indefinitely, a government (eg: state government) had a strict, carefully-constructed Constitutional limit, which specified that all debt would only be valid for a specific period (eg: 10 years), after which if not paid back it would be automatically void, and the government was explicitly prohibited from paying back any debt with new borrowing (ie: no interest/principle payments could be made for any debt during any fiscal year where any additional borrowing occurred, for any reason). The implications would be significant:
- Debt servicing cost from the private market would increase proportional to the expectation of fiscal prudence (to enable repayment) and responsibility (to repay the debt), knowing that there is a fixed expiration
- Financially responsible entities could still borrow to cover extraordinary events, but probably at a higher cost
- Governments would be forced to have a credible repayment plan at the time of borrowing
- Probably most importantly, it would eliminate the possibility of shouldering future generations with debt: the subset provision ensures that any debt expires within a fixed period of time, by design
- Borrowing costs for financially dysfunctional governments would be prohibitively high, forcing immediate changes rather than prolonged paper-over periods and political blame-games
- Governments will be more immediately responsible for the fiscal impact of their decisions
- Several other problems would likely be also solved as side-effects (eg: no more missing the budget deadline every year)
The more I think about it, the more I like it. Yes, the initial change-over would be painful for most governments, especially those with massive existing debt problems, but the end result would be a system which ran much more smoothly, and had much less potential for political abuse. Thoughts?
Tuesday, May 11, 2010
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I additionally would want a fiscal policy committee for the US that worked like the FOMC but for monetary policy. All they would set is the amount of debt incurred or retired each year. This would be powerful in that it could make it hard to spend for war or national emergency so non-activist committee members would have to be selected carefully. Congress would grill appointees about whether they would open the faucet for earthquake relief or to respond to an attack. Their answers are supposed to be that they would strictly focus on what's good for the economy and would only consider national emergencies to the extend they threaten the future economy.
ReplyDeleteThe committee would sort-of enforce the standards you lay out. This committee, though, would also have the power to force the gov't to borrow money temporarily if the economists on the committee thought that was best.