Is there any hope for a fiscal responsibility summit?


US residents owe $35,000 each for the Federal debt. The Government has also created huge unfunded Social Security and Medicare entitlements: so the total obligation per person, which will eventually become further debt, is $168,000 (pdf), 3.8 times national income.  

President Obama is holding a "fiscal responsibility summit" today to call a halt to the madness. But evidence from the thousand-year history of public debt in England suggests one thing -- the madness will only stop when creditors get worried enough about the solvency of the government to stop lending.

The huge public debts and unfunded obligations we wrestle with in modern America are, in historical terms, recent arrivals.

In England, for example, from the Magna Carta of 1215 until the Glorious Revolution of 1689, public debt was always tiny -- a few percent of national income.  This was because while the King controlled expenditures, the English Parliament controlled taxation. And Parliament refused to tax. The figure below shows how national expenditures as a fraction of national income were inconsequential from 1280 until 1689:

clark 1.png
(Source:  Gregory Clark, A Farewell to Alms, p. 149.)

Without a ready tax source, the early Kings were the ultimate sub-prime borrowers. Royal borrowing was at extremely high interest rates. The only lenders were financial adventurers willing to risk periodic defaults.

This all changed in 1689 when, in the Glorious Revolution, the English Parliament relegated the monarch to the tabloid gossip pages and took for itself the power of both taxing and spending. This unification led to rapid increases in government spending:

clark 2.png
(Source:  Gregory Clark, A Farewell to Alms, p. 158.)

But taxes have always been unpopular, and in eighteenth century England they were riotously, call-out-the-militia unpopular. Parliament's appetite for spending would thus have been curbed. But Parliament discovered an unexpected benefit of its newly enhanced taxing power: the government could become the safest of all borrowers. 

By the 1720s the British government discovered it could borrow at astonishingly low interest rates. This liberating discovery -- that you could spend without taxing -- led to unprecedented levels of public debt. 

Under times of fiscal stress this debt mounted rapidly. Between 1720 and 1815, the interminable struggle with France for European supremacy raised the debt to 2.5 times national income, close even to the levels of the modern US.  WWI and WWII also saw rapid accumulations of debt, as the figure above shows. 

Now, as societies face permanent fiscal stress from the massed armies of the elderly and the battalions of their attending physicians, we can see where public debt is headed once again.  The pressure of increased retirement and medical costs for the poor will not abate. We have entered the permanent equivalent of the British government's eighteenth-century struggle with the French. We have entered a world of constantly rising debt. What will stop it from rising? The inability to service the debt through taxes.

Economists like Martin Feldstein have for years warned in vain of the insidious damage such debt does by crowding out private capital. But because this damage is creeping and insidious -- not as obvious as hacking off a limb -- it will never motivate real political action.

Instead we will see an endless series of "fiscal responsibility summits." There will be plans for reforms, all conveniently timed to bite some years in the future. The new politics of Obama will soon succumb to the old politics of debt. 

None of this is new. As the British public debt mounted in the eighteenth century there were similar demands for reform. "Sinking funds" were created to allow for the extinction of the debt, which in the meantime grew ever larger. 

What stopped the rise of British debt after 1815 was not any political genius, but the defeat of Napoleon at Waterloo and the subsequent collapse in military spending. But Napoleon at his best was a much easier foe that the combination of American retirees and their physicians.

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Gregory Clark

Gregory Clark is a professor of economics at the University of California at Davis and the author of A Farewell to Alms.
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