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we're meeting today with Wharton Finance
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Professor Franklin Allen who's also one
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of the editors of a new book titled is
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US Government debt different
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the book's a collection of about 15
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articles based on a conference here at
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the University of Pennsylvania earlier
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this year or last year actually uh it's
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great to have you back uh and um it's a
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pretty timely topic uh given recurring
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talk of debt sealing and uh forced
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spending cuts through sequestering and
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also ongoing debt crisis in Europe um
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tell us what some of the major themes of
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this collection of Articles were what
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were some of the main ideas to come out
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of it well this book really arose as a
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result of the problems that we had with
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raising the debt ceiling back in July
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and August of
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2011 and I think one of the things that
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that episode underlined was that there
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was very little knowledge about what
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would happen if they didn't raise the
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debt ceing and and how that would play
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out would there be a default
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as many people were claiming what would
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that mean and so forth
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so the Wharton financial institution
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Center in conjunction with the law
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school decided that we should hold this
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conference and have a whole range of of
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disciplines included and just look in
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general is US Government de different it
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certainly plays a very important role in
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the global
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economy and because of the nature of our
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constitution there are a lot of issues
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which are rather different than in other
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countries so we talked about the debt
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cealing but there are real issues about
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whether it's possible for the US to
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default or not the 14th
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amendment has a section which or which
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states that the validity of the US debt
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shall not be questioned and there's a
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real issue as to what exactly does that
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mean does that mean that we're
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constitutionally
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prohibited from defaulting or or what
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does it mean that we can push payments
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into the future or what so one of the
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the main issues was what would happen if
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we hit the debt ceiling and I think uh
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two of the very interesting articles by
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legal experts were looking at that so uh
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Professor McConnell from Stanford
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University had a very
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interesting history of of how that
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Clause got into the Constitution and how
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it would be interpreted and then um the
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treasury likely react if we did hit the
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ceiling for a prolonged series of time
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so that was one very important part of
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the book but it also has many other
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themes to it which is what's the
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historical background how did US debt
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get its special characteristics so we
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start with a historical description of
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Alexander Hamilton and so forth and then
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also we looked at the long run problem
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that we have in the US in the sense that
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we are spending and are likely to go on
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spending as we get into the baby boom
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retirement years much more on Social
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Security but particularly Medicare and
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Medicaid then we're raising in taxes and
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we have to do something about that and
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that's of course what much of the
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negotiations this year are going to be
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about and we we start with this
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sequester in March 1st and then we have
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a whole sequence of events the run out
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of spending Authority for for large
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parts of the federal budget in March and
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then we have uh the the debt ceiling
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coming up again so there are many other
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issues and and the book deals with with
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many of those and give tries to give a
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very broad view of the US debt
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situation the the debt ceiling coming up
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again so there are many other issues and
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and the book deals with with many of
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those and give tries to give a very
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broad view of the US debt situation it
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sounds uh very very in-depth and
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comprehensive um a lay person outside
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looking in about the debt might ask a a
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question such as well the US is the
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global Reserve currency um we're not in
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any sort of monetary Union we can always
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print more money not to say there aren't
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consequences inflation and so forth but
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to get out of a short-term Jam for which
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you'd have to patch things up later you
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can always print money and get out of it
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and also um for us investors in
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particular but Global Investors there
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what currency is there that is anywhere
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near as risk-free um and also able to
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handle the volumes um that that US
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currency can take up for investors so so
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there's just nothing comparable
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therefore the argument would be
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everyone's always going to be buying us
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treasuries aren't they so this is one of
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the very interesting issues so certainly
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at the moment particularly with the
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problems in the Euro Zone the US does
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have a dominant position uh the Euro
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Zone I I think many people expected to
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become a much more important currency in
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the sense that it would perhaps rival
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and and maybe even overtake in terms of
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the foreign exchange reserves held by
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central banks the US dollar that hasn't
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happened because of things like the
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Greek default and other problems that
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are out there in the longer run the
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Chinese R&B is likely to become another
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Reserve currency in my view that's
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probably 10 15 maybe 20 years away but
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at the moment certainly the US dollar is
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supreme and we see that with the S&P
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downgraded us because of the problems in
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July and August 2011 it really didn't
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affect things very much at all so I
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agree now they can print money but as
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your
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question suggested there are problems
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with that and uh the inflationary
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consequences and also the redistribution
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consequences of doing anything like that
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would be very large indeed and it would
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be very problematic if we were to do
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that in my view and some of those ideas
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I'm sure came out at the conference yes
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and so there a discussion of various
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things that we might do um Professor
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money from the law school has a very
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nice paper which is a very Pro
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provocative one and talks about what
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would be happening maybe 5 to 10 years
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from now if we had a 60% inflation rate
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in the US would 60% yes it's very it's
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very provocative um he has Professor
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president uh Sarah Palin in office and
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60% sounds like a good movie yes we're a
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bad moving on so as you know what would
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be the options would we really want to
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have that kind of inflation rate or
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would we rather go in the direction of
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some kind of negotiated default so the
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these are issues which at the moment are
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a far far away from us the debt ceiling
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isn't to be clear but the long-term
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problems and and and so forth um are not
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imminent but they are there and
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financial have markets have a way of
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bringing the future to the
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present rather
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quickly um you mentioned that as a
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provocative idea another provocative
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idea by uh one of the contributors uh
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was that to help us get out of debt we
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sell off uh the family jewels in effect
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that we that we look at asset sales and
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when you look at asset sales in the US
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you're looking at mineral rights that
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that sort of energy rights um but um
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also was suggest that we sell off chunks
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of of one of our states Alaska which
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happens to be 85% owned by the federal
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government I think um which is I guess
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why that would even be presented but how
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was that received by by the group that
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idea I think uh Jim milstein who wrote
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that that
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essay wanted to stress that we are in a
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long run situation which is not a good
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one
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and the point the starting point there
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is in fact large parts of our country
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the Louisiana Purchase and the Alaska
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Purchase were made
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by countries that had massive fiscal
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problems and this was their solution to
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sell off large chunks and I think he
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wanted among other things to underline
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that we do have a serious situation and
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we need to worry about this and as you
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say they are you know the notion of
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selling off Alaska is something that I
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think most people would regard with with
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horror and that's I think underlines
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that we need to do something about this
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is not something that we can just push
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into the future like we've been doing we
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really need to do something now mineral
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rights are a little bit different I
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think uh there that's a valid way of
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raising revenues one of the very
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interesting things about that article is
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it it doesn't raise much money any of
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these strategies relative to the
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national debt so so it was meant to be
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provoc I think it was yes
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um were there any um
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particular um strong themes that would
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come out as um prescriptions for policy
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makers um maybe new ideas that even
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fairly well-informed people haven't
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heard of yet anything new that you could
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say this is these are there here's an
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interesting set of ideas that policy
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makers really should be considering
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that's maybe a little bit different than
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what's being talked about now now so I
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think in the in the literature there's a
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whole range of these ideas
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so I'm not sure that any of the ideas
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presented were particularly new it was
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really bringing together the literatures
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from a very diverse set of Scholars to
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to look at the problem seriously and I I
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think you know the major
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theme apart from the short run issues
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with the debt ceiling and the
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Constitutional issues there
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are to do with this long-term problem
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that we have we we are on a course to
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spend more than we raise in taxes and
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one way or another we've got to change
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that and there are many ways to do that
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one of the Intriguing ones was comparing
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the differences on our tax systems with
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those of other Advanced industrialized
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countries and basically we are an
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outlier we pay less in taxes but we
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we need to change that if we want to
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keep our benefit levels where they are
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and the main thing that is different is
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that we have a much lower proportion of
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GDP raised in sales taxes or Vats as
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they call them in in Europe value added
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taxes and if we ever need a silver
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bullet that is potentially one way we
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can simply solve the problem so a
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national sales tax a national sales tax
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or value added tax it it's well known
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how to do that they're very effective
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and we can easily raise 5 to 10% of GDP
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and just plug the Gap now of course
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there huge political problems to do that
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to do that but that is and no one's
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talking about that particular solution
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but I think that was one of the things
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that was very interesting that was
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raised in the conference probably go for
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that before selling off Alaska don't you
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think yes I think that that would be a
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much better solution part of um so we
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have some national taxes now some things
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do we on liquor perhaps are there
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National or cigarettes perhaps I guess
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there is on gasoline some syntax well
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gasoline also yeah so there are a few
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but they're not significant Revenue
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raises we raise about 4 and a half to 5%
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of GDP but that's mostly state sales
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taxes but I mean there's a presentent it
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wouldn't be completely breaking new
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ground in other words to have a fedal
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sales tax on something not as if that a
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constitutional amendment I don't think
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it is it's it's it's a political issue
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rather than a legal issue okay around
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1999 or so not so far back the US had a
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relatively low debt it was shrinking it
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was shrinking so much that um fed
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chairman Alan Greenspan was starting to
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express worry that we might not have
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enough debt why why would that be a bad
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thing I guess because you need a certain
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amount of debt instruments to finance
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retirements of different sorts whether
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it's Social Security or private
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retirement plans um and that um um we
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were sort of running out of treasury
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bills to sell it sounds hard to believe
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today because it you know it's not that
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long ago and our problems are so
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different today but how how was that
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such a
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turnaround so in the late 90s we had the
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the uh Tech bubble in the stock market
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and we had a lot of asset pricings going
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up dramatically what that led to was was
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big tax receipts from the capital gains
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tax and and various other taxes
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and so that enabled the government to
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pay down the debt and they also got a
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lot just because the economy was booming
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so much and then after the tech Bubble
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Burst then we had problems and in the
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sense so we weren't having this big um
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excess of of revenues over over uh like
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over expenditures and so that problem
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went away rather quickly and now we have
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this other problem
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which can also if you look at um
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projections can explode quite easily it
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can also be solved uh the real problem
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is Medicare if you're going to guarantee
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people a certain level of of of Health
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Care and not do it in dollar terms as as
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chairman Ryan proposed in his plan then
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you have got this rather open-ended
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liability and and that's the real issue
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I think which which we need to tackle
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with just a couple minutes left what
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other ideas um came out of the book or
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the conference or and what other um
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ideas from that would you like to tell
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us about um do I think you know the
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interesting one would is which we may
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get to this year is how would a a uh de
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hitting of the debt ceiling work and my
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own reading o of the papers on this is
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that we will not default I think for the
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administration to actually even go into
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technical default would cause so much in
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the way of legal problems and
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constitutional challenges that they
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won't do that and uh one of the things
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that that the book outlines is that the
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various options in terms of
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prioritizing payments so that what we
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could do we'll still have a lot of
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Revenue coming in so that what we could
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do is prioritize the debt and so um that
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that the interest on that gets repaid
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and to the extent issues are retired
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that we're able to new we go down below
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the de seing and we able to issue new
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issues to replace them and so on so we
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would keep the debt hole and then the
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question is what else would we pay well
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there are various technical ways that we
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can pay social security and Medicare and
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Medicaid so that would be uh fairly safe
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for a while at least and then I find it
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very difficult to believe that any
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government would not pay the military so
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they would probably get priority too and
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then the question would be who else
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would be prioritized uh there may be
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some other groups that they decid
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politically have to be paid but then the
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suggestion in in Professor Jackson's
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chapter is to have um first in first out
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so he would stack up all the bills as
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the revenue that was in excess of these
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prioritized ones was um came in you
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would start paying the top of the pile
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and gradually of course what would
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happen is you would lengthen the time
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period before people were paid but
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eventually everybody will be paid but it
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may take some time and of course in the
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meantime the pressure on uh Congress and
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the president will be very large to do
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something about this who would be at the
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bottom of the
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Heap hopefully
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Congressional house members in the
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Senate perfect symmetry okay and I guess
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we have we have that we have that Clause
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as part of the Republican bill that was
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passed how interesting okay so then so
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then we're safe nothing's ever going to
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happen a good good thinking thank you
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for joining us and uh for telling us
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about the book if anybody wants to
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download this book then it's available
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on the financial institution Center
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website so if you just Google Wharton
00:17:51
financial institution Center you can go
00:17:53
there and Download a pdf if anybody
00:17:57
would like to have a hard copy then
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please just write to us and we can mail
00:18:01
one out to you and the downloaded copies
00:18:03
are free the downloaded copies are free
00:18:06
and the hard copies are also free if
00:18:08
anybody would like that's a great price
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thank you thanks very much
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