I have just finished reading a fascinating symposium of papers on America’s sovereign debt crisis published in the most recent Econ Journal Watch (volume 9, number 1: January 2012). It is introduced by Tyler Cowen, and includes short papers by Jeffrey Rogers Hummel, Garett Jones, Arnold Kling, Joseph Minarik, and Peter Wallinson.
It is fascinating, if sobering. I am among those who believe the debt matters—indeed, that it may soon become the only issue that matters, because it will cripple our ability to handle any other issue. If you care about national defense, health care, education, investment in “green” energy, or anything else, beware: the ever-larger portion of our wealth that will need to go to paying interest on our debt, and of course the entitlements of Social Security, Medicare, and Medicaid, will mean that there is ever-less wealth available for anything else.
(By contrast, some, like Paul Krugman, argue that the debt is not as big an issue as I believe it to be, but I have a harder and harder time believing that position has credibility. Scott Winship has a point when he argues in National Affairs that we often exaggerate the economic “bogeymen” we face, but the national debt is one bogeyman he rather conspicuously leaves out of his discussion.)
So, back to the EJW symposium. I highly recommend reading it, sharing, as I do, the editors’ “hope that it’s not too late for them to make a difference” (22). I will not attempt reproduce their arguments and data, but I will offer a handful of short reflections that might whet your appetite for the papers themselves.
1. One thing the contributors seem to agree on is that there is only a handful of possible ways we might address the impending fiscal crisis. As Jones puts it, “There are four possible tools: Higher revenues, lower spending, inflation, and default” (41). But it strikes me that there is at least one other possible way we might address the potential crisis, a possibility that none of the contributors mentions: imperialism. By that I mean that we might start invading other lands, territories, and countries, and simply appropriating their assets. There is certainly ample historical precedent. I do not think we should discount the potential attraction of large-scale theft and confiscation as a method of financing our debts and the lifestyles to which we have become accustomed.
2. There is some disagreement about how likely default is. Jones, for example, argues it is relatively unlikely; Kling argues it is relatively more likely. I would be interested to hear how Jones and Kling might respond to one another, but, beyond that, another striking feature of the discussion is the astonishing degree to which they seem to agree that no one really knows. We are in uncharted territory here. The prospect of the largest wealth-producing nation in the entire history of humankind, whose economy has huge and deep ramifications in the rest of the world’s economies, facing the prospect of being unable to service the largest amount of debt that any nation has ever produced in the history of humankind—well, who knows? Kling writes, “much of what I will be discussing is outside the competence of . . . well, anybody, making the exercise highly speculative” (51; ellipsis in the original). Perhaps this fact contributes to the reason Tyler Cowen writes, in his introduction to the symposium, “Our times are now truly scary” (21). Indeed.
3. Finally, I wish there had been more discussion of possible solutions. The contributors seem to agree both that we are facing a desperate situation and that, nevertheless, we can avoid catastrophe if we act quickly. They offer various reasons for being pessimistic that solutions will actually be forthcoming (see particularly Minarek’s and Wallinson’s contributions), but perhaps recommendations about positive steps that might actually help, along with some discussion of how these steps might be feasible, would be helpful. Diagnosing the true extent of the sclerosis is, of course, the first step; but recommended courses of treatment are the next step.
PILEUS 
Default is the outcome. But default will not take the form that people expect. The US will not repudiate its debt outright.
The simplest default is to debase the currency. i.e. replace todays debts with tomorrows worthless dollars. This has in fact been the strategy of US policy makers in the 20th century and still is today.
A trickier default is for the fed to raise interest rates slightly and crush bond prices. Since interest is already in the zero range, a very slight uptick in yields could cut prices in half or three quarters. A mere doubling of yields from say, one percent to two percent would reduce the value of the outstanding debt by fifty percent. The treasury could then buy back the discounted treasuries with proceeds from gold sales which would become very pricey in that event.
An even trickier and more dishonest default would be to create an alternative class of treasuries which only American investors can buy. The yield on these would be perceived as safer and the other variety not as safe leading to an uptick in their yield and a collapse in their prices. The treasury could buy the second class treasuries back at a discount with the proceeds from the first class treasuries or with gold sales.
You can mix and match. The possibilities are endless.
If you truly are curious how Kling and Jones respond to one another, you can check out this video: http://www.youtube.com/watch?v=pSZpk_XseB0
Good to read posts by Professor Otteson. You’ve been missed on Pileus, even if we get a bit of you with Judge Napolitano.
Thank you, Professor Kling, for providing that link. And Roger, yes, I know. I’ll try to do better!