Published: October 24, 2013
Professor Jonathan Parker discusses the threat of U.S. government default at an Oct. 22 event
When MIT Sloan professor Deborah Lucas scheduled a panel discussion titled “U.S. Fiscal Crisis: Causes and Consequences,” the government was shut down, no compromise seemed imminent, and what the state of affairs would be at discussion time was, to say the least, uncertain.
Luckily, a budget was passed the week before the Oct. 22 gathering at Wong Auditorium, the government reopened, and the panel was able to present insightful commentary about the impacts of the impasse. Lucas, a former chief economist at the Congressional Budget Office, noted that the federal budget is both a financial and philosophical document, and the budget process is one where differences are raised and compromises reached.
“When the budget process breaks down, the ship of state is effectively put on autopilot,” Lucas said. “The functionality of government deteriorates, and the whole ship risks crashing into the shoals and breaking into pieces.”
Panelists agreed that, in the short term at least, the nation has avoided the shoals, but large questions remain about the impact of continued volatility, including the global impact of impassioned rhetoric about the United States not paying its debts.
MIT Sloan finance professor Jonathan Parker delved into the big issues at stake, including daunting projections of national debt due in part to longer life spans, social security and Medicaid commitments, and the skyrocketing cost of health care—all of which create friction between ideologically opposed factions who seek to address a long-term debt crisis by instituting policy changes today. He argued that the tangible costs of the recent stalemate were relatively small, but that the potential costs of continued discord could be quite large in terms of consumer confidence and decreased faith in U.S. Treasury bills. Even the possibility of default and talk of the government not honoring its debts can have a global impact, Parker said.
“The real threat to the government is the possibility that the U.S. loses its debt privilege, which comes from the certainty and the liquidity of the U.S. Treasury bill, and that is a major threat not just to the U.S. economy but to the global economy,” Parker said.
MIT Sloan professor Simon Johnson said he takes the debt seriously, but urged some caution in addressing long-term forecasts, as they are done without knowledge of future events. To illustrate his point, Johnson noted that similar projections in 1940 would have been as dire, but that those projections did not and could not anticipate events over the next 70 years, such as World War II, the baby boom, new industries, inflation, the war in Vietnam, and the expansion of medical care.
“This is how much happens in 70 years,” Johnson said. “It’s a huge emotional fight. Should we do the small adjustment now, versus the slightly bigger adjustment pushed back in time? I take the debt seriously, and I worry about our position in the world economy and how we can hurt ourselves here, and [about] the behavior of our politicians.”
“I wouldn’t rush too much into precipitate fiscal adjustment right now,” he said. “I would worry more about the way in which politicians behave, the way in which you shout and scream and say ‘We’re going to shut this down and we’re going to default on this’ and so on. That has real consequences. It shifts away from the dollar in a much more damaging way than any conscious decision these people are making.”
The panel also included Harvard Law School professor Howell Jackson, who discussed the legal options afforded the president and Congress when managing debt, and MIT Economics professor James Poterba, who gave an overview of the causes and consequences of the crisis.
The event was hosted by the MIT Center for Finance and Policy, formed this year to serve as a hub of research and financial analysis of global public policy issues and to bring together top thinkers in government, the private sector, and academia to address policy changes.