The Public Debt Crisis of the United States: an ADEMU lecture, with Professor Enrique G Mendoza

On 8 March, Professor Enrique G Mendoza, Presidential Professor of Economics at the University of Pennsylvania, delivered his lecture ‘The Public Debt Crisis of the United States’ at the European University Institute (EUI).

Hosted by the EUI Economics Department and the Robert Schuman Centre, the lecture formed one of a series of events staged by ADEMU, which also include workshops, conferences and seminars held across Europe.

Professor Mendoza’s lecture examined the five debt crises the United States has experienced since the birth of the republic, defined as year-on-year increases in net federal debt in the 95-percentile. The Great Recession is the second largest, and the only one in which primary deficits continue six years later and are expected to persist at least through 2026.

Persistent deficits are also sharply at odds with the surpluses that contributed to the reversal of all major debt surges in U.S. history. There is a view that high debt is not a concern and more debt is needed for fiscal stimulus and/or strong global demand for “safe assets.” But there are three strong arguments to the contrary based on finding findings from the existing literature.

First, empirical analysis shows that fiscal stimulus fails when debt is high and debt sustainability conditions display a significant break. Second, a fairly standard dynamic macroeconomic model predicts that tax adjustments may not make the debt sustainable and will have adverse effects on macro-aggregates and social welfare. Third, the strong appetite for U.S. public debt worldwide can be a slow-moving, transitory result from financial globalization in an environment in which U.S. financial markets are more developed and the expected financing needs of the U.S. government are large.

Convergence in these features, or changes in the opposite direction, could drive down the price of U.S debt and make it unsustainable.

See the slides that were presented during the lecture.