Download A History of U.S. Debt Limits George J. Hall Thomas J. Sargent

A History of U.S. Debt Limits
George J. Hall
Thomas J. Sargent
Brandeis University
New York University
Next Steps for the Fiscal Theory of the Price Level
April 1, 2016
The Government Budget Constraint
X
Bt−1
t
= Et
(mt,t+j σt+j
)
pt
∞
j=0
where
◮
Bt−1
pt
is the value of the debt
◮ mt,t+j is a stochastic discount factor
t
◮ σt+j
is the primary government surplus
QUESTION: Under a debt ceiling, what is the object that being limited?
Government Accounting and Macroeconomic Theory
Two conceptual differences
1. Treasury measures the debt at the par or face value; in our
models, Bt−1 is the market value of the debt
2. Treasury records its interest payments by summing up coupon
payments and the discount on T-bills; in our models, the
return to creditors is the holding period of the debt
The Government Budget Constraint
◮ The one-period gross nominal return on a j-period zero coupon bond
t
qt+j−1
t−1
qt+j−1
!
j
= (1 + rt−1,t
)
where
t
qt+j
=
1
(1 + ρjt )j
t
◮ bt+j
∼ par or principal
t
◮ ct+j
∼ coupon
t
t
t
◮ σt+j
= Tt+j
− Gt+j
∼ primary surplus
Then the government budget constraint is
value of government debt = P.V. of future surpluses
∞
X
j=0
t
t
t
qt+j
(ct+j
+ bt+j
)=
∞
X
j=0
t
t
qt+j
σt+j
Two measures of government debt
U.S. government accounts:
nt
X
t
bt+j
(1)
t
t
t
qt+j
(bt+j
+ ct+j
)
(2)
j=1
Macroeconomics:
nt
X
j=1
The debt limit is an upper bound on (1), not on (2).
◮ Promises labeled “principal” are recorded as debt and count against the
limit
◮ Promises labeled “coupons” or “interest” do not.
Promised Principal and Coupon Payments
150
promised principal payments
promised principal + coupon payments
125
percent of GDP
100
75
50
25
0
1800
1820
1840
1860
1880
1900
1920
1940
1960
1980
2000
Debt to GDP Ratio, Market and Par Value, 1776-2014
140
market value
par value
120
World War II →
percent of GDP
100
G.W.Bush/Obama →
80
60
40
← Reagan
← 1790
Civil War →
20
World War I →
← War of 1812
← Revolutionary War
0
1775
1800
1825
1850
1875
1900
1925
1950
1975
2000
2025
Ratio of Market Value to Par Value of Debt
120
110
100
100 × market value/par value
90
80
70
60
50
40
30
20
1775
1800
1825
1850
1875
1900
1925
1950
1975
2000
2025
Two measures of “interest payments”
US government accounts:
before 1929:
ctt−1
after 1929:
1
t−1
ctt−1 + rt−1,t
b1,t
Macroeconomics:
X
nt−1
j=1
j
t−1
t−1
t−1
)
+ ct+j−1
(bt+j−1
rt−1,t
qt+j−1
Nominal Holding Period Return and Official Net Interest
Payments as Percent of the Debt, Annual by Fiscal Year
40
35
30
25
percent
20
15
10
5
0
−5
−10
1780
1800
1820
1840
1860
1880
1900
1920
1940
1960
1980
2000
2020
Limit or Limits?
◮
Congress has imposed an aggregate limit only since 1939
◮
Before WWI, Congress imposed limits on each bond
◮
◮
◮
For most securities, Congress limited quantities to be issued
◮
Limits were not on quantities outstanding
◮
After a security was redeemed, it could not be re-issued
Restricted the projects on which proceeds could be spent
We construct implied limits on aggregate limit by keeping track of
unexpired limits on each individual security
Total Debt and the Limit: Nominal, 1776-1835
200
180
160
Lo
120
a
an
si
ui
Pu
100
se
ha
rc
→
millions of nominal dollars
140
80
← War of 1812
← Assumption of
State Debts
60
40
← Accumulating Unpaid Interest
← Consolidation of Revolutionary Debt
20
0
1775
1785
1795
1805
1815
1825
1835
Total Debt and the Limit: Nominal, 1840-1916
4000
80
60
3500
40
20
0
1840
1845
1850
1855
1860
m
Ca
old
fG
l→
so
na
se
→
a
ar
W
ha
rc
← Civil War
1500
na
n
Pa
ica
er
2000
Pu
millions of dollars
→
2500
m
−A
ish
an
Sp
g
cin
an
fin
Re
3000
→
1000
Pa
of
ica
ex
nic
M
→
→
ar
57
W
18
n
500
0
1840
1850
1860
1870
1880
1890
1900
1910
Second Liberty Bond Act of 1917
Granted the Secretary of the Treasury authority
to borrow from time to time, on the credit of the United
States for the purposes of this Act, and to meet expenditures
authorized for the national security and defense
and other public purposes authorized by law not to exceed
$7,538,945,460
This broad language broke the tight connection between borrowing and
spending for specific purposes that had characterized Congress’s policy
since 1776.
Total Debt and the Limit: Nominal, 1917-1939
55
May 26, 1938 →
50
45
February 4, 1935 →
billions of nominal dollars
40
← Victory Loan Act
35
← March 3, 1931
30
← Fourth Liberty Loan Act
25
20
← Third Liberty Loan Act
15
10
← Second Liberty Loan Act
5
← First Liberty Loan Act
0
1918
1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
Total Debt and the Limit: Nominal, 1939-2014
20
18
16
trillions of nominal dollars
14
12
10
8
6
4
2
0
1940
1950
1960
1970
1980
1990
2000
2010