Tuesday, December 17, 2019
As a historical matter, the U.S. has twice successfully restructured its finances: “once in the 1790’s under Alexander Hamilton’s debt repayment scheme and again at the start of the New Deal when it abrogated the gold clauses in its debt instruments.” (p.6) Could the U.S. restructure its debt again? Would it be constitutional? Might the U.S. constitutional framework even facilitate this? These are important, timely issues explored in a fascinating new essay, Restructuring United States Government Debt: Private Rights, Public Values, and the Constitution (here), by Edmund W. Kitch & Julia D. Mahoney.
ABSTRACT. Mainstream policy discussions take as given that the United States will and must pay its debts in full and on time, and that “restructuring” is legally and politically impossible. In our judgment, this assumption is unwarranted. Far from being unthinkable, under some circumstances restructuring the debt of the United States would merit serious consideration, and these circumstances may well be fast approaching. We diverge from the standard wisdom for two reasons. First, we doubt that payments on treasury obligations will necessarily take precedence over what the electorate sees as more pressing needs, including national security and price stability. In particular, we suspect voters may balk if told that holders of United States debt securities have ironclad priority over Social Security claimants and others with well settled expectations of government benefits. Second, we think it wrong to equate restructuring with catastrophe. While we do not dismiss out of hand the dangers of not paying creditors in full and on time, we believe that—perhaps counterintuitively—the American constitutional framework could prove an asset rather than a liability when it comes to handling severe financial stress. Our conclusion on this point follows from the insight that the very dispersals of power that can fuel gridlock can also serve to enable the United States to offer credible assurances that its new financial structure will be stable going forward.