Required Reading to Understand Debt Ceiling

For Those Who Escaped College Without Taking Economics 101, Professors Offer Reading Recommendations Ahead of Debt Ceiling Debate

Posted May 4, 2011 at 6:41pm

The debate over raising the nation’s debt ceiling from its current limit of $14.3 trillion has intensified as members of Congress prepare for the upcoming vote.

Democrats have insisted on raising the ceiling so the government can continue spending and avoid the possibility of defaulting on its debt. Republicans have said they will support the increase if reforms on future spending are included in the legislation.

Outside of the partisan wrangling, Sara Ellison and James Poterba, professors of economics at the Massachusetts Institute of Technology, and Mark Kuperberg, professor of economics at Swarthmore College, each recommended a book that could be useful to Capitol Hill readers seeking to gain a big-picture perspective on the debt ceiling debate.

This Time Is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth Rogoff
“I don’t know of any books that deal directly with raising the debt ceiling,” said Kuperberg. But “This Time is Different” comes fairly close, with its analysis of eight centuries of government defaults. Drawing from the experiences of 66 countries, Reinhart and Rogoff present a complete review of financial crises and assert that the United States’ economic tribulations are not unique. Excessive debt and limited efforts to reduce government spending could ultimately lead to increased inflation or stagflation, no matter where in the world the crises occurs.

“In principle, if Congress does not extend the debt ceiling when the national debt reaches that number, then the government would have to instantly run a balanced budget, including the interest that it pays on the debt, from that moment on,” Kuperberg said. “In the entire eight centuries, I doubt there was a case of a government that could have perfectly well managed to pay its debts but chose not to.” 

The Age of Diminished Expectations by Paul Krugman
“‘The Age of Diminished Expectations’ is an outdated book in the sense that Paul Krugman is addressing the pressing economic policy issues of 20 years ago, not those of today. However, many of the explanations of mechanisms and relationships in the economy are just as valid now as they were then.

The chapter on the budget deficit, for instance, explains the basic effects that most economists believe will result from the U.S. government running large budget deficits,” Ellison said. She added that Krugman includes a brief mention of the possibility of the U.S. government defaulting on its debt, but, ironically, “it is dismissed as unthinkable.” Krugman warns that citizens live in an “age of diminished expectations, an era in which our economy has not delivered very much but in which there is a little political demand to do it better.”

Macroeconomics by N. Gregory Mankiw
Poterba recommends skimming through university textbooks to find detailed and straightforward economic analysis on debt. “A good place to look would be the chapter in Greg Mankiw’s ‘Macroeconomics’ book on Government Debt.” Mankiw, a professor of economics at Harvard University, explains the causes and consequences of excessive government debt, touching on examples in history to inform the description.