When States Go Broke collects insights and analyses from leading academics and
practitioners who discuss the ongoing fiscal crisis among the American states. No
one disagrees with the idea that the states face enormous political and fiscal challenges.
There is, however, little consensus on how to fix the perennial problems
associated with these challenges. This volume fills an important gap in the dialogue
by offering an academic analysis of the many issues broached by these debates.
For the applied economist, the confident and apparently successful application of Keynesian
principles to economic policy which occurred in the United States in the 1960s was an
event of incomparable significance and satisfaction. These principles led to a set of simple,
quantitative relationships between fiscal policy and economic activity generally, the basic
logic of which could be (and was) explained to the general public and which could be applied
to yield improvements in economic performance benefitting everyone.
In the surnmero f 1997, whent he Federal ReserveB anko f Bostons elected the topic for its fortysecond
annual economicc onference, manyp undits werea sking: "Is the business cycle dead, or
at least permanently dampened?"B y the time the Bank’s conference convenedi n June 1998,
the same pundits queried: "What caused the massive recessions in Asia?" and "Can the United
States remain ’an oasis of prosperity,’ as Fed Chairman Alan Greenspan termed it, while
economiesw orldwidea re under siege from financial crises?" Howq uickly things change!
BeyondS hocks:W hatC ausesB usiness Cycles ? t...
The potential impact of debt on inflation depends on the response of monetary policy. High
government debt could well constrain the ability of the central banks to set the policy rate to
control inflation. This is the “fiscal dominance” view. Heavily debted governments force the
central bank to accept inflation in order to reduce the real value of their debt. Historically,
inflation has helped governments to reduce their public debt burdens.
We next turn to comparisons between the US and other countries in the Second Great
Contraction. The simplest of cross-country comparisons involves dividing the post-2007 crisis
experience into two batches, those countries that experienced systemic banking crises and those
that had milder borderline problems in their financial sector (which does not preclude them from
having other serious “varieties” of crises, notably fiscal in this case.)
This applies the same
criteria as Reinhart and Rogoff (2008).