January 23, 2012

U.S. Sovereign Debt Crisis: Tipping-Point Scenarios and Crash Dynamics

  • Tyler Cowen

    Holbert L. Harris Chair of Economics at George Mason University
  • Arnold Kling

    Senior Affiliated Scholar
  • Garett Jones

    Senior Research Fellow
  • Peter Wallison

  • Jeffrey Rogers Hummel

    Associate Professor of Economics, San Jose State University
  • Joseph Minarik


EJW and the Mercatus Center at George Mason University present this symposium on what a sovereign debt crisis in the United States would look like and what might bring it about.

With the economy facing a sluggish recovery and debt and deficits soaring, it's no longer far-fetched to say that a sovereign debt crisis could occur in the United States. Econ Journal Watch and the Mercatus Center at George Mason University have undertaken this symposium to produce and disseminate a better understanding of what a sovereign debt crisis in the United States would look like and what might bring it about.

This symposium was edited by Daniel Klein and Tyler Cowen, and contributors include Garett Jones, Arnold Kling, Jeffrey Rogers Hummel, Joseph Minarik, and Peter Wallison. The authors were invited to speculate on possible tipping points, associated triggers, and on crash dynamics (what happens in the crisis). The authors were encouraged to imagine possible futures, not merely as financial analysts but as political economists.

  • This brief introduction outlines the EJW-Mercatus symposium on sovereign debt tipping-points and crash dynamics. It explains the motivation for the symposium, chiefly the need for the imaginative formulation and analysis of possible scenarios. The symposium itself contains contributions by Jeffrey Rogers Hummel, Garett Jones, Arnold Kling, Joseph Minarik, and Peter Wallison.

    Tyler Cowen
    January 23, 2012
  • The U.S. government has made a set of promises that it cannot keep. The current level of outstanding debt is a relatively small part of the problem. Long-term debt is a small part of outstanding debt. Therefore, inflation is unlikely to solve the problem. The promises that are most important to change are Social Security and Medicare. It is easy to assemble a blocking coalition against changes. At some point, investors may see default as a realistic possibility. This can quickly produce a crisis, because it would lead to higher interest rates and would force the government to make tough decisions. The resolution of a crisis would likely take the form of a negotiated default, rather than a unilateral default or a one-party political cave-in.

    Arnold Kling
    January 23, 2012
  • A U.S. default is unlikely: As a demographically young nation, the United States will watch other nations face demographic crises years before it faces the full brunt of the same. The spectacle will furnish salient examples of the short-run shame and suffering caused by default. Further, the soft default of inflation demands the element of surprise, always difficult for politicians to engineer.

    Garett Jones
    January 23, 2012
  • This paper provides an interpretation of how U.S. politics dulls the awareness of policymakers as to the danger of the current fiscal-policy deadlock in Washington, and how it could set in motion vicious cycles that could not be reversed. It hypothetically extrapolates that behavior to show how it could take the country beyond a tipping point into a financial abyss. The purpose is to show the urgency of honorable compromise to head off irreversible drastic consequences.

    January 23, 2012
  • A U.S. sovereign debt crisis is a remote possibility, but in our increasingly fragile system it could be triggered by a number of financial catastrophes—from a chaotic break-up of the eurozone to something as adventitious as a serious earthquake in California. The most likely source of a U.S. sovereign debt crisis, however, is a failure of the U.S. political system to address the growth of the major entitlement programs—Social Security, Medicare and Medicaid. That possibility is discussed in this paper.

    Peter Wallison
    January 23, 2012
  • The U.S. government faces a looming fiscal crisis and a default on Treasury securities appears inevitable. The short-run consequences for the economy will be painful, but the long-run consequences, both economic and political, could be beneficial. The most important long-run political benefit would be the imposition of fiscal discipline. The long-run economic benefit would be the alleviation of the future tax liabilities required to service the national debt, irrespective of whether those liabilities are correctly anticipated or not. This article examines the state government defaults of the 1840s, which provides one case study where the long-run consequences were indeed salutary.

    Jeffrey Rogers Hummel
    January 23, 2012