Conversations with Visiting Scholars

Pages10-11
IMF Research Bulletin
10
The editors of the Research Bulletin are pleased to anno unce
the launch of a new, occasional feature: C onversations with
Visiting Sc holars. In this inaugural interview, Prakash
Loungani talks to Thoma s Sargent, winner of the 2011 Nobel
Prize in Economic Scien ces, about problems ailing Europe
and the United States—and what each could l earn from the
other’s history. Sargent has made se veral visits over the past
year to the IMF’s Research Depar tment.
Loungani: Europe’s scal cha llenges are foremost on minds
here. is is something you have worked on in the pa st—the
interplay of monetary and sc al policy.
Sargent: Yes. I think Europe can lea rn from U.S history.
In the 1780s, the U.S. consisted of 13 sovereign states and a
weak center. e states could levy ta xes, the federal govern-
ment could not. Government debt, federal plus state, was 4 0
percent of GDP, very high for a poor countr y. It was a crisis.
Creditors worried that they cou ld not be repaid.
Loungani: How was it resolved? ere wasn’t an IMF…
Sargent: Well, in the end the outcome was that the U.S.’s
founding fathers rewrote the C onstitution so that it gave bet-
ter protection to creditors. e Constitut ion reected a grand
bargain: the centr al government bailed out the states, and
the states gave up the power to levy ta ris. Knowing that the
federal government had the power to raise ta x revenues gave
creditors reassurance t hat their debts would be repaid.
A Fiscal Union
Loungani: You’re saying the present U.S. Constitution was
adopted to give better protection to creditors?
Sargent: Yeah, makes me sound like a Mar xist, doesn’t
it? But it’s all there in our history. Alexander Ha milton was
basically creati ng a scal union—bailing out the st ates in
return for a transfer of ta x-levying aut hority to the center.
And the point of a scal u nion was to change the expecta-
tions of creditors about the chances of being repa id now
and in the futu re. Note, by the way, that the U.S. had a scal
union before it had a monetary union.
Loungani: So what are the les sons for Europe today?
Sargent: Don’t some aspects of the EU today remind you
of the historical ex perience I’ve described? e member
states have the power to tax, not the center. Many EU-wide
scal actions requ ire unanimous consent by member states.
But reforms that could lead to a scal u nion are being pro-
posed, as they were in t he U.S. in the 1780s. I thi nk at the
very least the historic al episode—not just the one I described
but several others that I could—s hows that many congura-
tions of scal and monetar y arrangements are possible, and
some of these work to provide assurance to cred itors that
there will be enoug h tax revenues to service the debt. I oer
this as hope, but I must say that I am not a n expert on day-
to-day European economics or on their p olitics.
Curing U.S. Unemployment
Loungani: You are an expert on the U.S., and pa rticularly
on unemployment, which you’ve also worked on over the
years. What would you do about the hig h U.S. unemploy-
ment rate?
Sargent: I would deal with t he fundamental causes of
nancial cri sis—the housing market particula rly, where
there are debts that haven’t been settled a nd people can’t
yet see how they will be s ettled. And then to the extent that
uncertaint y about the course of government regulations is
holding things back, I’ d tackle that.
Loungani: at could ta ke time. How would you ease the
pain of the unemployed in the meant ime?
Sargent: Some of the European countries , Germany and
the U.K., have the right idea. ey seem to do bet ter on
what’s calle d welfare-to-work progra ms—ways of helping
the unemployed get into new jobs. We could have done more
of that here in the U.S.
Loungani: We extended unemployment benets many
times. Were you in favor of that?
Sargent: I worry that can be a t rap—we could end up with
persistently high unemployment.
Conversations with Visiting Scholars
Tom Sargent on European and U.S. Economic Woes—and History
“Yeah, makes me sound like a Marxist,
doesn’t it?”

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