On December 2, Thomas Sargent, 2011 Nobel Laureate in Economics, delivered the inaugural Richard Goode Lecture at the IMF. Convened by the IMF’s Fiscal Affairs Department (FAD), the Richard Goode Lecture, named after FAD’s first director, who served from 1965–1981, is designed to bring together annually academia and policymakers to discuss important topics of fiscal policy.
Sargent: I believe that the economic doctrines that are in policymakers’ heads are very important.
As noted by David Lipton, First Deputy Managing Director of the IMF, the forum “will offer an opportunity to reflect on the evolution of fiscal policy and think about fiscal challenges that lie ahead.”
In his address, Sargent, the William R. Berkley Professor of Economics and Business at New York University, the Donald L. Lucas Professor in Economics, Emeritus, at Stanford University, and Senior Fellow at the Hoover Institution, discussed the role debt limits have played throughout the economic and financial history of the United States. IMF Survey sat with Sargent to discuss his work on the debt limits.
IMF Survey : Professor Sargent, could you please explain the role debt limits have played in the economic history of the U.S.?
Sargent: Based on the evidence that my friend George Hall and I have assembled, the answer is different before 1917 and after 1939.
Before 1917, there was not an aggregate debt limit. Instead, interestingly, there was a debt limit bond by bond. Congress designed every bond and put a limit on the amount that could be issued. And those limits were taken seriously. They seem to have provided information about what upper bound on what future debt would be, except during wars.
After 1939, an aggregate debt limit was created for the first time. It restricts the par value of the total amount of debt. If you adjust for inflation, in real value, the government debt limit was constant until a little after 1980. It actually went down after 1945. In real terms, the value of debt relative to GDP went down even more. After 1983, nominal debt limits rose and more than inflation except in the Clinton administration. So, as I said, the answer seems to differ substantially after 1939 and before 1917.
IMF Survey : And what was the reason for moving from this bond-by-bond approach to the...