The Global Debt Crisis

The Global Debt Crisis: Haunting U.S. and European Federalism

Paul E. Peterson
Daniel J. Nadler
Copyright Date: 2014
Pages: 241
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  • Book Info
    The Global Debt Crisis
    Book Description:

    Debt crises have placed strains not only on the European Union's nascent federal system but also on the federal system in the United States. Old confrontations over fiscal responsibility are being renewed, often in a more virulent form, in places as far flung as Detroit, Michigan, and Valencia, Spain, to say nothing of Greece and Cyprus. Increasing the complexity of the issue has been public sector collective bargaining, now a component of most federal systems.

    The attendant political controversies have become the debate of a generation. Paul Peterson and Daniel Nadler have assembled experts from both sides of the Atlantic to break down the structural flaws in federal systems of government that have led to economic and political turmoil. Proposed solutions offer ways to preserve and restore vibrant federal systems that meet the needs of communities struggling for survival in an increasingly unified global economy.

    Contributors: Andrew G. Biggs (American Enterprise Institute); C�sar Colino (National Distance Education University, Madrid); Elo�sa del Pino (Instituto de Pol�ticas y Bienes P�blicos, Madrid); Henrik Enderlein (Hertie School of Governance, Berlin); Cory Koedel (University of Missouri); Carlos Xabel Lastra-Anad�n (Harvard University); Daniel Nadler (Harvard University); Shawn Ni (University of Missouri); Amy Nugent (Government of Ontario, Canada); James Pearce (Mowat Centre, University of Toronto, Canada); Paul E. Peterson (Harvard University); Michael Podgursky (University of Missouri); Jason Richwine (Washington, D.C.); Jonathan Rodden (Stanford Uni versity); Daniel Shoag (Harvard University); Richard Simeon (University of Toronto, Canada); Camillo von M�ller (University of St. Gallen, Switzerland, and Leuphana University, Germany); Daniel Ziblatt (Harvard University)

    eISBN: 978-0-8157-2417-9
    Subjects: Political Science

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-x)
  4. Part I Federalism and the Pension Crisis in the United States

    • 1 Federalism’s Emerging Fiscal Crisis
      (pp. 3-14)

      It is well understood that defaults, bankruptcies, and fluctuations in interest rates are shaped by business cycles, banking management, and financial engineering. However, credit risk among the lower tiers of government within a federal system also has political determinants and political consequences. Without downplaying the importance of economic conditions and technical considerations, this volume focuses on the political realities that affect the capacity of subnational governments to survive global financial crises. The material explored here serves as a reminder that the founding social science was calledpoliticaleconomy and that visionaries from Adam Smith and David Ricardo to John Keynes,...

    • 2 Competitive Federalism under Pressure
      (pp. 15-39)

      It is, of course, no longer politically correct to characterize anything American as exceptional. In days gone by, however, descendants of the Pilgrim faithful spoke easily of their country as a “city upon a hill,” a “New Jerusalem”³ whose hallowed light shone as a beacon for all nations to see. It was not difficult for nineteenth-century Americans to imagine that the nation was destined to spread from “sea to shining sea.” Even in the mid-twentieth century, school children learned to sing of a “sweet land of liberty” made beautiful by its “purple mountain majesties,” “spacious skies,” and “amber waves of...

    • 3 Can Market Discipline Survive in the U.S. Federation?
      (pp. 40-61)

      A rare point of agreement among progressive and conservative ideologues in the United States is that the U.S. system of federalism is dysfunctional. Credit-constrained states are responsible for implementing ambitious federal programs that are funded through inflexible grants that create bad incentives. State taxes are highly sensitive to the business cycle, and federal transfers are not designed to fill the gaps left during recessions. Thus state fiscal policy exacerbates the business cycle, and recessions lead to ad hoc scrambles for additional federal resources. States save very little during booms, and they are tempted to underfund pension programs during slowdowns, leading...

    • 4 Putting a Price on Teacher Pensions
      (pp. 62-79)

      Public employee pension funds across the nation suffer from unfunded liabilities that are large by any measure, but a growing number of economists, government agencies, and bond raters point out that even so, official figures significantly understate actual liabilities. The movement for “fair market valuation” of pension liabilities argues that financial disclosures must account for the fact that benefit payments are essentially guaranteed and must be paid even if pension investments fail to produce assumed rates of return. When pensions are valued under a fair market approach, state and local pension obligations increase significantly, moving unfunded liabilities from under $1...

    • 5 Structural Flaws in the Design of Public Pension Plans
      (pp. 80-93)

      The cost of retiree benefits in the public sector is under increased scrutiny in states and municipalities across the United States. In a 2010 report, the Pew Center on the States estimates that the unfunded liabilities of state and local governments for retirement benefits total roughly $1 trillion. Novy-Marx and Rauh argue that that is an optimistic assessment because the actuarial reports from the pension funds underestimate the true cost of pension liabilities, primarily by discounting liabilities at the typically assumed 8 percent rate of return.¹ If a more appropriate discount rate is used, the projected unfunded liabilities increase dramatically....

    • 6 Past and Present High-Risk Investments by States and Localities
      (pp. 94-110)

      The years between 1824 and 1841 were a period of enormous public investment by state governments.¹ The Erie Canal, completed in 1825, proved substantially more profitable than projected. New York initially set aside revenues from existing sources to meet the canal’s financing costs, but to the state’s delight, the canal proved to be self-financing. Spurred by that success, Indiana, Illinois, Maryland, Michigan, New York, Pennsylvania, and Ohio financed new canal projects over the next 15 years. Those projects were generally debt-financed and unaccompanied by revenue-raising measures. The estimated proceeds from the projects and the subsequent growth that the projects were...

  5. Part II The Federalism Crisis Worldwide

    • 7 Between Centralization and Federalism in the European Union
      (pp. 113-133)

      In the European Union (EU) today, what are the prospects for the type of decentralized federalism described by Peterson and Nadler in the introduction to this volume? Can a robust multi-tiered political system be created and sustained in which the center and lower-tiered units have constitutionally protected separate spheres of influence and taxing and spending autonomy—and in which subunits have representation in a second chamber, as is standard in federal political systems?¹ In short, can a new supranational federalism save Europe in this age of financial crisis?

      In the current context of economic turmoil, proposals for such reforms—previously...

    • 8 German Federalism at the Crossroads
      (pp. 134-158)

      Germany’s fiscal situation in the aftermath of the recent financial crisis and the subsequent “Great Recession” is a paradox. While the debt of the federal government (henceforth theBund) has remained relatively stable in comparison with that of many other industrialized countries and the national outlook is clearly positive, the subnational units in Germany, theLänder,face a much more difficult situation. Debt and deficit levels increased rapidly during the crisis and its immediate aftermath. While the majority of theLänderhave reduced their structural deficits since then,¹ as of 2012 budgetary crises were pending for theLänderof Bremen,...

    • 9 Spanish Federalism in Crisis
      (pp. 159-178)

      Spain has been hit very hard by the current fiscal crisis. Although Spanish federalism has faced a number of challenges before—for example, in accommodating territorial and ethnic differences and promoting economic efficiency—today it is having to deal with a combination of fiscal and political problems that were previously unknown: economic stagnation and fiscal crisis, increasing economic divergence among regions, and the strengthening of traditional centrifugal forces in some autonomous communities (ACs). Discussion of the demise or radical reform of the system has now entered the public sphere and the government agenda.

      While some of the literature on Spain...

    • 10 Regional Identity and Fiscal Constraints in Spanish Federalism
      (pp. 179-200)

      “A majority of Catalans want to build a new country.” With 54 percent of the popular vote going to parties that favor independence in the November 2012 elections, that assertion by Artur Mas i Gavarró, the reelected president of Catalonia, is undoubtedly true. Mas added, “The great purpose of a new country is guaranteeing the maximum civic, spiritual, and material well-being of its citizens.”¹ Why has the Spanish state not been able to deliver a sense of such wellbeing to Catalans and other regional groups in the 36 years since the passage in 1978 of its democratic constitution—at least...

    • 11 The Resilience of Canadian Federalism
      (pp. 201-222)

      This volume explores the idea that federal or decentralized systems of government may pose special difficulties for countries experiencing a fiscal crisis of the sort that has disrupted North America and Europe in recent years. On the one hand, autonomous subnational units—states and provinces—may use their powers to tax and spend in ways that are fiscally undisciplined and even irresponsible, exacerbating the crisis at the national and the international level. On the other hand, in responding to a crisis central governments may employ controls, regulations, and reductions in intergovernmental transfers that seriously limit the ability of subnational governments...

  6. Contributors
    (pp. 223-224)
  7. Index
    (pp. 225-241)
  8. Back Matter
    (pp. 242-242)