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Provides background accounts of political development in the USA from the American War of Independence to the Philadelphia Convention, and establish that, by 1787, Congress was marked by military weakness and financial insolvency. Here, an account is given of the efforts of Congress to implement the fiscal clauses of the US Constitution, which shows that the national government created by the Articles of Confederation experienced serious difficulties in its ability to raise money, and in the end failed to raise sufficient money to meet its expenses. The focus of the chapter is on the means by which Congress raised money from the outbreak of the War of Independence up to the Philadelphia Convention, and also on how, one by one, these means were lost, so that by 1787 the insolvency of the national government was total. The first two parts of the chapter describe the attempts of Congress to raise money through fiat (printed) money, loans, and taxes, with the author contending that the Federalists accepted existing restrictions to taxation and formed a tax system that would be able to generate sufficient income for the national government without putting undue pressure on the American people. The last section of the chapter looks at the problem of the public debts run up by Congress and the states during the War of Independence, and at the reasons for the federal assumption of state debts – whether they were democratic or economic – and the reasons given by the Federalists as to why Congress had to resume payment of the public domestic and foreign debt.

The first of three chapters on the implications of electoral politics and the design of political institutions for welfare state adjustment. Swank first provides an overview of two key domestic and international pressures on developed welfare states: domestic fiscal stress and international capital mobility. He then outlines the theoretical argument that democratic institutions fundamentally determine government responses to domestic and international structural change, focusing on formal and informal institutions and drawing on and fusing insights from ‘power resources’ theory, the new institutionalism, and new cultural arguments about the determinants of social policy in advanced capitalist democracies. The next two sections utilize new data on social welfare effort, national political institutions, and internationalization to provide an econometric assessment of the social policy impacts of domestic fiscal stress and capital mobility during the period 1965 to 1995, looking first at the direct impacts of rises in public sector debt and in international capital mobility on social welfare provision, and second at the welfare state effects of fiscal stress and global capital flows across nationally and temporally divergent democratic institutional contexts; the initial focus is on total social welfare effort and then the analysis is shifted to changes in cash income maintenance and social services. The conclusion assesses the implications of the arguments and findings for the future course of social policy in developed democracies, and potentially bolsters the evidence for the central assertion that domestic institutions systematically determine the direction of welfare state restructuring.

Shows how the Federalists responded to the Antifederalist objections to a stronger national government in the “fiscal‐military” sphere, thereby creating an understanding of the kind of state that was proper to American conditions. In the debate over ratification of the US Constitution there was little discussion about the exact way in which the Federalists intended to organize the revenue administration, but nevertheless, it is the argument of this chapter that with the important exception of the assumption of the state debts, the general outline of Hamiltonian public finance was in place in 1787, and widely shared by the supporters of the Constitution. Thus, the idea that the least oppressive tax was also the most productive, the claim that adoption of the Constitution would mean a change in the structure of taxation from direct to indirect taxes and a reliance on the impost (customs duties), and the ideal of the federal government as a “waterfront state” hardly noticed by the people, were all among the most important points made in Federalist rhetoric on the fiscal powers of the Constitution. In the ratifying debate, the Federalists presented a solution to the equation of how to create a sufficiently powerful government without making unacceptable demands on society: the federal government had the right to mobilize the full resources of society at will, but in peacetime it would keep a very low profile while assuming the payment of the union's debts and the cost of defense using money raised by taxation. This federal assumption of expenses that had earlier been carried by the states, and the mode of raising the taxes to pay for it ensured that overall taxation would not increase, as the Antifederalists claimed, but would become less burdensome to the majority of the people.

This chapter begins with a review of historical examples that shaped the thinking of economists about the importance for effective monetary policy of understanding the link between inflation and public debt. The threat to monetary policy from high levels of government indebtedness stems from the temptation to use monetary policy to erode or eliminate public debt. The chapter examines this area of thinking with particular reference to the episode of very high inflation in Russia in the 1990s, since that episode clearly demonstrates the links between fiscal and financial conditions and monetary factors in bringing about high inflation. It concludes by considering the question of whether the Sargent and Wallace analysis is well validated by the experience of mature economies.

This chapter applies the political agency model to public finance issues. Section 4.2 lays out the basic agency problem and the main assumptions. Section 4.3 identifies the three basic kinds of agency model. The first has purely hidden type, the second only hidden action, and the third both features. Section 4.4 draws out some implications of the model for the data. Section 4.5 uses the model to discuss a variety of means for restraining government: explicit restraints on taxation, tax competition, increased transparency, and yardstick competition. The model is then extended to include public debt. If public debt is observable, then the model and its insights remain unchanged. However, difficulties in observing public debt levels do create a rather different spin on the model. This is discussed in Section 4.6. Section 4.7 applies the ideas to whether an NGO is a more efficient provider of public spending. Section 4.8 looks at what happens if it is fiscal competence that is not observed and Section 4.9 provides conclusions.

This chapter examines public credit and political representation in three European city-states: Cologne, Genoa, and Siena. The goal is to identify the mechanisms at work that determined whether a state had access to credit and at what cost. The chapter considers how public debt was an issue of strong and often violent social conflict within city-states, along with the importance of political control by merchants. The experience of Cologne, Genoa, and Siena shows that there was nothing more effective in ensuring access to credit than being ruled by a merchant oligarchy. Evidence also suggests that when merchant control was challenged, this had negative consequences for access to credit.

This chapter considers the possible application of academic research to address the dire predicament of balance sheet recession and chronic stagnation characterizing large parts of the world economy since 2007. Contemporary policymakers have striven to stimulate demand despite huge debt overhangs and without undermining confidence in the future value of money or sustainability of the public finances and debt. However, as the analysis in the book has shown, excess public debt is fraught with future inflation risk. It highlights two characteristics underlying the best thinking about inflation: adaptation and remembering. It then addresses the question of how inflation targeting might be usefully applied to the post-2007 problems of recession and stagnation against a background of excessive indebtedness.

This chapter discusses the basic analytical framework of “second-generation” models of currency crises and their extensions to deal with new characteristics of international financial crises such as the connections between financial fragility and currency instability, government's reputation and credibility, asymmetric information and herding behavior, contagion across markets and countries, financial intermediation and liquidity crises, credit constraints and balance-sheet effects, strategic interaction among agents and equilibrium selection. The most important implication to emerge from this approach is that the run on central bank foreign reserves does not require policy inconsistencies and an adverse trend in the fundamentals before the crisis. The attack itself may induce an optimizing regime-switching choice that makes the crisis self-validating. Thus, the exact timing of a speculative attack turns to be indeterminate and arduous to forecast.

Reviews the Philippine public finance experience over two decades from 1980 to 2000. It notes that in some years, the government's dominant fiscal problems were caused, at least initially, by external economic shocks, with domestic adjustments to them – including political upheavals – resulting in a unique trajectory of development experience. Its review of public finance history covers operational deficits and fiscal stabilization, public expenditure, revenue mobilization, and “hidden” deficits from quasi‐fiscal activities. The study first asserts that the country's fiscal strategy has been influenced for the most part by the need to rein in domestic expenditure to match the level of available fiscal resources. Next, it argues that the growth in public expenditure has largely been constrained by the scarcity of fiscal resources. Finally, it shows that the strengthening tax administration remains a sticking point, as nontax revenues are only temporary measures to bridge the expenditure gap.

This chapter examines whether the difference in the activities of representative assemblies in city-states and territorial states had implications for the evolution of public credit. It first develops a basic game theoretic model that demonstrates how both political representation and public credit might emerge as an equilibrium outcome dependent on an underlying cost for representatives of monitoring public finances. It then uses the model to conduct empirical tests in order to identify what factors were correlated with the initial creation of a long-term public debt. Three hypotheses are tested: that access to credit depended on commercial and economic development; that access to credit depended on the presence of representative institutions; and that access to credit depended on the differing underlying conditions in city-states and territorial states. The results show that greater commercial and economic development favored access to public credit.

This chapter explains mass popular involvement in public debt. It provides an index for the complex ways in which the public credit system was beginning to be used by different kinds of people. These ordinary people saw the public funds as secure and reliable enough to be part of their own planning for their future. This small but significant trend of popular investment sat among a series of patterns of continuity and discontinuity in public investment in the sénéchausée in the late eighteenth century. The chapter also reveals the changing nature of debt and money in the eighteenth-century Languedoc, which remained relatively stable. Credit and debt were everyday features of European life. An older historiography saw debt as the road to impoverishment for peasants and other nonelites. In those accounts urban bourgeois offered credit to economically marginal peasants with a view to their eventual default and the expropriation of their land.

This chapter considers the nature of the discourse about public debt, from the two perspectives of political legitimacy and of financial markets. It analyses and assesses the power of numeric financial indicators and faith in the objectivity provided by probabilistic reasoning about default. The chapter examines the risks associated with probabilistic reasoning and the use of numeric indicators, including the complex links between public finances and national balance sheets, the distinction between gross and net debt, and the limitations of official balance sheets. It offers a critical assessment of such indicators as public debt ‘overhang’ as a measure of optimal debt, fiscal deficit/GDP, public debt/GDP, structural fiscal balance, public expenditure, gross financing requirement, bond yields, and debt maturity profile. The chapter also examines CDS market spreads and externally-held debt. It concludes by addressing the problem of ‘telling truth to power’: which truth; whose truth?

The empirical findings of this study rest on two sorts of evidence: first, a set of detailed case studies of the five major UK recessions since 1920; and second, a statistical analysis that seeks to explain these and other fluctuations in terms of indicators of four types of exogenous demand shock. This chapter summarizes this evidence and its underlying rationale; it needs to be read with Ch. 10, and like that aims to be self‐contained; the picture presented does not have to be accepted or rejected as a bloc. The explicanda of the study are taken to be not absolute falls in output during a recession, but deviations of output from previous trend rates of constant‐employment growth; Sect. 11.1 summarizes how such trends are estimated, and this provides a rough estimate of the output loss resulting from major recessions. Sect. 11.2 summarizes the statistical analysis of the causation of major recessions and other fluctuations, and recapitulates the methods used to estimate the scale of shocks and their effect on output; Sect. 11.3 provides a summary of the case studies of the five major UK recessions, and the Great Depression in the USA; and Sect. 11.4 summarizes possible reasons for the long period from World War II to 1973 that saw fairly steady growth without major recessions. Section 11.5 concludes with notes on, first, the effect of the three major recessions since 1973 on the stock of public debt; and, second, whether major recessions are predictable.

This chapter provides a critique of formal debt sustainability analysis, including the Maastricht Treaty fiscal rules, stressing the problems of one-size-fits-all approaches. It examines patterns in public debt accumulation, including the roles of rent-seeking behaviour and economic, financial, and geo-strategic crises. The chapter looks at macroeconomic drivers of debt sustainability, notably GDP growth, as well as at structural drivers, in particular sector balance and dependency. The chapter also investigates the roles of cultural, ideological, and institutional drivers of debt sustainability. They include the ideological character of governments, cabinet duration and type of government, electoral cycle, domestic fiscal institutions, fiscal rules, veto players, economic culture, public opinion, state traditions, and governing competence of elites. The analysis of these drivers leads to the conclusion that formal debt sustainability analysis fails to address key determinants of public debt, notably governing competence.

The author presents a number of arguments for the establishment of independent institutions to improve fiscal sustainability and avert debt crises. The main argument is based on recent empirical literature suggesting that high levels of public debt appear to reduce economic growth. Yet, in spite of the costs, governments have an observed tendency to accumulate excessive debt. Based on theories drawn from behavioural economics and political economy, the author discusses a set of functions that can be performed by independent fiscal institutions—especially by making the public sector more transparent and offering cogent analysis on the macroeconomic and fiscal effects of various policies—to help governments eliminate deficit bias and preserve public debt sustainability.

This chapter examines public sector spending in Japan in the broader context of those of other G7 countries, and assesses the effectiveness of the Ministry of Finance's policies to reconstruct the finances of central government compared with the performance of other central and federal governments. It is worth nothing that, despite all the economic and fiscal vicissitudes of the 1990s, Japan's economy remained the second largest in the world, and cumulative growth in real terms compared very favourably with that of the other G7 countries from 1989 to 1996; only Germany out-performed it. However, the slowdown in the Japanese economy after 1991 allowed first the United States and then all but Italy to catch up, and by 1998 to overtake it. General government expenditure, deficits, and debts in G7 countries are discussed, along with Japan's fiscal performance relative to that of G7 countries and the failure of fiscal reconstruction in G7 countries in the 1980s.

This chapter focuses on the marginal cost of public funds (MCF) from public sector borrowing. The chapter is organized as follows. Section 8.1 begins with a brief overview of the postwar literature on the burden of the public debt. Section 8.2 uses the Diamond (1965) overlapping generations model to analyze the wealth effect of the public debt and to derive a measure of the marginal cost of funds from public sector borrowing. Section 8.3 analyzes the MCF from public sector debt when interest payments on the debt are financed by a distortionary tax on total output. Section 8.4 uses this framework to derive a rule for the optimal financing of lumpy expenditure projects—use debt financing to equalize over time the marginal cost of public funds through taxes. Finally, Section 8.5 uses a simple endogenous growth model, which incorporates the Ricardian equivalence effect and the distortionary tax effect, to derive a measure of the marginal cost of funds from public sector borrowing and to explore the connection between the level of public debt and the rate of economic growth. This model is used to compute the MCF from public sector borrowing in the Canada and the United States and to consider the effect of higher public debt on the optimal level of public expenditures.

The United States federal government began to experience increasingly severe symptoms of fiscal crisis as the 1980s progressed. Unable to achieve fiscal balance through normal means, the Gramm-Rudman-Hollings Act provided for arbitrary and automatic budget cuts as a last resort. This chapter examines some of the ways that government, in reacting to fiscal crisis and the new mountains of debt, has influenced or accelerated the pattern of structural change in the economy. Three aspects of fiscal crisis have had particularly significant impacts on the economy: the growth of the public debt since the 1970s, the revision of the income tax in 1986, and the reform of the social security system in 1983. The chapter contains case studies of these three events that chronicle their effect on the economy and their impact on the United States' current and future living standards.