Dr. Thomas J. Sargent is quite sure that President Obama knows two countries that use U.S. currency, but he doubts he could name the third country.
Sargent, the William R. Berkeley Professor of Economics and Business at New York University who was awarded the Nobel Prize in Economic Sciences by the Royal Swedish Academy of Sciences in 2011 for his “empirical research on cause and effect in the macroeconomy,” shared that the President would know Panama and Ecuador use the U.S. dollar, but he would not know that Zimbabwe does, too. He added that the United States doesn’t care that other countries use our currency.
Sargent is a fellow of the Econometric Society, the National Academy of Sciences, the American Academy of Sciences, and the American Academy of Arts and Sciences. He is the author of more than 150 published articles in journals.
He focused on deep questions during his UTC presentation, like “Should a government pay its debts?” and “In a federal system, should a central government pay debts incurred by subordinate governments? He explored “Lessons from the Fiscal History of the United States,” in a speech supported by The Scott L. Probasco Jr. Chair of Free Enterprise for the 2014 Burkett Miller Distinguished Lecture Series.
Governments decide to pay their debts because in the future, they may have to borrow again. Paying debts helps foster a good reputation among prospective creditors, Sargent explained. On the flip side, paying debt is costly—collecting taxes and paying creditors with tax money is costly.
When a federal system pays the debt of its subordinate governments, in exchange, the central government can restructure and exercise more control over subordinate governments. If the central government does not assist in paying off the debt of subordinate governments, a “moral hazard” has been created.
After the Revolutionary War allowed our country to separate from England, 13 sovereign states were formed, each with its own constitution. The central government in America was prevented from taxing, spending, and borrowing. There was enormous debt after the war and Sargent explained that Spanish dollars were being printed and issued. “We were a Banana Republic,” Sargent said.
The U.S. constitution changed that, he said, and the federal government assumed state debts by borrowing a massive amount of money to pay them off. The tradeoff came when the central government was given the right to tax and regulate trade.
“American governments do not confront problems until they become crises,” Sargent said.
Sargent also discussed the different economies in the European Union—some that consider leaving the currency union because of the imposition of financial constraints on their economy—others consider leaving because as a fiscally prudent country, they must help bail out countries with economies that are failing.
Dr. Edward J. López, commentator at the event and Professor of Economics and BB&T Distinguished Professor of Capitalism at Western Carolina University, noted that future generations do not have “a seat at the table” today to help determine a course of action for our escalating national debt.
He talked about the shift from voluntary rotation in government to what we have today, professionals serving in elected office.
“We don’t have statesmen anymore, we have politicians,” López said.
López also suggested it would help the U.S. economy to work toward a balanced budget.
