Speakers divided over viability of American constitutional solutions, despite Swiss success

NEW ORLEANS, La. – On Thursday a Swiss delegation joined with the Murphy Institute of Tulane University for a revealing panel discussion on “Facing Public Debt.” Commemorating Albert Gallatin (1761-1849), a Swiss-American politician, panelists considered the viability of constitutional methods for controlling government debt, taxes, and spending.

Claudio Leoncavallo, director of the Swiss Consulate in Atlanta, opened the discussion and introduced the approximately 40 attendees to Gallatin’s life. An immigrant to the United States in his twenties, Gallatin became a congressman and the longest serving secretary of the United States Treasury.

Gallatin’s experience with American finances segued into the challenge at hand – the almost universal budget shortfalls and growing debts of the federal and state governments.

Werner Weber, deputy head of financial and economic affairs with the Swiss Embassy in Washington, D.C., explained “The Swiss Experience,” overcoming consistent government overspending. In Switzerland, tax rates are written into the constitution and difficult to change. Spending, however, was not restrained, and they sought to address that flaw with a “debt-brake” solution.

After rising debt in the 1990s, in 2001 the Swiss people overwhelmingly voted in favour of a financial management amendment to the constitution – Article 126. Werner explained the amendment’s mechanics and that it had been more successful than anticipated, perhaps too restraining. Even with the latest recession, Swiss national debt, at less than 25 percent of the economy, is now lower than it was in the late 1990s and early 2000s. Compare that to reported United States federal debt of 94 percent of the economy, not accounting for unfunded liabilities.

Swiss Federal Debt: Total (Blue) and Relative to GDP (Red)

Source: Swiss Federal Department of Finance, FDF

The purpose of the amendment is to keep long-term spending in balance with taxation. While allowing flexibility for short-term booms and busts, it still has explicit restraints on deficits, according to recent trends in economic growth. (Click here for the exact formula.) Such restraints force a rapid reaction, Werner said, but the approach still has flaws, since it does not distinguish the prudence of areas for cuts. Nor does it account for an aging population, which may necessitate higher taxes rather than spending restraints to maintain fiscal balance.

Debt Brake Principle

Source: Swiss Federal Department of Finance, FDF

Steven Sheffrin, executive director of the Murphy Institute and a Tulane professor of economics, countered that the challenges associated with constitutional amendments in the American context were “insurmountable.” He noted that fiscal restraints at the state level are notoriously flexible and frequently disobeyed, and he questioned whether constituents should want federal officials to obey a strictly balanced budget. In his view 99 percent of economists would deem such a rigid constraint as undesirable in a downturn. He did not dismiss all budget constraints, but his preference is for statutory approval and modest goals.

James Alm, chair and professor of the economics department, expanded on Sheffrin’s research and highlighted the desperation of the scenario. He joked that there has never been a prosecution on account of a balanced budget law, but he noted public disapproval for disobedience as a powerful reprimand. He also speculated that many of the unfunded liability promises will have to be broken.

“The future obligations for a lot of these commitments require a level of taxation that people simply will not accept.” Although not willing to speak for Louisiana, he referred to European nations as examples American states are likely to follow, specifically with regard to higher retirement ages.

Alm was optimistic, though, that there are creative ways to alleviate unfunded liabilities. He cited research by Maria Fitzpatrick, a postdoctoral fellow of Stanford University, that indicates governments can buy back promised pension benefits – offering cash in the hand rather than incremental payments – for just a fraction of their expected present value.

The Murphy Institute, sponsor of the event, is an endowed academic program that “exists to help Tulane faculty and students understand economic, moral, and political problems… to help us understand how these problems have come to be so closely interconnected.” Many of their events are open to the public and can be found here.

Fergus Hodgson is the capitol bureau reporter with the Pelican Institute for Public Policy and editor of The Pelican Post. He can be contacted at fhodgson@pelicanpolicy.org, and one can follow him on twitter.