The Future of Debt, Interest Rates, and Taxes

Question: How does your research inform our understanding of the crisis?


Glenn Hubbard: Well in a perverse sense, for people like me, the crisis had a nice effect because, frankly, this is what I do research on, on models of so-called financial accelerators, what happens when you get into financial crises, what happens to investment, what happens to consumer spending. A lot of people like me have done work in this area have generally relied on historical episodes because that’s where we’ve seen crises, so now we have unfortunately an episode in the modern period. And what we know in those periods is that when you get into a financial crisis, the inside net worth of borrowers becomes very, very important. And this is what we saw in the collapse of consumer spending is consumer net worth decline and in the business sector, as the cost of external financing became very high as credit spreads became very high.


We also though have a sense of what to do in an environment like this. Very aggressive monetary policy is part of the answer, we did that with the Federal Reserve, tax cuts can be part of the answer. So, I think policy has been very aggressive today, much more aggressive than it was in Japan in the 1990’s or in the U.S. in the 1930’s, taking a crisis that was very bad, but making it not as bad as it could have been.


Question: How do you expect the crisis to impact long-term debt levels, and what does this imply for interest rates?


Glenn Hubbard: I’m very worried about this. What we have essentially is a set of deficit problems in the country. The very short run, I’m not sure that we should worry so much about the extra deficit that was used to help attack the financial crisis. I think it’s very important to be very aggressive, to give the Federal Reserve any administration credit there, I would have done perhaps a different set of things in the administration, but they’re basic thrust I’m okay with.


Going toward the medium term though, we’ve seen a built up both from the Bush Administration and now from the Obama Administration in significant levels of spending that will have to be paid for with future taxes and that deficit is a real problem and then the third deficit, the one that scares me the most, is the long-term entitlement deficit because of our promises for Social Security and Medicare. If you just let the clock run one generation, 25 years, we would be spending about 10 percentage points of U.S. GDP on just Social Security and Medicare than we do today and given that the whole federal tax share today is 19% of GDP, that would mean 60% tax increases for everybody, that’s obviously not going to happen, and so we’re going to have to come to grips with this. At some point, bond markets will worry about this and it will be a problem for interest rates because bond market participants will realize the U.S. is going to have a very difficult problem with these debt levels. If I were to say one thing to President Obama right now it would be focus, focus, focus, on getting that long-term deficit down.


Question: What level of taxation would be necessary to finance our current expenditures?


Glenn Hubbard: Well, we have to figure out what our expenditures are going to be. The first order of fiscal decision is how much you spend, then you have a decision of do you use taxes or borrowing, where borrowing is just future taxes. I think for the U.S., our levels of spending promises for the future, again, particularly the entitlement programs are so big; we really can’t raise taxes enough to pay for that. I don’t mean we can’t by arithmetic, but the amounts are so big. You know, 60%, 70%, that’s just not going to happen. Even economic growth. So, I think we really have to talk a lot about how to scale back some of these programs going forward and do so in a way that keeps the least well off among us fine, but ask for some sacrifices frankly from those of us who are better off.


Recorded on December 17, 2009

The Columbia Business School dean to President Obama: "Focus on getting that long-term deficit down."

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Kosovo land swap could end conflict - or restart war

Best case: redrawing borders leads to peace, prosperity and EU membership. But there's also a worst case

Image: SRF
Strange Maps
  • The Yugoslav Wars started in 1991, but never really ended
  • Kosovo and Serbia are still enemies, and they're getting worse
  • A proposed land swap could create peace - or reignite the conflict

The death of Old Yugoslavia

Image: public domain

United Yugoslavia on a CIA map from 1990.

Wars are harder to finish than to start. Take for instance the Yugoslav Wars, which raged through most of the 1990s.

The first shot was fired at 2.30 pm on June 27th, 1991, when an officer in the Yugoslav People's Army took aim at Slovenian separatists. When the YPA retreated on July 7th, Slovenia was the first of Yugoslavia's republics to have won its independence.

After the wars

Image: Ijanderson977, CC BY-SA 3.0 / Wikimedia Commons

Map of former Yugoslavia in 2008, when Kosovo declared its independence. The geopolitical situation remains the same today.

The Ten-Day War cost less than 100 casualties. The other wars – in Croatia, Bosnia and Kosovo (1) – lasted much longer and were a lot bloodier. By early 1999, when NATO had forced Serbia to concede defeat in Kosovo, close to 140,000 people had been killed and four million civilians displaced.

So when was the last shot fired? Perhaps it never was: it's debatable whether the Yugoslav Wars are actually over. That's because Kosovo is a special case. Although inhabited by an overwhelming ethnic-Albanian majority, Kosovo is of extreme historical and symbolic significance for Serbians. More importantly, from a legalistic point of view: Kosovo was never a separate republic within Yugoslavia but rather a (nominally) autonomous province within Serbia.

Kosovo divides the world

Image: public domain

In red: states that have recognised the independence of Kosovo (most EU member states – with the notable exceptions of Spain, Greece, Romania and Slovakia; and the U.S., Japan, Turkey and Egypt, among many others). In blue: states that continue to recognise Serbia's sovereignty over Kosovo (most notably Russia and China, but also other major countries such as India, Brazil, Mexico, South Africa and Iran).

The government of Serbia has made its peace and established diplomatic relations with all other former Yugoslav countries, but not with Kosovo. In Serbian eyes, Kosovo's declaration of independence in 2008 was a unilateral and therefore legally invalid change of state borders. Belgrade officially still considers Kosovo a 'renegade province', and it has a lot of international support for that position (2). Not just from its historical protector Russia, but also from other states that face separatist movements (e.g. Spain and India).

Despite their current conflict, Kosovo and Serbia have the same long-term objective: membership of the European Union. Ironically, that wish could lead to Yugoslav reunification some years down the road – within the EU. Slovenia and Croatia have already joined, and all other ex-Yugoslav states would like to follow their example. Macedonia, Montenegro and Serbia have already submitted an official application. The EU considers Bosnia and Kosovo 'potential candidates'.

Kosovo is the main stumbling block on Serbia's road to EU membership. Even after the end of hostilities, skirmishes continued between the ethnically Albanian majority and the ethnically Serbian minority within Kosovo, and vice versa in Serbian territories directly adjacent. Tensions are dormant at best. A renewed outbreak of armed conflict is not unthinkable.

Land for peace?

Image: BBC

Mitrovica isn't the only area majority-Serb area in Kosovo, but the others are enclaved and fear being abandoned in a land swap.

In fact, relations between Kosovo and Serbia have deteriorated spectacularly in the past few months. At the end of November, Kosovo was refused membership of Interpol, mainly on the insistence of Serbia. In retaliation, Kosovo imposed a 100% tariff on all imports from Serbia. After which Serbia's prime minister Ana Brnabic refused to exclude her country's "option" to intervene militarily in Kosovo. Upon which Kosovo's government decided to start setting up its own army – despite its prohibition to do so as one of the conditions of its continued NATO-protected independence.

The protracted death of Yugoslavia will be over only when this simmering conflict is finally resolved. The best way to do that, politicians on both sides have suggested, is for the borders reflect the ethnic makeup of the frontier between Kosovo and Serbia.

The biggest and most obvious pieces of the puzzle are the Serbian-majority district of Mitrovica in northern Kosovo, and the Albanian-majority Presevo Valley, in southwestern Serbia. That land swap was suggested previous summer by no less than Hashim Thaci and Aleksandar Vucic, presidents of Kosovo and Serbia respectively. Best-case scenario: that would eliminate the main obstacle to mutual recognition, joint EU membership and future prosperity.

If others can do it...

Image: Ruland Kolen

Belgium and the Netherlands recently adjusted out their common border to conform to the straightened Meuse River.

Sceptics - and more than a few locals - warn that there also is a worst-case scenario: the swap could rekindle animosities and restart the war. A deal along those lines would almost certainly exclude six Serbian-majority municipalities enclaved deep within Kosovo. While Serbian Mitrovica, which borders Serbia proper, is home to some 40,000 inhabitants, those enclaves represent a further 80,000 ethnic Serbs – who fear being totally abandoned in a land swap, and eventually forced out of their homes.

Western powers, which sponsored Kosovo's independence, are divided over the plan. U.S. officials back the idea, as do some within the EU. But the Germans are against – they are concerned about the plan's potential to fire up regional tensions rather than eliminate them.

Borders are the Holy Grail of modern nationhood. Countries consider their borders inviolate and unchanging. Nevertheless, land swaps are not unheard of. Quite recently, Belgium and the Netherlands exchanged territories so their joint border would again match up with the straightened course of the River Meuse (3). But those bits of land were tiny and uninhabited. And as the past has amply shown, borders pack a lot more baggage in the Balkans.

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