Mass Preferences over Sovereign Borrowing

• In Event: Politics of Sovereign Borrowing

Abstract

After years of relatively strong fiscal health, governments around the world are facing fiscal crisis, including looming debt defaults in many countries that previously appeared stable. There are also ongoing debates in the United States and elsewhere about the extent to which governments should rely on borrowing to fund budget shortfalls, and how (or whether) citizens understand the phenomenon of sovereign borrowing. While there is a growing academic literature on the politics of sovereign debt, almost all of this work is at the macro level. There is little research on how individual citizens understand debt, or how they form preferences over government borrowing, relative to other potential sources of government revenues. Given the importance of debt in most countries’ political economy, this is a serious oversight.

This paper relies on an original nationally-representative survey to provide evidence on American citizens’ understanding of, and preferences over, government borrowing. We first provide descriptive evidence that Americans have a weak understanding of government borrowing. We find that a majority of respondents believe that US debt is too high, but also that the respondents significantly overestimate the fraction of the federal budget spent on debt servicing. In addition, American respondents significantly overestimate the proportion of US debt that is owed to foreign investors, particularly to Chinese lenders. Given the recent rise of China as a major source of international lending, along with frequent politicization of US debts owed to China, this is an understandable misperception, but one with likely consequences for debt feasibility.

We then use survey experiments to gain a deeper understanding of the factors that affect individual-level support for debt. Importantly, we document (using a conjoint experiment) that respondents are more supportive of debt when it is owed to domestic actors, and are most opposed to debt owned by Chinese investors, suggesting that geopolitical tensions that have been highlighted in recent research in the trade and investment domains also appear prominent in the realm of sovereign finance. When asked how to afford borrowing, we also highlight broad based support for greater corporate taxation, but significant disfavoring of mass taxation (such as through a sales tax or income tax). Finally, contrary to standard economic theory, we find some evidence that citizens are more likely to favor borrowing when the economy is doing well. Together, these results suggest that, while Americans have an imperfect understanding of government borrowing, they also have defined preferences over when sovereign debt is more or less favored, with important implications for the political feasibility of pending fiscal reform.

Authors

• Cameron Ballard-Rosa, University of North Carolina, Chapel Hill

• Lucy E. S. Martin, University of North Carolina, Chapel Hill