“Leeper highlights three fiscal norms. One, established in one of Hamilton’s 1790 reports, is that budget deficits should be followed by budget surpluses (i.e., the government pays off its debts). The second is that ordinary spending should be paid for with taxes while emergency spending can be paid with borrowed funds to be repaid later. The third is that austerity becomes necessary when interest payments on outstanding debt become a sufficiently large fraction of federal expenditures.
Despite their informal nature, these fiscal norms have historically constrained U.S. fiscal policy in a meaningful way, even without a gold standard or other formal devices often found in history. They’re also important because they determine long-term expectations for fiscal policy. These expectations, in turn, influence bond prices, inflation, and the real economy, keeping things relatively stable.
So far, adherence to these informal fiscal norms has paid off. U.S. Treasuries are a cornerstone of the global financial system, serving functions akin to money worldwide. However, the norms are weakening.”