Did the U.S. Really Grow Out of Its World War II Debt? / Julien Acalin, Laurence M. Ball.

Format:

Book

Author/Creator:

Acalin, Julien.

Contributor:

National Bureau of Economic Research.

Ball, Laurence M.

Series:

Working Paper Series (National Bureau of Economic Research) no. w31577.

NBER working paper series no. w31577

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

The fall in the U.S. public debt/GDP ratio from 106% in 1946 to 23% in 1974 is often attributed to high rates of economic growth. This paper examines the roles of three other factors: primary budget surpluses, surprise inflation, and pegged interest rates before the Fed-Treasury Accord of 1951. Our central result is a simulation of the path that the debt/GDP ratio would have followed with primary budget balance and without the distortions in real interest rates caused by surprise inflation and the pre-Accord peg. In this counterfactual, debt/GDP declines only to 74% in 1974, not 23% as in actual history. Moreover, the ratio starts rising again in 1980 and in 2022 it is 84%. These findings imply that, over the last 76 years, only a small amount of debt reduction has been achieved through growth rates that exceed undistorted interest rates.

Notes:

Print version record

August 2023.