Did the U.S. Really Grow Out of Its World War II Debt?

Did the U.S. Really Grow Out of Its World War II Debt?
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Volume/Issue: Volume 2024 Issue 005
Publication date: January 2024
ISBN: 9798400262999
$20.00
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Topics covered in this book

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Banks and Banking , Exports and Imports , Inflation , Economics- Macroeconomics , Public Finance , Economics / General , U , S , Public Debt , Financial Repression , Surprise Inflation , r-g , GDP ratio , World War II debt , GDP path , inflation expectation , Inflation , Real interest rates , Fiscal stance , Interest payments , Global

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.