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

Julien Acalin and Laurence Ball

No 31577, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E31 E43 E65 H60 H63 (search for similar items in EconPapers)
Date: 2023-08
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Working Paper: Did the U.S. Really Grow Out of Its World War II Debt? (2024)
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