Debt Digest | Debt Growth and Decline
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts.
Is economic growth responsible for the post-WWII debt reduction? Julien Acalin and Laurence M. Ball of John Hopkins University examine the idea that the decline of the U.S. public debt-to-GDP ratio can primarily be attributed to high rates of economic growth. They find that “[w]ithout primary surpluses and interest rate distortions, the debt/GDP ratio falls only from 106% in 1946 to 74% in 1974, rather than falling to 23% as in reality. Over the three decades after World War II, the natural erosion of debt from economic growth was considerably smaller than is often suggested.”
Healthcare costs are a major driver of national debt. According to projections by the Congressional Budget Office (CBO), spending on major healthcare programs is projected to rise by 78 percent over the next decade. “Improving the U.S. healthcare system will be crucial to providing quality, affordable healthcare and to bettering our nation’s long-term economic and fiscal wellbeing,” explains the Peterson Foundation. Limiting the growth of Medicare spending to gross domestic product growth could be a start argues Michael Cannon. Read about additional healthcare reforms here and here.
Merge health and life insurance? As Robin Hanson of George Mason University explains, life insurance companies have clear incentives to make sure their beneficiaries stay healthy. Combining life and health insurance is the next logical step. A survey of 23 senior executives in the life and health insurance industries suggests that one major barrier to a life/health insurance combo is “regulatory friction.” In other words, regulation is blocking innovation, and it’s only gotten worse over time.
Nordic social policy won’t work in America. The Manhattan Institute’s Brian Riedl and John Gustavsson examine key aspects of Nordic countries’ economic systems that would be unpopular and unworkable in America. Nordic countries place a significantly higher tax burden on the middle class. A typical full-time worker making $50k (adjusted in U.S. dollars) faces an effective tax rate of 52 percent. Most Americans would balk at such extensive taxes. What about the rich then? Financing a complex welfare state solely on the backs of the wealthy isn’t possible. Even seizing every dollar of billionaire wealth would fund the federal government for only eight months. “[P]rogressives should focus on paying for the existing government programs that are already driving $100 trillion in projected budget deficits over the next three decades.”
Macro illusions. George Mason University’s Tyler Cowen lays out a variety of economic doctrines that appeared true on a temporary basis but turned out to be less impressive than initially believed upon further analysis (or wholesale wrong). He highlights one clear winner for the macro “delusion” of our time: “Enough government action on the demand side can fix macroeconomic problems and ensure full employment.”
GAO Overstates Retirement Problem. Based on the Government Accountability Office’s (GAO) new report, only 1 in 10 households in the bottom fifth of incomes have a retirement account. The American Enterprise Institute’s Andrew G. Biggs critiques the unduly grim future GAO paints for low-income, elderly Americans. Most low-income older workers aren’t earning wages. Moreover, putting earnings from welfare payments or investment income in a retirement account would actually be discouraged because they could lose so-called “means-tested” benefits—welfare conditional on meeting certain criteria (such as income and assets). Finally, the GAO report excludes the more than $17 trillion in benefits accrued under traditional pensions. Bottom line: Most Americans who need to be saving for retirement are doing so.
Deficit surge heralds higher interest rates and inflation. Bloomberg writes, “The outlook for the federal budget right now is essentially unprecedented—crisis-size deficits as far as the eye can see, even though the economy appears to be in good health. That prospect is making investors uneasy, as demonstrated by yields on benchmark 10-year Treasuries climbing above 4.3% this week, their highest levels since 2007. Other borrowing costs are rising in tandem: The average rate on a 30-year fixed mortgage has surged above 7% for the first time in more than two decades.” The graphic below shows projected and historical changes in the federal deficit as a share of total economic output (GDP).
