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Public Debt in the USA: How Much, How Bad and Who Pays?

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  • Buiter, Willem H

Abstract

In terms of the ratio of its public debt and public deficit to GDP the United States lies in the middle of the pack of industrial countries. The period since 1980 is the only peacetime period outside the Great Depression to see a sustained increase in the debt-GDP ratio. The budgetary retrenchment planned by the Clinton administration is likely to prove insufficient to achieve a sustainable path, although the remaining permanent primary (non-interest) gap is small: between 0.1% and 1.0% of GDP. The maximal amount of seigniorage revenue that can be extracted at a constant rate of inflation is not far from the recent historical value of less that 0.5% of GDP. Subtracting net public sector investment from the conventional budget deficit is likely to overstate the government revenue producing potential of public sector investment. Public debt matters when markets are incomplete and/or lump-sum taxes are restricted. Future interest payments associated with the public debt are not equivalent to currently expected future transfer payments. Even ignoring the distortionary character of most real-world taxes and transfers, and holding constant the government's exhaustive spending programme, the `generational accounts' do not therefore constitute sufficient statistic for estimating the effect on aggregate consumption of the government's tax-transfer programme. Solving the immediate budgetary problems would still leave the much more serious macroeconomic problems of an undersized US Federal government sector and an inadequate US national saving rate.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 791.

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Date of creation: Jul 1993
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Handle: RePEc:cpr:ceprdp:791

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Keywords: Crowding Out; Inflation Tax; Public Debt; Public Sector Investment; Solvency;

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References

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  1. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  2. Laurence J. Kotlikoff & Laurence J. Kotlikoff & Willi Leibfritz, 1999. "From Deficit Delusion to the Fiscal Balance Rule: Looking for an Economically Meaningful Way to Assess Fiscal Policy," NBER Chapters, in: Generational Accounting around the World, pages 9-30 National Bureau of Economic Research, Inc.
  3. Buiter, W.H., 1988. "Some Thoughts On The Role Of Fiscal Policy In Stabilisation And Structural Adjustment In Developing Countries," Papers 312, London School of Economics - Centre for Labour Economics.
  4. B. Douglas Bernheim, 1987. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 263-316 National Bureau of Economic Research, Inc.
  5. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  6. Buiter, W.H. & Corsetti, G. & Roubini, N., 1992. "Excessive Deficits: Sense and Nonsence in the Treaty of Maastricht," Papers 674, Yale - Economic Growth Center.
  7. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
  8. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-74, June.
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  10. Anand, Ritu & van Wijnbergen, Sweder, 1989. "Inflation and the Financing of Government Expenditure: An Introductory Analysis with an Application to Turkey," World Bank Economic Review, World Bank Group, vol. 3(1), pages 17-38, January.
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Cited by:
  1. Uhlig, H.F.H.V.S., 1997. "Capital Income Taxation and the Sustainability of Permanent Primary Deficits," Discussion Paper 1997-11, Tilburg University, Center for Economic Research.
  2. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1994. "Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 73-94, Winter.
  3. Budina, Nina & Van Wijnbergen, Sweder, 2000. "Fiscal deficits, monetary reform, and inflation stabilization in Romania," Policy Research Working Paper Series 2298, The World Bank.

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