Julien Acalin and Laurence M. Ball write,
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.
Pointer from Tyler Cowen.
Oy. Their conclusion is correct, but nobody needed to use an opaque simulation model to get there. Thirteen years ago, I explained it using a simple table.
One point that stands out is that the years of dramatic reductions in the ratio of debt to GDP were years in which the United States ran primary surpluses. The only other chapter in history where the debt to GDP was reduced was the Inflation Shock. Even then, it was not reduced by much, and this chapter was followed by the Bond Market Vigilantes chapter, in which investors punished the government for its prior inflationary transgressions.
In short, there is no precedent for reducing the ratio of debt to GDP by simply growing our way out of it. Instead, policy choices must be made in order to restore a primary surplus.
Some of my essays have stood the test of time, but only I remember them. That is one example.