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Econ 122 paper

Econ 122 paper - Ellen Degnan Econ 122 The U.S Debt Crisis...

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Ellen Degnan Econ 122 12/7/2011 The U.S. Debt Crisis: A comparative perspective In the aftermath of WWII, United States public debt as a percentage of GDP surged to record levels, reaching 109 percent in 1947, and declined rapidly thereafter, sinking to 25 percent by the 1970s. (Committee on the Fiscal Future of the United States (“Committee”), 2010) In a New York Times column, Christina Romer, former Chair of the Council of Economic Advisers in the Obama Administration, drew hope in our ability to manage current the current debt overhang, 62.9 percent of GDP 1 , from the post-WWII recovery. She noted that historical highs “had no obvious adverse consequences for growth or our ability to borrow” 2 and urged the super committee to craft a deficit reduction strategy consonant with “a World War II approach to our problems.” Recent failure of the super committee aside, I would argue that Romer’s WWII comparison is misguided. The direction of the US economy, nature of the debt and exchange rate regime from 1945-1980s differ substantially from current conditions. This paper will explore why the post-WWII experience of debt liquidation has limited usefulness as a model for consequences of and responses to the current U.S. debt dilemma. I. The demographic transition and economic growth The U.S. population is aging. As they retire and become eligible for Social Security and Medicare, baby boomers that once spurred post-WWII economic growth are threatening the viability of U.S. entitlement programs and the sustainability of the federal budget. The shrinking workforce relative to total U.S. population and concomitant fall in government tax revenues must somehow support a towering Medicare edifice teetering under the weight of rising per capita healthcare costs. Thus, the demographic transition impedes economic growth in the short and long run. The Great Recession has
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