We decompose the movements of debt/GDP into the effects of primary surpluses and deficits; distortions of real interest rates from surprise inflation and from pegged nominal rates; and the difference between the undistorted real interest rate and the growth rate of output (r⋆ − g). For the period up to 1974, we find that the fall in the debt-GDP ratio is explained mostly by primary surpluse and interest-rate distortions. Absent those factors, with the path of the ratio determined entirely by r⋆ − g, the ratio of 106% in 1946 would have fallen only to 74% in 1974 rather than the actual trough of 23%. As of the end of fiscal year 2022, the actual debt/GDP ratio stands at 102%, close to its peak of 106% in 1946. Over the last 76 years, however, g > r⋆ has contributed only modestly to debt reduction. History should not make us optimistic that the U.S. will grow out of its debt.
- Date Posted:
- August 24, 2023
In the figure above, the gap in patent applications and earnings between inventors who go to incumbents and entrants are indistinguishable before the job change, and then begin to diverge after they start working in different types of firms. Two equally productive inventors, one working for a young/small firm and another working for an incumbent/large firm, will be told to work on problems that are different. The inventor in the large firm might be asked to work on innovations that are less likely to threaten the firm’s existing product lines, and therefore less likely to lead to patents (let alone high-impact patents). Akcigit and Goldschlag (2023) suggest that’s because large firms are paying their inventors better but asking them to work on projects less likely to lead to new patents and products.