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Marriott Marquis, Grand Ballroom 3
American Economic Association
Is United States Deficit Policy Playing with Fire?
Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)
- Chair: Laurence Kotlikoff, Boston University
A Skeptic’s Guide to Modern Monetary Theory
How, Why and When Deficits and Debt Are Dangerous
Simulating the Blanchard Conjecture in a Multi-Period Life-Cycle Model
AbstractIn recent writings, Olivier Blanchard and Lawrence Summers have suggested that additional deficit-financed U.S. federal spending would come at no cost to any future generation and benefits to some, with welfare measured in terms of expected remaining or entire lifetime utility. This paper studies this question in a ten-period overlapping generations model in which agents face macroeconomic uncertainty about their future earnings and demand government bonds to limit their risk. It shows that the safe rate on government debt can, on average, be far less than the economy’s growth rate without its implying that ongoing redistribution from the young to the old is Pareto improving. Indeed, in a 10-period, OLG, CGE model, whose average safe rate averages negative 2 percent on an annual basis, welfare losses to future generations resulting from the introduction of pay-go Social Security, financed with a 15 percent payroll tax, are enormous – roughly 20 percent measured as a compensating variation relative to no policy.
Leveraging Posterity's Prosperity?
AbstractWe critically review two studies – one by Blanchard (B) and one by Rachel and Summers (RS). By the standard fiscal-gap measure of fiscal solvency, the U.S. government is in dire, long-term fiscal shape. This is thanks to running, for seven decades straight, an ever-expanding, take-as-you-go Ponzi scheme. Yet B and RS entertain expanding the scheme. B’s rationale is achieving a Pareto improvement. RS seek to forestall secular stagnation. Their arguments largely rely on the U.S. growth rate exceeding the supposed marginal safe borrowing rate – the rate on short U.S. bonds. But almost all households face far higher marginal rates, namely the rates they can earn by pre-paying their high-interest mortgages, car, student, and other loans. We also question certain B and RS modeling assumptions that presage key results and caution that one can easily construct very low, safe-rate models, which, nonetheless, do not admit beneficial Ponzi schemes.
University of California-Berkeley
Massachusetts Institute of Technology
- H6 - National Budget, Deficit, and Debt