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)| false “ Auerbach, Alan, Jagadeesh Gokhale, and Lawrence Kotlikoff, Generational Accounts: A Meaningful Alternative to Deficit Accounting,” in L.H. Summersand D. Bradford, eds., Tax Policy and the Economy( Cambridge, Massachusetts: NBER and MIT Press, 1991), pp. 55– 110.
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This paper was presented at a symposium, “Budget Deficits and Debt: Issues and Options,” held at Jackson Hole, Wyoming, on September 1-2, 1995, and sponsored by the Federal Reserve Bank of Kansas City. It is to be published in a conference proceedings volume. We are grateful to our colleagues at the Fund for comments and help with the data, to Claire Adams for research assistance, and to participants at the symposium for useful discussions.
A detailed examination of deficit and debt data for industrial countries since 1970 is presented in Tanzi and Fanizza (1995).
The exceptional nature of budget deficits has been documented in many places; for instance, Ornstein (1985) calculates that without the deficits caused by the wars in the 19th century, the U.S. federal government would have had a budget surplus at the beginning of the 20th century, and without the deficits caused by the 2 world wars, it would have had a negligible debt in 1961 (rather than debt equal to some 60 percent of GDP).
Unweighted, and excluding Italy.
Anderson (1987) argues that in the case of the United States, growth in spending became increasingly automatic, and individual politicians could evade responsibility for the resulting deficits because of changes in the way Congress was run.
There is general misconception that encouraging early retirement or reducing working hours for those employed will open job opportunities for the unemployed and lead to a reduction of unemployment rates. This is a version of an even broader misconception—the fixed number of jobs fallacy—that encourages many errors of government policy; see Mussa (1993).
The U.S. social security system (for retirement benefits) is not fully funded or anywhere near fully funded; it is basically a pay-as-you-go system that has been modified to smooth out the effects of changes in the age structure of the population. The amounts accumulated in the trust fund constitute only a modest fraction (estimated to be about 20 percent) of the present value of the prospective benefits of current retirees and of future retirees who have already built up claims on the system through their past payroll contributions. The objective of the 1983 reforms was not to create a fully funded system; it was only meant to assure that the trust fund remained “solvent” in the sense that it did not run completely out of money.
The growth rate decline has been linked to the oil price shock in 1973; however, lower oil prices from the mid-1980s onward do not seem to have stimulated productivity growth. The oil shock in the 1970s may, in addition, have led to an attempt to cushion output losses through higher government spending, leading to a widening of deficits. On the other side, the unanticipated inflation helped to reduce public debt/GDP ratios (discussed below).
Among the seven largest industrial countries, the United States has the smallest cumulative increase in the price level since 1945. Inflation in both Germany and Japan was quite high in the few years after the end of the war. Italy and France also experienced relatively rapid inflation in the decade after the war’s end. Prices in the United Kingdom have risen about twice as much as in the United States, and prices in Canada have risen somewhat more than in the United States. Looking more broadly at the smaller industrial countries, Switzerland has had somewhat less cumulative inflation during the past 50 years than the United States.
Nominal interest rates on federal debt were very low before the Accord of 1951 and remained quite low through 1955. There was very little inflation premium in these nominal interest rates even by 1955, and it is arguable that expectations of deflation (and an accommodative monetary policy) generated negative inflation premia in the years immediately following the Second World War. From the perspective of holders of federal debt, it is not too extreme to conclude that essentially all of the inflation between 1945 and 1955 was a surprise and represented an unexpected loss in the real purchasing power of these federal obligations.
Though Japan’s pension system has assets equal to some 37 percent of GDP, while the other public pension plans are essentially unfunded.
Health care benefits and other public services are also provided to working people and to children, and the future provision of such services implies a continuing stream of public expenditure. However, it generally seems relevant to treat these public benefit programs on a pay-as-you-go basis, under the assumption that benefit levels and contribution rates will be adjusted to keep public benefit programs in fiscal balance. For benefits to retirees, who typically do not continue to make contributions to social insurance programs, it is more relevant to be concerned with the net liabilities that are implied by a changing demographic structure and by rising real health care costs. These net liabilities are the present value of the amount by which taxes or contribution rates would need to be raised in order to sustain the present path of program benefits.
See Auerbach, Gokhale, and Kotlikoff (1991). Generational accounts have been criticized for requiring arbitrary assumptions about the distant future. Whatever their deficiencies, they have the merit of raising issues that are too easily ignored in public debate. A clear statement of assumptions (even if somewhat arbitrary) enhances the transparency of government accounts and makes clear implicit future commitments.
In public pension schemes, the initial level of benefits at retirement often depends on the level of earnings, while post-retirement increases in benefits are linked to the consumer price index. The growth of earnings over time raises the level of benefits at retirement both because of inflation and because of real earnings growth. Measurement of increases in real earnings is also distorted by the bias in measuring inflation. Correction of this bias in determining initial retirement benefits implies that these benefits will not keep pace with the earnings of employed workers, but it does not imply any reduction in the (correctly measured) level of real retirement benefits.
A review of G-7 policy measures, and an attempt to quantify their macroeconomic effects, are presented in Bartolini, Razin, and Symansky (1995).