THE MYTH OF GROWTH
An important analysis exposes the myth of growth:
Did the United States grow its way out of WWII debt?
by Tyler Cowen August 24, 2025 at 11:54 am in
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Not as much as you might think:
ABSTRACT: 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.
The full Article is here:
7 Conclusions
This paper studies the factors behind the behavior of the U.S. debt/GDP ratio since 1946, both the large decline in the ratio from 1946 to 1974 and the large increase since then. 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 before the 1951 Fed-Treasury Accord; 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 surpluses 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%. For the debt increase since 1974, the most important factor is large primary deficits. Another factor, however, is a switch in the sign of r ⋆ − g: on average, the undistorted real interest rate has exceeded the growth rate. As a result, with primary balance and undistorted interest rates, the debt/GDP ratio would have grown from 74% in 1974 to 84% in 2022, not too far from its 1946 level.
All in all, the experience from 1946 to 2022 suggests only a modest tendency for the economy to grow out of debt without primary surpluses or interest-rate distortions.
As of the end of fiscal year 2022, the actual debt/GDP ratio has risen to 97%, close to its peak of 106% in 1946. If history is a guide, economic growth will probably not be enough to resolve this problem. Will the debt/GDP ratio be reduced some other way?
It is unlikely that the interest-rate distortions that reduced the ratio after World War II will occur again. Presumably, U.S. policymakers are not considering the kind of interest-rate peg (with price controls to contain the inflationary effects) that was imposed during World War II. And despite the recent surge in inflation, the Federal Reserve appears committed to pushing inflation back down and keeping it low, which would preclude debt erosion through surprise inflation. Additionally, any inflation surprises that occur will have smaller effects than they did in the past because the average maturity of the debt is shorter (Aizenman and Marion 2011, Hilscher et al. 2021). The upshot is that reducing the debt/GDP ratio substantially will probably require primary budget surpluses. Yet surpluses also appear unlikely: Under current policy, the Congressional Budget Office predicts large primary deficits over the next three decades. Absent a major shift toward fiscal consolidation, these deficits are likely to push the debt/GDP ratio to higher and higher levels.9
Bottom line: a country cannot grow its way out of endemic structural crisis.