After World War II, birthrates boomed, leading to gains in household formation and growing workforces. A housing development in California in 1950.
Photo: Bettmann ArchiveAs countries world-wide boost spending to battle the new coronavirus, government debt has soared to levels not seen since World War II.
Among advanced economies, debt rose to 128% of global gross domestic product as of July, according to the International Monetary Fund. In 1946, it came to 124%.
For now, governments shouldn’t worry about mounting debt and instead focus on bringing the virus under control, said Glenn Hubbard, chairman of the Council of Economic Advisers under President George W. Bush.
“The war analogy is exactly the right one,” said Mr. Hubbard, dean emeritus of Columbia University’s Graduate School of Business. “We were and are fighting a war. It’s a virus, not a foreign power, but the level of spending isn’t the problem.”
After World War II, advanced economies brought down debt quickly, thanks in large part to rapid economic growth. The ratio of debt to GDP fell by more than half, to less than 50%, by 1959. It is likely to be harder this time, for reasons involving demographics, technology and slower growth.
In the optimistic era after the war, birthrates boomed, leading to gains in household formation and growing workforces. Circumstances were ripe to reap the benefits of electrification, suburbanization and improved medicine.
Through the late 1950s, economies soared. Growth averaged around 5% a year in France and Canada, almost 6% in Italy and more than 8% in Germany and Japan. The U.S. economy grew almost 4% a year.
“We’d be lucky to have half that over the next decade,” said Nathan Sheets, a former undersecretary of the Treasury for international affairs and now chief economist at PGIM Fixed Income, the investment-management business of Prudential Financial Inc.
In recent years, the U.S., U.K. and Germany have grown about 2% a year. In Japan and France, it has been closer to 1%. Italy has barely grown at all.
Though vanquishing the virus could bring a surge of optimism, the post-World War II boom would be difficult to re-create. Population growth has slowed in advanced economies, the workforce is shrinking as societies age and productivity is slowing.
By the early 1960s, the Group of Seven advanced economies all had population growth of nearly 1% a year or more. Today, no G-7 country has population growth of 1%, and Japan and Italy are shrinking.
Rapid economic growth and lower military spending in the postwar years made it easy to reduce debt. In the U.S., federal outlays fell by more than half between 1945 and 1947, not accounting for the effects of growth or inflation.
The end of the various pandemic-era programs, such as extended unemployment benefits and direct payments to households would reduce spending, but not by as much as the end of World War II.
“Can we avoid letting the exploding spending during the war, not turn into massive expanded social spending going forward?” asked Mr. Hubbard.
Today’s high levels of debt didn’t start with the pandemic. Since the 1980s, even outside of recessions, debt has grown in the U.S., Europe and Japan, driven largely by spending on health care and pensions.
After the war, as advanced economies reduced wage and price controls, a burst of inflation helped lower the debt. Today, there is no inflation in sight, despite massive stimulus spending.
Low interest rates are a common feature of both periods. After World War II, the Federal Reserve kept borrowing costs low to reduce the government’s interest costs.
Today, there is no formal collaboration between the Treasury and the Fed. But with a backdrop of low growth, a damaged labor market and low inflation, most central bankers view an extended period of ultra low rates as appropriate.
By default, if not by design, advanced economies might end up accepting a world of much higher government debt.
Central banks have bought huge quantities of government debt to bring down long-term interest rates and shore up growth in periods of weakness. That has reduced the amount of government securities held by the public, and the interest paid on this debt is largely remitted back to the government.
Over $4 trillion of the $26 trillion in U.S. debt is held by the Fed. Japan’s central bank owns over $4 trillion worth of its government liabilities, an even larger share of the country’s roughly $11 trillion in outstanding debt.
The example of Japan has shown that debts can rise for a long time, well above 200% of GDP, without sparking a fiscal crisis.
By having central banks own so much debt, some of the risks and challenges of debt management are shifted from the Treasury or finance ministry to central banks, economists say.
“My expectation is central banks will be successful, but it does pose challenges,” said Mr. Sheets, who formerly headed the Fed’s international-finance division. “Whenever you’re in such unfamiliar terrain, there’s always the risk of something possibly going wrong. It is a generational question that we’ll struggle with for some time to come.”
Write to Josh Zumbrun at Josh.Zumbrun@wsj.com
Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
"easy" - Google News
August 23, 2020 at 09:00PM
https://ift.tt/2QlJeMc
Coronavirus Lifts Government Debt to WWII Levels—Cutting It Won’t Be Easy - The Wall Street Journal
"easy" - Google News
https://ift.tt/38z63U6
Shoes Man Tutorial
Pos News Update
Meme Update
Korean Entertainment News
Japan News Update
Bagikan Berita Ini
0 Response to "Coronavirus Lifts Government Debt to WWII Levels—Cutting It Won’t Be Easy - The Wall Street Journal"
Post a Comment