Federal Budget Policy with an Aging Population and Persistently Low Interest Rates

Federal Budget Policy with an Aging Population and Persistently Low Interest Rates AbstractSome observers have argued that the projections for high and rising debt pose a grave threat to the country's economic future and give the government has less fiscal space to respond to recessions or other unexpected developments, so they urge significant changes in tax or spending policies to reduce federal borrowing. In stark contrast, others have noted that interest rates on long-term federal debt are extremely low and have argued that such persistently low interest rates justify additional federal borrowing and investment, at least for the short and medium term. We analyze this controversy focusing on two main issues: the aging of the US population and interest rates on US government debt. It is generally understood that these factors play an important role in the projected path of the US debt-to-GDP ratio. What is less recognized is that these changes also have implications for the appropriate level of US debt. We argue that many—though not all— of the factors that may be contributing to the historically low level of interest rates imply that both federal debt and federal investment should be substantially larger than they would be otherwise. In conclusion, although significant policy changes to reduce federal budget deficits ultimately will be needed, they do not have to be implemented right away. Instead, the focus of federal budget policy over the coming decade should be to increase federal investment while enacting changes in federal spending and taxes that will reduce deficits gradually over time. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Perspectives American Economic Association

Federal Budget Policy with an Aging Population and Persistently Low Interest Rates

Preview Only
20 pages

Loading next page...
 
/lp/aea/federal-budget-policy-with-an-aging-population-and-persistently-low-MIDlQLbt0q
Publisher
American Economic Association
Copyright
Copyright © 2017 © American Economic Association
ISSN
0895-3309
D.O.I.
10.1257/jep.31.3.175
Publisher site
See Article on Publisher Site

Abstract

AbstractSome observers have argued that the projections for high and rising debt pose a grave threat to the country's economic future and give the government has less fiscal space to respond to recessions or other unexpected developments, so they urge significant changes in tax or spending policies to reduce federal borrowing. In stark contrast, others have noted that interest rates on long-term federal debt are extremely low and have argued that such persistently low interest rates justify additional federal borrowing and investment, at least for the short and medium term. We analyze this controversy focusing on two main issues: the aging of the US population and interest rates on US government debt. It is generally understood that these factors play an important role in the projected path of the US debt-to-GDP ratio. What is less recognized is that these changes also have implications for the appropriate level of US debt. We argue that many—though not all— of the factors that may be contributing to the historically low level of interest rates imply that both federal debt and federal investment should be substantially larger than they would be otherwise. In conclusion, although significant policy changes to reduce federal budget deficits ultimately will be needed, they do not have to be implemented right away. Instead, the focus of federal budget policy over the coming decade should be to increase federal investment while enacting changes in federal spending and taxes that will reduce deficits gradually over time.

Journal

Journal of Economic PerspectivesAmerican Economic Association

Published: Aug 1, 2017

There are no references for this article.

Sorry, we don’t have permission to share this article on DeepDyve,
but here are related articles that you can start reading right now:

Explore the DeepDyve Library

Unlimited reading

Read as many articles as you need. Full articles with original layout, charts and figures. Read online, from anywhere.

Stay up to date

Keep up with your field with Personalized Recommendations and Follow Journals to get automatic updates.

Organize your research

It’s easy to organize your research with our built-in tools.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

Monthly Plan

  • Read unlimited articles
  • Personalized recommendations
  • No expiration
  • Print 20 pages per month
  • 20% off on PDF purchases
  • Organize your research
  • Get updates on your journals and topic searches

$49/month

Start Free Trial

14-day Free Trial

Best Deal — 39% off

Annual Plan

  • All the features of the Professional Plan, but for 39% off!
  • Billed annually
  • No expiration
  • For the normal price of 10 articles elsewhere, you get one full year of unlimited access to articles.

$588

$360/year

billed annually
Start Free Trial

14-day Free Trial