Leveraging posterity’s prosperity?

Abstract

We critically review studies by Blanchard (B) and Rachel and Summers (RS). By the standard fiscal-gap measure, the US government is in dire fiscal shape thanks to constantly enlarging its postwar, take-as-you-go Ponzi scheme. Yet B and RS seemingly rationalize its expansion. Their arguments rest on the safe rate being very low. But almost all households face high safe rates--the rates available from pre-paying their loans. We also question modeling assumptions that help drive key B and RS results and reference recent simulation studies, which reach strongly opposite conclusions to B's.