The U.S. Federal Debt - How big is too big?

The Federal debt has risen on average +8.5% each year over the last 52 years, from $320bn in the beginning of 1966 to $22tn at the end of 2018.

At the same time, national income, as measured by nominal Gross Domestic Product (GDP) has increased on average only +6.4% per year. As the Federal debt increased at a faster pace than GDP the debt to GDP ratio has increased from 40.3% in 1966 to 105.3% in 2018.

Policy makers and economists alike have become concerned regarding the debt level. Is the current debt level sustainable?

Historically low interest rates make the direct cost of the U.S. Federal debt, the interest payments on the debt, far from their historical maximums. Interest payments depend not only on the size of debt but also on interest rates. Since the 1980’s interest rates on the 10-year Treasury bonds have declined from a maximum of 15.15% in 1981 to 2.53% in 2019.

As a result, interest payments on the current Federal debt has declined from a maximum of 5.0% in 1995 to 3.2% in 2019.

We must not forget the indirect costs of the U.S. Federal debt. There are several channels through which high U.S. Federal debt could adversely impact medium- and long-run growth which have received attention in the economics literature. High public debt can adversely affect capital accumulation and growth via higher long-term interest rates, higher future taxation, inflation, and greater uncertainty regarding economic policies and prospects. In more extreme cases of a debt crisis, by triggering a banking or currency crisis, these effects can be magnified. High debt is also likely to constrain the scope for stabilization policies during recessions, which may result in higher volatility in terms of GDP growth, inflation and employment and further lower growth.

Today U.S. real GDP growth is on average 1.3 percentage points lower, relative to 1966 due to the increase in the debt-to-GDP ratio. In general, the estimated impact of the U.S. Federal debt on growth is small, with a 10 percentage points increase in the initial debt-to-GDP ratio leading to 20 basis points slowdown in annual real per capita GDP growth . This implies that the U.S. economy could have grown at 4.2% in 2018 instead of the 2.9% recorded at the end of the year, if the debt-to-GDP level had remained at its 1966 level.

A large number of empirical papers find that the relationship between debt and growth is non-linear and characterized by the presence of a threshold, around 90 to 100 of debt-to-GDP, above which debt starts having a larger negative effect on economic growth. However, the negative relationship between debt and growth and the classic 90 percent threshold are not robust across samples, specifications, and estimation techniques. In particular, there is evidence that the effect of debt depends on the quality of institutions and that its negative effect is confined to non-democratic developing countries and economies in which the majority of debt-holders are non-resident. It is not clear whether a debt overhang argument can be easily applied to the U.S. economy.

In conclusion, the cost of the Federal debt in terms of real GDP growth could already be large and the U.S. economy could benefit from a reduction in Federal debt. However, it is unlikely that U.S. economic growth will collapse if it passed a certain critical level of debt-to-GDP.

Wage Subsidies and the Labor Supply of Older People: Evidence from Singapore's Workfare Income Supplement Scheme

I currently completed and submitted to a journal a paper on the labour supply impact of a wage subsidy program for older workers. In particular, I looked at the impact of the Workfare Income Supplement Scheme in Singapore and found that the program increased the labour supply of women age 60 to 64 by 3.3 and 5.4 percentage points. This is the same paper I presented at the Asian Pacific Economies Seminar in May. You can find the paper on SSRN.

Using Wikipedia to enhance student learning: A case study in economics

I have completed and uploaded on SSRN a new version of my joint paper with JingPing Li on using Wikipedia in teaching economics.

Rural-Urban Migration and the Skill Wage Premium in Brazil: 1980-2000

I have uploaded a new version of my paper on rural-urban migration and the skill wage premium in Brazil. It is available on SSRN

Cidade De Deus Redux: Inequality, Migration and Violent Crime in Brazil between 1980 and 2000

I recently finished a first draft of my paper "Cidade de Deus Redux: Inequality, Migration and Violent Crime in Brazil between 1980 and 2000". It is available on SSRN (just follow the link). Feel free to send any comment or question you may have.

Using Wikipedia to enhance student learning in Economics

I have finished a first draft of my joint work with Li JingPing on "Using Wikipedia to enhance student learning in Economics". I had the opportunity to present this paper at the Development in Economics Education conference in Exeter, UK, organized by the Higher Education Academy in the UK.

This presentation also lead to a follow up in The Economics Network newsletter where I talked about our conference and my research on economics education.

European Economic Association Conference, European Regional Science Association Conference, European Association of Labour Economists and Portuguese Economic Journal Meetings

During this summer I had the opportunity to present my joint work with Xiaoye Li - "How immigration reduced social capital in the U.S.:2005-2011" at the European Economic Association Conference in Gothenburg, Sweden; the European Regional Science Association Conference in Palermo, Italy; the European Association of Labour Economics Conference in Turin, Italy and the Portuguese Economic Journal Meeting in Covilhã, Portugal.

Thank you to all the participants in these meetings for their comments. We are currently revising the article and be uploading and submitting a new version of this paper soon.

How Immigration Reduced Social Capital in the US: 2005-2011

http://ssrn.com/abstract=2222650
Joint work with Xiaoye Li submitted to Journal. Furthermore, will be presenting this paper at a seminar at the University of Nottingham - Ningbo and Western Economic Association International  (WEAI) Meeting in Tokyo this March.

How the 1978 Changes to the Foreign Domestic Workers Law in Singapore Increased the Female Labour Supply

http://dx.doi.org/10.2139/ssrn.2220107
Finally submitted to Journal.

North American Regional Science (NARSC) Conference - Ottawa 2012

My articles "The Impact of Migration on the Gender Wage Gap" and "How Unemployment, Inequality, Wages, and Migration Determine Violent Crime in Brazil Between 1980-2000." have been accepted for presentation at NARSC Conference in 2012. Furthermore, my co-author, Xiaoye Li, a PhD student at NUS, will be presenting our joint work: "Migration and the Decline of Social Capital in the U.S.: How Migration Lead to a Reduction in Volunteering between 2004-2010".