What It Takes to Solve the U.S. Government Deficit Problem
CFDP Revision Date
This paper uses a structural multi-country macroeconometric model to estimate the size of the decrease in transfer payments (or tax expenditures) needed to stabilize the U.S. government debt/GDP ratio. It takes into account endogenous eﬀects of changes in ﬁscal policy on the economy and in turn the eﬀect of changes in the economy on the deﬁcit. A base run is ﬁrst obtained for the 2013:1-2022:4 period in which there are no major changes in U.S. ﬁscal policy. This results in an ever increasing debt/GDP ratio. Then transfer payments are decreased by an amount suﬀicient to stabilize the long-run debt/GDP ratio. The results show that transfer payments need to be decreased by 2 percent of GDP from the base run, which over the ten years is $3.2 trillion in 2005 dollars and $4.8 trillion in current dollars. The output loss is 1.1 percent of baseline GDP. Monetary policy helps keep the loss down, but it is not powerful enough in the model to eliminate all of the loss. The estimates are robust to a base run with less inflation and to one with less expansion.
Fair, Ray C., "What It Takes to Solve the U.S. Government Deficit Problem" (2011). Cowles Foundation Discussion Papers. 2152.