COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1807 What It Takes to Solve the U.S. Government Deficit Problem Ray C. Fair July 2011 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. |
