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"What It Takes To Solve the U.S. Government Deficit Problem,"
revised July 2012.
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.