From the comments (ouch!)

E. Barandiaran passes along to us:

On the substantive issues of how to solve U.S. fiscal crisis, I suggest to read Ray Fair’s latest paper

ABSTRACT: This paper estimates how large fiscal-policy changes have to be to solve the U.S. government deficit problem. This question is complicated in part because of endogeneity issues. A fiscal-policy change designed to decrease the deficit has effects on the macro economy, which in turn affects the deficit. Any analysis of fiscal-policy proposals must take these effects into account: one needs a model of the economy. This paper uses a macroeconometric model of the world economy to examine the deficit problem. A base run is first obtained in which there are no major changes in U.S. fiscal policy. This results in an ever increasing debt/GDP ratio. Then net taxes (taxes minus transfers) are increased by an amount sufficient to stabilize the long-run debt/GDP ratio. The increases are linearly phased in over a three-year period beginning in the first quarter of 2012. The estimates of the needed net tax increases are large. Compared to values in the base run, net taxes after the phase in need to be about $650 billion higher each year in 2011 dollars. In percentage terms this translates into about 45 percent of personal income taxes, 51 percent of social security taxes, 24 percent of transfer payments to state and local governments and to persons, 44 percent of purchases of goods and services, and 176 percent of corporate profit taxes. The output loss is 1.38 percent of real GDP over the 9 years analyzed.

Indeed, Ray shows that your crisis it’s not a laughing matter.

I’m more skeptical about macro models than is Ray Fair, and that includes more skepticism toward the Fair model.  Still, I don’t think there is any kind of free lunch available which renders this general mode of reasoning invalid.  Ouch!

File under “We’re not as wealthy as were thought we were.”


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