Debt and the U.S. Economy

Abstract

Publicly held debt to GDP ratio in the U.S. has reached 68% in 2011 and is expected to continue rising. Many proposals regarding the ways to curb the government deficit and the resulting debt are being discussed. In this paper, we use the standard neoclassical growth model to examine the implications of some of these policy proposals on the future path of the budget deficit and debt in the U.S. economy. The experiments we conduct reveal how difficult it will be for the U.S. debt to GNP ratio to return back to its average level of 40%. In fact, unless there is a significant increase in the growth rate of GNP, debt to GNP ratios above 100% are more likely to continue into the future.