How Reducing the Deficit Can Make Us Richer

by Mark Whitehouse

Bloomberg
February 2, 2012

How bad can it get if the U.S. government fails to get its debts under control? If you believe a new paper published by the International Monetary Fund, Americans could be worse off to the tune of about $2.6 trillion.

The paper's authors, Bertrand Gruss of the IMF and Jose Torres of the University of Maryland, subject a model of the U.S. economy to various fiscal scenarios. In one, they assume legislators do no more than they already have to reduce deficits over the next 20 years. In another, they implement fiscal reforms similar to those proposed by the Simpson-Bowles deficit reduction commission.

Result: In the world with no fiscal reforms, interest rates end up being 4.6 percentage points higher, and the U.S. suffers a permanent economic loss equal to 17.1 percent of annual output. In today's terms, that amounts to about $2.6 trillion. And that's assuming there won’t be a nightmare scenario in which concerns about government debt levels trigger an investor strike and financial meltdown.

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