Wednesday, July 14, 2010

The CEPR Deficit Calculator

http://www.cepr.net/calculators/calc_deficit.html

The CEPR Deficit Calculator

There is considerable concern that the debt burden that United States will face by the end of the next decade will place serious strains on the government and the economy. It is not clear how high the debt can go before it begins to hamper economic growth or raise questions about the creditworthiness of the U.S. government. As is shown on the calculator below, the debt burden has been much higher for the United States in the past and is currently far higher for many countries than it is projected to be in the baseline scenario for the United States in 2020.

This calculator allows users to see how various policies will affect the debt burden in 2020. These options have appeared in public debates (or should) and would have a substantial impact on the deficit. The calculator allows users to select whatever target they consider appropriate given the various reference points shown.

The measure of the debt used in this analysis is the commonly used measure of “publicly held” debt minus the portion of the debt held by the Federal Reserve Board. Publicly held debt refers to all the debt held by individuals, corporations, mutual funds, pension funds, foreign investors or foreign central banks. Interest is paid on these holdings from the government to the owners of the debt.

The Federal Reserve Board owns hundreds of billions of dollars of government debt that is included in publicly held debt. However, the interest on the debt held by the Federal Reserve Board is paid to the Federal Reserve Board. Most of this interest is then rebated back to the Treasury (some money is kept to cover the Fed’s operating costs), so it is not a net drain on the Treasury. Therefore, insofar as we are interested in the burden that the debt will pose on taxpayers, we should exclude the portion of the debt held by the Fed.

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