Friday, March 22, 2013

How Much Debt Can We Bear?

In a recent Bloomberg post, I argued that small federal budget deficits were infinitely sustainable. That seemed to give a lot of people an intellectual heart attack. It really shouldn't. This is basic stuff.

To prove it, I built a simulator which allows you to plug in a few basic inputs -- the original debt, the annual rate of inflation, the annual real interest rate, the total or primary deficit as a share of GDP, and the annual rate of real GDP growth -- and it will plot back for you the trajectory of debt for the next 100 years.

I even included two optional features, one that assigns a penalty on real GDP growth if there is a high debt-to-GDP ratio, and another that boosts GDP according to the deficit.

You can play with the model online here. Download an Excel spreadsheet version here. I hope this is a useful tool for people who want to think about government debt. (Please, if you adjust the online settings, which I encourage you to do, set it back when you are done.)

A few thoughts which come from the model:
Evan Soltas | economics & thought
How Much Debt Can We Bear?

1 comment:

Jonf said...

I think Wray's little book says that so long as the interest rate is less than the GDP growth rate, the debt is sustainable. I also think he said elsewhere that we can always make that happen unless GDP is negative. If interest gets over growth for too long it becomes a Ponzi scheme.