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# Seven U.S. Economic Models Project Rapid Growth of Federal Debt

By Efraim Berkovich and Jagadeesh Gokhale

On May 16, 2019, PWBM participated in a session at the National Tax Association (NTA) 49th Annual Spring Symposium. The session compared overlapping-generations (OLG) models from Penn Wharton Budget Model (PWBM), the Congressional Budget Office (CBO),1 the U.S. Senate Joint Committee on Taxation (JCT),2 EY QUEST,3 Diamond-Zodrow (DZ)4 from the Rice University, Texas, Overlapping Generations USA (OGUSA)5 and the Global Gaidar Model (GGM).6

This NTA session constituted the second round of the OLG modeling meetings organized by the CBO. The goal of these meetings is to learn about the implications of alternative modeling choices for projecting U.S. economic outcomes under pre-specified changes in U.S. fiscal policy. CBO’s presentation is available here. All of the models were executed under very simplified policy and economic assumptions to ensure comparability across models. Besides only focusing on a simple benefit cut, the analysis only reported percent changes in key macroeconomic variables (e.g., percent changes in GDP) rather than levels (e.g., actual GDP) and budgetary impacts (e.g., changes in program costs), consistent with an actual score.

Projections differ across models because of alternative ways in which they are constructed and calibrated, especially on the sensitivity of individuals’ choices of how much to work and earn and how much to consume or save over time. PWBM’s projections of macroeconomic variables turned out to be quite close to the CBO’s results in key macroeconomic variables.

Each modeling group reports how the economy’s path changes under the alternative policy of a preannounced Old-Age and Survivors Insurance (OASI) benefit cut of one-third beginning in 2031. This simplified and stylized policy change was chosen to fit within the capabilities of all the models. PWBM can model highly complex Social Security reform proposals. In fact, PWBM has modeled the Social Security 2100 Act and options for return Social Security to financial balance. In addition, our Social Security simulator shows the effects of 648 policy combinations.

The model comparison metric for each macroeconomic outcome variable is the change in the variable’s time path under the new policy relative to the path projected under current policy. Although the results presented at the symposium were limited to changes in variables, models that are supported by a microsimulation, such as PWBM’s and CBO’s, can also analyze levels of economic indicators. A critical assumption underlying outcome differences across models is how open the U.S. economy is to international capital flows.

Comparing Model Projections

Figure 1 shows that all except one of the models show that the OASI benefit cut in 2031 reduces the debt-to-GDP ratio by between 55-75 percentage points approaching mid-century. Under PWBM’s model (light blue line in Figure 1), this ratio declines by 55 percentage points (from 285 percent to 230 percent) whereas the decline projected by the CBO (orange line in Figure 1) is 59 percentage points.

Figure 1: Change in the Debt-to-GDP Ratio

Projections of growth in the capital stock differ significantly across models are seen in Figure 2. The differences mostly arise from alternative international capital flows assumed by different models. The OASI cut policy induces model individuals to consume less and work more, thus generating additional national saving. The more closed the economy is to foreign capital flows, the greater the share of increased saving that is retained within the United States. PWBM assumes that foreigners purchase 40 percent of new debt issued by the federal government each year and provide 40 percent of capital flows needed to equilibrate U.S. interest rates to the world rate. The CBO’s openness assumption is similar to PWBM’s as reflected in similar projection outcomes for growth in the U.S. capital stock.

Figure 2: Change in Capital Stocks

As seen in Figure 3, different models assume different sensitivities of labor supply by individuals in response to the OASI cut policy. In addition, higher retention of capital within the economy increases wages and thereby elicits a stronger labor supply response to the OASI cut policy. PWBM’s projection of the labor supply response is in the middle of the range of model outcomes. It is smaller than that of the CBO, especially over the long term.

Figure 3: Change in Labor Supply

Output growth projections follow from labor and capital growth. More capital and a stronger labor response make for a larger increase in output over time in response to the OASI benefit cut policy. PWBM’s projected output growth is less than that of CBO because of our lower projections of growth in the capital stock and labor supply.

Figure 4: Change in GDP

The NTA session brought forth three critical conclusions:

1. According to all model runs, under current fiscal policies, the U.S. economy appears to be fiscally unsustainable primarily because of rapid increases in national debt projected within the models.

2. Even significant policy adjustments such as an OASI benefit cut by one third after 2031 still leaves the U.S. with sizable debt relative to GDP by mid-century.

3. Projections of how such a policy alters the paths of key macroeconomic variables agree on the direction but not on the magnitudes of outcomes.

1. Congressional Budget Office, “An Overview of CBO’s Life-Cycle Growth Model” (February 2019), https://www.cbo.gov/publication/54985 and Shinichi Nishiyama and Felix Reichling, The Costs to Different Generations of Policies That Close the Fiscal Gap, Working Paper 2015-10 (Congressional Budget Office, December 2015), https://www.cbo.gov/publication/51097.  ↩

2. Rachel Moore and Brandon Pecoraro, “Modeling the Internal Revenue Code in a Heterogeneous-Agent Framework: An Application to TCJA” (draft, May 2019), https://doi.org/10.2139/ssrn.3367192 and Rachel Moore and Brandon Pecoraro, “Macroeconomic Implications of Modeling the Internal Revenue Code in a Heterogeneous-Agent Framework” (draft, December 2018), https://doi.org/10.2139/ssrn.3193142  ↩

3. EY QUEST Model, developed by Brandon Pizzola, Robert Carroll, and James Mackie: EY, Analyzing the Macroeconomic Impacts of the Tax Cuts and Jobs Act on the US Economy and Key Industries (2018), https://tinyurl.com/y4fpbjgf (PDF, 2.9 MB).  ↩

4. Diamond-Zodrow Model: George R. Zodrow and John W. Diamond, “Dynamic Overlapping Generations Computable General Equilibrium Models and the Analysis of Tax Policy: The Diamond-Zodrow Model,” in Peter B. Dixon and Dale W. Jorgensen, eds., Handbook of Computable General Equilibrium Modeling (Elsevier, 2013), vol. 1, pp. 743–813, https://doi.org/10.1016/B978-0-444-59568-3.00011-0.  ↩

5. OG-USA Model: Richard W. Evans and Jason DeBacker, “OG-USA: Documentation for the Large-Scale Dynamic General Equilibrium Overlapping Generations Model for U.S. Policy Analysis” (November 2018), https://tinyurl.com/y694ljom (PDF, 1.6 MB).  ↩

6. Global Gaidar Model, developed by Seth Benzell, Maria Kasakova, Laurence Kotlikoff, Guillermo Lagarda, Kristina Nesterova, Victor Ye, and Andrey Zubarev: Seth G. Benzell, Laurence J. Kotlikoff, and Guillermo LaGarda, Simulating Business Cash Flow Taxation: An Illustration Based on the “Better Way” Corporate Tax Reform, Working Paper 23675 (National Bureau of Economic Research, August 2017), https://www.nber.org/papers/w23675.  ↩

    Year,PWBM,CBO,JCT,EY,DZ,OGUSA,GGM
2018,0,0,-0.0090,-0.002,0.000683153,0.0085451,-0.0018
2019,-0.001817296,-0.00043586,-0.0038,-0.002,-0.000883303,0.009088321,-0.0025
2020,-0.002107175,-0.00114846,-0.0049,-0.002,-0.001767173,0.010364061,-0.0033
2021,-0.002727837,-0.00218941,-0.0043,-0.002,-0.002719637,0.011699796,-0.0042
2022,-0.003502271,-0.00355514,-0.0058,-0.003,-0.003791984,0.012981108,-0.0053
2023,-0.004812542,-0.00532386,-0.0066,-0.003,-0.005037284,0.014225625,-0.0065
2024,-0.006338599,-0.00749107,-0.0098,-0.004,-0.006488249,0.01552127,-0.0081
2025,-0.008340937,-0.01008102,-0.0144,-0.004,-0.008171496,0.016864144,-0.0098
2026,-0.010960611,-0.01313484,-0.0148,-0.005,-0.01011223,0.018081362,-0.0118
2027,-0.012795497,-0.01669578,-0.0191,-0.006,-0.012336492,0.019292072,-0.0142
2028,-0.015856299,-0.02079704,-0.0231,-0.007,-0.014872398,0.020500215,-0.017
2029,-0.019122668,-0.02546013,-0.0268,-0.008,-0.017751121,0.021719239,-0.0202
2030,-0.0227193,-0.03074516,-0.0302,-0.009,-0.021007152,0.022994115,-0.024
2031,-0.026840366,-0.03669265,-0.0370,-0.028,-0.024679218,-0.000989848,-0.0287
2032,-0.048283272,-0.06004975,-0.0653,-0.049,-0.045481772,-0.025565117,-0.08
2033,-0.070433207,-0.08403,-0.0943,-0.071,-0.067582047,-0.05079439,-0.1354
2034,-0.093398143,-0.10870346,-0.1246,-0.093,-0.091053384,-0.076796932,-0.1958
2035,-0.117051417,-0.1341507,-0.1539,-0.117,-0.115974303,-0.103585966,-0.2621
2036,-0.141315,-0.16045472,-0.1858,-0.143,-0.142431351,-0.131128417,-0.3337
2037,-0.166435919,-0.18771103,-0.2188,-0.169,-0.170519426,-0.15941696,-0.4117
2038,-0.192649581,-0.21602616,-0.2523,-0.196,-0.200342818,-0.18850191,-0.4967
2039,-0.219737696,-0.24551513,-0.2862,-0.225,-0.232016977,-0.21849496,-0.5894
2040,-0.247476964,-0.27631256,-0.3219,-0.254,-0.265517259,-0.249445713,-0.6903
2041,-0.276241592,-0.3085553,-0.3574,-0.285,-0.300973947,-0.281493933,-0.8002
2042,-0.306012178,-0.34239975,-0.3921,-0.317,-0.338526324,-0.314778028,-0.9195
2043,-0.336773047,-0.37801987,-0.4297,-0.350,-0.378342343,-0.34952309,-1.0489
2044,-0.368645423,-0.41561233,-0.4684,-0.385,-0.420612634,-0.386052148,-1.1899
2045,-0.401769824,-0.45540131,-0.5087,-0.422,-0.465554121,-0.424585918,-1.3423
2046,-0.435956657,-0.49763611,-0.5485,-0.459,-0.513416385,-0.46550356,-1.5079
2047,-0.471560584,-0.54260589,-0.5907,-0.499,-0.564475053,-0.509220137,-1.6879
2048,-0.508663259,-0.59064255,-0.6353,-0.540,-0.619222335,-0.556311086,-1.8835
2049,-0.547677816,-0.64213196,-0.6810,-0.583,-0.677285891,-0.495761489,-2.0966
2050,-0.547677816,-0.69752441,-0.7299,-0.627,-0.743092776,0.078701851,-2.3295

    Year,PWBM,CBO,JCT,EY,DZ,OGUSA,GGM
2018,0,0.00405095,0.0000,-0.001787746,-0.001676639,-0.002241398,0.021384929
2019,1.88675E-11,0.006651896,-0.0006,-0.001120728,0.000750919,-0.000819137,0.020916335
2020,0.004760008,0.009320146,-0.0011,-0.000481299,0.002283607,1.33619E-05,0.019569472
2021,0.008294739,0.01189044,-0.0012,0.000184092,0.003954317,0.000877794,0.019230769
2022,0.011825338,0.01452677,-0.0010,0.000889403,0.005658137,0.001748805,0.018903592
2023,0.015569176,0.017231348,-0.0006,0.00160248,0.007392626,0.002621852,0.018587361
2024,0.019330572,0.020013839,0.0001,0.002347319,0.009160192,0.003496164,0.017351598
2025,0.02324485,0.022873532,0.0010,0.003118522,0.010967842,0.004406511,0.016157989
2026,0.027442537,0.025818622,0.0020,0.003929701,0.012824493,0.005340402,0.01590106
2027,0.030602276,0.028845076,0.0031,0.004648971,0.014740227,0.006230011,0.015638575
2028,0.034708225,0.031954597,0.0041,0.00549514,0.01672643,0.007055676,0.014517506
2029,0.03870731,0.035223786,0.0052,0.006382183,0.018795716,0.007787284,0.014285714
2030,0.042744258,0.038632821,0.0064,0.007290972,0.020961968,0.00836727,0.014107884
2031,0.047065478,0.042311359,0.0076,0.008282086,0.023241344,0.012746892,0.013114754
2032,0.05067827,0.046113609,0.0088,0.011613781,0.025899653,0.017202954,0.012135922
2033,0.054242268,0.050093033,0.0101,0.015095718,0.028746684,0.021744069,0.011990408
2034,0.058029931,0.054261347,0.0115,0.018689988,0.031792839,0.026408761,0.011049724
2035,0.061805295,0.058623584,0.0128,0.02239747,0.035045012,0.03119347,0.010140406
2036,0.065599308,0.063205823,0.0141,0.026289702,0.038513605,0.036068303,0.010802469
2037,0.069461654,0.068024218,0.0154,0.030263876,0.042212264,0.041016662,0.009916095
2038,0.073644444,0.073111477,0.0168,0.034395888,0.046157964,0.046044842,0.009803922
2039,0.078024442,0.078489045,0.0181,0.038654256,0.05037115,0.051194397,0.009694258
2040,0.08236624,0.084188681,0.0195,0.043037668,0.054875756,0.056475238,0.0095518
2041,0.08692423,0.090245672,0.0209,0.047537825,0.05970081,0.061942074,0.010130246
2042,0.091672315,0.096730306,0.0225,0.052165781,0.064876824,0.067648493,0.00997151
2043,0.096602544,0.103630805,0.0241,0.056937718,0.070458834,0.073669158,0.009810792
2044,0.101752576,0.111067707,0.0260,0.061868229,0.076510863,0.080132293,0.010337698
2045,0.107144716,0.119099561,0.0281,0.067068447,0.08310441,0.087133537,0.010847458
2046,0.112767746,0.127813583,0.0305,0.072366943,0.090329055,0.094821657,0.010666667
2047,0.118691542,0.137322508,0.0330,0.077984189,0.098252191,0.103382713,0.011147541
2048,0.124937814,0.147803902,0.0357,0.083842359,0.107206944,0.113064784,0.012250161
2049,0.131517969,0.159420973,0.0382,0.089952808,0.115940747,0.104514092,0.012674271
2050,0.132203469,0.172356152,0.0401,0.096334345,0.126792532,0.011650116,0.013707165

    Year,PWBM,CBO,JCT,EY,DZ,OGUSA,GGM
2018,0,0.005788074,0.0185,0.005419556,0.002214848,-0.015433091,0.020396714
2019,0.003300599,0.005891166,0.0128,0.005190235,0.002517937,-0.015438785,0.020059878
2020,0.00306546,0.005989089,0.0115,0.004939059,0.002689777,-0.015518887,0.018804052
2021,0.002823498,0.005829442,0.0070,0.004671772,0.002878006,-0.015711889,0.017865391
2022,0.002372761,0.00569545,0.0069,0.004381967,0.003029483,-0.015928107,0.017051639
2023,0.002277175,0.005582555,0.0050,0.004071729,0.003154707,-0.016105594,0.016781878
2024,0.002046212,0.005499409,0.0076,0.003746093,0.003260289,-0.016378319,0.015908661
2025,0.001756763,0.00543827,0.0116,0.003402399,0.003351135,-0.01655981,0.01592699
2026,0.001782561,0.005395041,0.0061,0.0030241,0.003431241,-0.016868907,0.015742941
2027,0.001005832,0.005357685,0.0085,0.002626689,0.003504382,-0.017162663,0.014735282
2028,0.000913528,0.005320343,0.0089,0.002210123,0.003573931,-0.017487029,0.013742513
2029,0.000717638,0.005358903,0.0083,0.001762997,0.003643184,-0.017851434,0.013592414
2030,0.000490324,0.005440003,0.0065,0.001283561,0.003715752,-0.018281935,0.012875057
2031,0.000158383,0.00569379,0.0104,0.000362267,0.00379533,-0.018180167,0.011949244
2032,8.48403E-05,0.005825642,0.0096,0.000183934,0.003938222,-0.01808098,0.012380684
2033,-3.98934E-06,0.005970681,0.0086,4.13233E-05,0.004123837,-0.01797458,0.011478385
2034,-5.60496E-05,0.006142141,0.0083,-8.69228E-05,0.004353565,-0.01784265,0.011362069
2035,-4.52806E-05,0.006328799,0.0057,-0.000217797,0.004628938,-0.0176874,0.011709476
2036,-3.38061E-06,0.00654568,0.0063,-0.000308825,0.004952256,-0.017507814,0.01155225
2037,-4.60597E-05,0.006786296,0.0073,-0.000376911,0.005326564,-0.017293693,0.012130406
2038,-6.53263E-05,0.007061587,0.0073,-0.000427946,0.005755704,-0.017039913,0.012175814
2039,-2.80706E-05,0.007364642,0.0068,-0.000455476,0.006244703,-0.016737433,0.012211164
2040,9.90958E-05,0.007706468,0.0078,-0.000458921,0.006799014,-0.016377656,0.012519702
2041,0.000253458,0.00809018,0.0070,-0.000430188,0.007425465,-0.0159399,0.013027978
2042,0.0003369,0.00855374,0.0044,-0.000366436,0.008134996,-0.015406439,0.013031822
2043,0.000610215,0.009018946,0.0060,-0.000265028,0.008939577,-0.014745798,0.013505572
2044,0.000755459,0.009573249,0.0072,-0.000123451,0.009853353,-0.013917398,0.014623072
2045,0.00094788,0.010202222,0.0102,5.6984E-05,0.010892797,-0.012881752,0.01503885
2046,0.00116785,0.010913956,0.0091,0.000289935,0.012078916,-0.011573927,0.016280864
2047,0.001354149,0.011726469,0.0108,0.000566169,0.013437927,-0.009903261,0.016840025
2048,0.001636265,0.012713531,0.0143,0.000896432,0.015013879,-0.007747537,0.017821855
2049,0.002203082,0.013888583,0.0146,0.001282306,0.0167764,-0.007804256,0.018765268
2050,0.002130705,0.01523904,0.0177,0.001727061,0.018550003,-0.020487349,0.020467652

    Year,PWBM,CBO,JCT,EY,DZ,OGUSA,GGM
2018,0,0.00518243,0.0118,0.00178,-0.001311387,-0.010836548,0.020231214
2019,0.00220664,0.006156152,0.0078,0.00195,0.000487247,-0.010347457,0.02
2020,0.003728063,0.007148579,0.0068,0.00206,0.001125504,-0.010111243,0.019774011
2021,0.004793765,0.007937249,0.0039,0.00218,0.001611022,-0.009937962,0.019589552
2022,0.00576798,0.008763904,0.0039,0.00234,0.001987641,-0.00977786,0.019408503
2023,0.006936996,0.009626338,0.0029,0.00246,0.002309746,-0.009591985,0.020164986
2024,0.008121617,0.010533368,0.0049,0.00260,0.002600298,-0.009468266,0.02
2025,0.009322092,0.011479496,0.0079,0.00274,0.002871181,-0.009272691,0.020739405
2026,0.010685021,0.0124651,0.0049,0.00295,0.003129509,-0.009152836,0.02066487
2027,0.01145042,0.013480435,0.0069,0.00305,0.003380211,-0.009038546,0.021505376
2028,0.012757321,0.014522183,0.0076,0.00317,0.003627451,-0.008966667,0.021428571
2029,0.014006441,0.015666144,0.0078,0.00329,0.003875088,-0.00895372,0.022261799
2030,0.015253079,0.016884006,0.0072,0.00340,0.004126476,-0.009036558,0.022182786
2031,0.016592181,0.018304848,0.0103,0.00333,0.004384748,-0.007465437,0.02214349
2032,0.017757466,0.019684699,0.0104,0.00446,0.004831878,-0.005873898,0.022988506
2033,0.018886098,0.021130706,0.0103,0.00565,0.005347839,-0.004252743,0.02292769
2034,0.02009413,0.022654742,0.0108,0.00688,0.00593122,-0.002576973,0.023746702
2035,0.021304984,0.024250998,0.0098,0.00815,0.006580561,-0.000849506,0.025438596
2036,0.022555036,0.025937735,0.0108,0.00947,0.00729663,0.000919975,0.025327511
2037,0.023807234,0.027715471,0.0121,0.01084,0.008081569,0.002732483,0.026956522
2038,0.025151098,0.029602076,0.0127,0.01224,0.008938677,0.004593466,0.027657736
2039,0.026596485,0.031598953,0.0130,0.01369,0.009872495,0.006522788,0.029184549
2040,0.028033287,0.033724016,0.0143,0.01517,0.010888096,0.008529322,0.029812606
2041,0.029572817,0.035989868,0.0145,0.01669,0.011992725,0.010644925,0.031223629
2042,0.03117581,0.038443715,0.0136,0.01824,0.013179531,0.012898972,0.031746032
2043,0.03284458,0.041028395,0.0154,0.01985,0.014463586,0.015336876,0.033912324
2044,0.034571778,0.04384105,0.0171,0.02150,0.015861669,0.018027645,0.035159444
2045,0.036399233,0.046888956,0.0200,0.02321,0.017390733,0.021028451,0.036319613
2046,0.038291337,0.05020407,0.0204,0.02498,0.019069783,0.02443073,0.037450199
2047,0.0402765,0.053832448,0.0227,0.02681,0.020901434,0.028355029,0.040125885
2048,0.042382769,0.057878422,0.0263,0.02871,0.023074542,0.032962852,0.04189294
2049,0.04473137,0.062399474,0.0277,0.03068,0.024650485,0.030140669,0.044376435
2050,0.044898335,0.067440117,0.0306,0.03273,0.02989402,-0.009351013,0.046792453