How can we reduce the national debt? More specifically, what economic policies can we use to reduce it? In this video I teamed with economist Brian O'Roark (from Robert Morris University) and we asked ChatGPT how we should fix the National Debt. See our reaction to ChatGPT’s answer and learn what they get right and wrong in their economic analysis.
The question we asked: 1) What Fiscal Policy can be used to reduce national debt? And if this is adopted, what happens to the real interest rate, aggregate demand & potential output?
CHAT GPT's response:
One fiscal policy that can be used to reduce the national debt is a policy of fiscal austerity, which involves reducing government spending and/or increasing taxes in order to decrease the budget deficit and slow the accumulation of debt over time.
If a policy of fiscal austerity is adopted, it would likely result in a reduction in aggregate demand in the short run, which could lead to a decrease in real output and an increase in the unemployment rate. However, over the long run, a reduction in government debt could lead to lower interest rates, which would stimulate investment and economic growth
In this graph, the original equilibrium output and price level are represented by point A. If the government adopts a policy of fiscal austerity, it would lead to a leftward shift in the aggregate demand (AD) curve from AD1 to AD2, as government spending and/or transfer payments are reduced. This would lead to a new equilibrium output and price level represented by point B, which is lower than the original equilibrium.
Over the long run, however, reduction in government debt could lead to lower interest rates, which would lead to an increase in investment and an increase in potential output. This is represented by the rightward shift of the long run aggregate supply (LRAS) curve from LRAS1 to LRAS2.
Overall, the adoption of a policy of fiscal austerity would likely result in short-run costs in terms of lower output and higher unemployment, but it could lead to long-run benefits in terms of lower interest rates and increased investment. However, the specific effects of such a policy would depend on a variety of factors, including the size of the austerity measures and the overall state of the economy.
Check out our reaction in this video: