Posted on 07/10/2006 10:59:12 AM PDT by Paul Ross
Synopsis
Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives.
It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of U.S. fiscal institutions is essential to secure the nation’s economic future.
The paper offers three policies to eliminate the nation’s enormous fiscal gap and avert bankruptcy: a retail sales tax, personalized Social Security, and a globally budgeted universal healthcare system.
_Preface
Is the U.S. bankrupt? Or to paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bear, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors?
Many would scoff at this notion. They’d point out that the country has never defaulted on its debt; that its debt-to-GDP (gross domestic product) ratio is substantially lower than that of Japan and other developed countries; that its long-term nominal interest rates are historically low; that the dollar is the world’s reserve currency; and that China, Japan, and other countries have an insatiable demand for U.S. Treasuries.
Others would argue that the official debt reflects nomenclature, not fiscal fundamentals; that the sum total of official and unofficial liabilities is massive; that federal discretionary spending and medical expenditures are exploding; that the United States has a history of defaulting on its official debt via inflation; that the government has cut taxes well below the bone; that countries holding U.S. bonds can sell them in a nanosecond; that the financial markets have a long and impressive record of mispricing securities; and that financial implosion is just around the corner.
This paper explores these views from both partial and general equilibrium perspectives. The second section begins with a simple two-period life-cycle model to explicate the economic mean-ing of national bankruptcy and to clarify why government debt per se bears no connection to a country’s fiscal condition. The third section turns to economic measures of national insolvency, namely, measures of the fiscal gap and genera-tional imbalance. This partial-equilibrium analy-sis strongly suggests that the U.S. government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds.
The world, of course, is full of uncertainty. The fourth section considers how uncertainty changes one’s perspective on national insolvency and methods of measuring a country’s long-term fiscal condition. The fifth section asks whether immigration or productivity improvements arising either from technological progress or capital deepening can ameliorate the U.S. fiscal condition.
--SNIP--[skipping ahead to the meat of the paper]
THE U.S. FISCAL CONDITIONAs suggested above, the proper way to consider a country’s solvency is to examine the life-time fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country’s policy will be unsustainable and can constitute or lead to national bankruptcy. Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke.
Consider, for starters, Gokhale and Smetters’s (2005) analysis of the country’s fiscal gap, which measures the present value difference between all future government expenditures, including servicing official debt, and all future receipts. In calculating the fiscal gap, Gokhale and Smetters use the federal government’s arbitrarily labeled receipts and payments. Nevertheless, their calcu-lation of the fiscal gap is label-free because alter-native labeling of our nation’s fiscal affairs would yield the same fiscal gap. Indeed, determining the fiscal gap is part of generational accounting; the fiscal gap measures the extra burden that would need to be imposed on current or future generations, relative to current policy, to satisfy the government’s intertemporal budget constraint.
The Gokhale and Smetters measure of the fiscal gap is a stunning $65.9 trillion! This figure is more than five times U.S. GDP and almost twice the size of national wealth. One way to wrap one’s head around $65.9 trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143 percent.
The Gokhale and Smetters study is an update of an earlier, highly detailed, and extensive U.S. Department of the Treasury fiscal gap analysis commissioned in 2002 by then Treasury Secretary Paul O’Neill.
Smetters, who served as Deputy Assistant Secretary of Economic Policy at the Treasury between 2001 and 2002, recruited Gokhale, then Senior Economic Adviser to the Federal Reserve Bank of Cleveland, to work with him and other Treasury staff on the study. The study took close to a year to organize and complete. Gokhale and Smetters’s $65.9 trillion fiscal-gap calculation relies on the same methodology employed in the original Treasury analysis. Hence, one can legitimately view this figure as our own government’s best estimate of its present-value budgetary shortfall. The $65.9 trillion gap is all the more alarming because its calculation omits the value of contingent government liabilities and relies on quite optimistic assumptions about increases over time in longevity and federal healthcare expenditures.
_____________________________________________________
Laurence J. Kotlikoff is a professor of economics at Boston University and a research associate at the National Bureau of Economic Research.
© 2006, The Federal Reserve Bank of St. Louis. Articles may be reprinted, reproduced, published, distributed, displayed, and transmitted in their entirety if copyright notice, author name(s), and full citation are included. Abstracts, synopses, and other derivative works may be made only with prior written permission of the Federal Reserve Bank of St. Louis.
In a nutshell this is what it is all about. In fact the entire worlds financial stability is build around those 2 words. A US Gov't bond is nothing but a piece of paper which is as I believe the saying goes backed by "the full faith and security" of the United States Government. Once that faith is lost the bonds will not sell unless interest rates rises to usurious levels and that in and of itself exacerbates the implosion by causing an ever rising rate level It is all smoke and mirrors but as long as we and the rest of the world keep jerkin' each other off it isn't a problem. Watch out though if one nation decides to let go of another ones crank.
You don't seem to think any large-scale economic breakdown is possible; trees just grow to the sky forever, eh??? Never need to pay off debts; just inflate them away, eh?
That's nice.
If they earnestly went capitalist and ditched the communism this wouldn't even be a hiccup. How many centuries has the lure of the teeming "mass" market of China been a siren call for Yankee merchants?
The only reason they can't kick their "US" market dependency...is the communists don't want to.
First, the PRC knows...and structures things...so that they are rising at our expense. Enfeebling our resident industrial base, and relocating it to their control. And accruing a large enough financial stake in our debts to undermine the dollar at a time of their choosing. Meanwhile, they lock up oil supplies via direct barter with rogue countries (Venezuela, Iran, Kyrgastan, Russia, etc. )outside the U.S. dollar system.
Second, they keep the vast majority of their populace out of the "new economy" for a very deliberate reason. They wish the main majority to stay totally engrained in their communist ideology. While encouraging the East coasters "to become rich is glorious" in fact, very few can, because wages and the currency are so rigorously kept world-beating low. This is a form of three-card monty. The only ones getting rich are the Communists who run the game. It is a choke collar that allows them to maintain total control. This prevents a true middle class from arising...which might not be so controllable.
Exactly!!
The Commerce Department reported Wednesday that new orders rose by 0.7 percent in May following a 2 percent plunge in April. The slight increase left orders at a seasonally adjusted $399.9 billion in May.
I wonder how much we manufactured before we were enfeebled? I wonder how much China manufactured in May?
You seem to have a good grounding on China and it's objectives - stated or unstated. Makes one wonder if they might not intentionally "dump the dollar" at some point, eh??
According the the fed's own figures the debt has risen almost $500 million in the last 9 months and with three months to go this fiscal year plus Social Security surpluses that will be offset with more fedgov IOU's it looks as though the increase in the national will come very close to that figure.
If you own the bank $1,000 and can't pay your are introuble.
If you owe the bank $1,000,000,000 and can't pay the ban is in trouble!
Did you mean $500 billion?
Social Security surpluses that will be offset with more fedgov IOU's
Surpluses reduce the amount the Feds borrow. You have a link to these numbers?
The State of U.S. Manufacturing (2003)
Commerce Secretary: U.S. Manufacturing Still Strong (2006)
U.S. Secretary of Commerce Carlos Gutierrez on March 23 highlighted the strength of U.S. manufacturing and the nation's economy while emphasizing the need to reject trade barriers that could put the nation at a competitive disadvantage.
During his speech at National Manufacturing Week in Rosemont, Ill., Gutierrez pointed out that the U.S. still surpasses other industrialized nations in economic growth, noting that the U.S. gross domestic product (GDP) grew 3.5% in 2005 compared with GDP growth of 0.9% in Germany, 0.3% in Italy, 1.5% in France, 1.5% in the European Union, 2.9% in Canada and 2.8% in Japan.
However, the rate of growth in the less-industrialized nations of China and India is much faster, according to reports by the Agence Presse France news service. China grew 9.8% in 2005, and India's GDP is projected to grow 8.1% in fiscal 2006.
Gutierrez also said the U.S. has doubled its manufacturing output since 1985 and is significantly outpacing Mexico, Germany, France and Japan in production. And since 2001, productivity in the U.S. has grown at an average rate of 3.8%, the fastest rate since World War II, Gutierrez said.
Gutierrez, who followed a speech presented by Caterpillar CEO Jim Owens, echoed Owens' call for maintaining free trade between the U.S. and China.
"Economic policy choices should not be dictated by fear," he said. "Policy choices must be driven by steps that build and sustain our strengths. Free trade is our best hope to raise living standards around the world."
Impossible!! Paul Ross and the other NAFTA/China-phobes said our manufacturing has been enfeebled. Will they ever admit their error?
Yes, I did mean 500 bill......check out the Bureau of Public Debt.......and even though the fedgov is using Soc. Sec. surpluses to reduce the amount they borrow 'today', according to the OMB report from '99 those $ represent a future claim against the Treasury.....which seems to be a fancy way of saying it's a debt that'll need to be repaid at some point.....so they're just shuffling off current debt exposure to repayment some point down the road......at our kids expense of course.
Look at the other links for more good news.
Except the courts have already ruled you have no ownership right to your Social Security. It might be more precise to say the Federal government's borrowing needs are reduced by the money they steal from Social Security.
My father has been saying this since the 1970's.
Yup. I think some pudgy pink posteriors will end up in the Potomac that day.
ping
Why do you suppose the feds are trying to sell off our ports and highway system to foreign governments and agents as fast as possible? They are propping up the GDP until Bush is out of office, or the NAU is implemented.
No. The argument will be one of two things. First, we are just low wage assembly line workers who allow other countries to do the serious manufacturing and then re-import those products here for final assembling. Or, it will be that we make more in total dollars but not in total units. As if making more toothpicks, T-shirts and cheap molded plastic toys is the way to raise our standard of living.
Who knows, maybe they've come up with a third option since then.
Answered:
China's industrial production up 17.9% in May
(Xinhua Online) [15 Jun 2006]China's industrial production grew 17.9 percent in May from the same month last year, the National Bureau of Statistics (NBS) said on Wednesday.
The total added value of China's large and medium-sized industrial enterprises in the first five months is 3174.8 billion yuan, up 17 percent.
A NBS monthly report said the added value of China's large and medium-sized industrial enterprises reached 706 billion yuan (88.25 billion U.S. dollars).
In terms of products, the output of coal went up by 12.9 percent to 173 million tons, crude oil, up 2.5 percent to 15.72 million tons, and electricity, up 12.5 percent to 217.5 billion kilowatt-hour.
The output of pig iron, crude steel and steel rose 23 percent, 19.6 percent and 27.1 percent, respectively, the NBS said.
The output of automobiles grew 28.4 percent to 620 thousand units, with that of sedans increasing 51.7 percent to 330 thousand units.
Double-figure growth was registered in the industrial added value of the textile industry, chemical materials and related processing industry, non-metal mineral industry, ferrous metals smelting and pressing industry, telecommunications devices, computers and other electronic devices, and transportation equipment manufacturing.
The value of goods for export delivered by large and medium-sized enterprises witnessed a 23-percent growth in May to 475.5 billion yuan.
The sales ratio of industrial goods increased by 0.22 percent to 97.75 percent.
Large and medium-sized enterprises comprise all state-owned ones and non-state owned ones, whose annual sales exceed five million yuan.
So we can see that they are well on track to have annual industrial production of over a trillion. But not to worry, we're always told that the hemmhorrage will be healed like magic by insourcing. Let's examine that topic briefly, and see what is happening with one of the principal foreign "insourcers" that are building plants in the U.S. Perhaps we can get a small clue from Honda's production figures, which are starting from a non-existent base in China...to almost a quarter of what they make in the U.S.:
Production by Region
| April | Year-to-Date Total (Jan - Apr 2006) |
|||
|
Units
|
Vs.4/05
|
Units
|
Vs.2005
|
|
| North America |
110,241
|
-2.5%
|
473,250
|
+3.9%
|
| (USA only) |
77,335
|
-1.0%
|
335,656
|
+7.1%
|
| Europe |
14,832
|
-12.1%
|
66,701
|
+1.4%
|
| Asia |
54,061
|
+27.9%
|
193,595
|
+23.0%
|
| (China only) |
29,835
|
+44.2%
|
103,271
|
+41.4%
|
| Others |
6,163
|
-8.2%
|
27,726
|
+11.7%
|
| Overseas Total |
185,297
|
+3.6%
|
761,272
|
+8.2%
|
At this rate of expansion, the Chinese Honda operation will surpass, by units (not profits) total U.S. Honda operations within five years.
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