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.
Well, considering we imported $22.25 billion from China in May, I'd say not very much.
It is especially telling that you blow off the actual vectors and growth indicators and their scope,
I love that we manufacture 5 times more than China and that proves to you we are enfeebled.
As an aside, it should be mentioned that you can never have a realistic comparison vis-a-vis China so long as there is no adjustment for the Communist's strategy to deeply understate the value of their labor and hence their product.
So they sell us an $80 product for $60? That's gonna make them rich. LOL!
More likely "rising U.S. manufacturing output" doesn't mean what you think it means.
Right. Because our output is falling?
Gutierrez also said the U.S. has doubled its manufacturing output since 1985 and is significantly outpacing Mexico, Germany, France and Japan in production.
If you, as a 25 year old, had to give your entire paycheck to your 65 year old father, that would certainly suck for you. If your father needed that money to survive and you only gave him half your paycheck, that would certainly suck for him. These transfers do not change your family net worth.
So saying the unfunded liability of Social Security and Medicare is larger than our net worth and therefore we are bankrupt is simply wrong. We're simply moving it from one person's control to another's.
If only the money people make providing services could be used to buy goods. LOL!
When your own manfacturing drops to zilch, just who's goods are you going to buy and sell in a chase for the last inflated dollar?
Check out the link in post #124. We're not quite at zilch yet.
just who's goods are you going to buy and sell in a chase for the last inflated dollar?
We would buy the goods of the people who bought our services. I stopped producing goods over 20 years ago. The services I've produced since then paid a higher return.
I haven't noticed a lack of manufactured goods or people willing to trade them to me. What about you?
Check out the link in post #124. We're not quite at zilch yet.
Just working at it, more dollars chasing each other in an ever growing service economy.
Yep, selling, washing, repairing Hondas instead of creating them. Just the way to stay a great nation.
That's right. Nearly $400 billion in goods in May alone. Almost too small to bother counting.
That's a great chart you keep posting. Are you claiming our standard of living was higher in 1959 when we produced more than it is in 2006 when we produce less?
Remember...we used to produce 100 times more than China, and they had no freaking clue how to make semiconductors or cars...or even quality steel. Now that we have handed all the state-of-the-art production technologies to them, squandering our own investment capital to do so, they are poised to do us serious harm.
Well, considering we imported $22.25 billion from China in May, I'd say not very much.
You can't assume that since you don't know what the U.S. cost of indigenous replication of the Chinese content is. Since their labor price is approximately 1/100th of ours, their product's value is understated. And your analysis is deficient in respect to that:
So they sell us an $80 product for $60? That's gonna make them rich. LOL!
Rich isn't the issue. They are going to get the business. And the manufacturing investments and technolgy to keep doing this. It's like the Titannic. The Unsinkable. Tear a long enough hole in it, and pop enough rivets, that sucker is going down.
A simple test: If our manufacturing sector is so healthy, why don't we successfully export more finished goods to them? You look at the total figures...the net exports to the same country. h'mmm?
Remember their exports to us are almost entirely manufactures, whereas ours are mostly raw foodstuffs, unprocessed iron ore and lumber, and yet still we have a gross negative imbalance:
From the Census Bureau
May 2006 U.S. Exports to China=$4,542.0 Million
Imports from China = $22,253.6 MillionBalance= -$17,711.6 Millions.
This $18 billion monthly net deficit is actually a larger total manufacturing net deficit between China and the U.S...masked to the extent of our unprocessed commodities shipped to them.
Bottom line: They are displacing U.S. manufacturing activity, and the more their manufactures are built up by the West, the more Western manufacturing they will eventually displace. If you look at macro numbers, and say, Aha! US mfg is rising, you miss what is happening at the micro levels that are fundamental and crucial to the continuing viability of U.S. manufacturing. Plus, it is likely that Guiterrez's optimistic assertions don't comport with reality, as inflation is so grossly understated, hence overstating real production.
And you also miss the key factor that China represents in the overall trade deficit, as the N.A.M. has noted:
China’s surplus with the U.S. accounted for 70% of the growth in our manufactured goods deficit in 2005.
We also produced 100s of times more than Japan after we nuked them, so? All you're proving is that they make more than they used to. Not that we make less. Not that we are enfeebled.
and they had no freaking clue how to make semiconductors or cars...or even quality steel. Now that we have handed all the state-of-the-art production technologies to them, squandering our own investment capital to do so, they are poised to do us serious harm.
I agree that there are certain technologies we should not have sold them.
You can't assume that since you don't know what the U.S. cost of indigenous replication of the Chinese content is. Since their labor price is approximately 1/100th of ours, their product's value is understated. And your analysis is deficient in respect to that:
Blah blah blah. You want me to believe that their $22 billion in exports to us makes up a huge chunk of our $400 billion in manufacturing output then prove it.
Tear a long enough hole in it, and pop enough rivets, that sucker is going down.
So $400 billion in May is like the Titanic? What will you call it when our output hits $500 billion a month? The Hindenburg?
If our manufacturing sector is so healthy, why don't we successfully export more finished goods to them?
They're a poor country. How much would they have to buy for you to admit we have a healthy ($400 billion in May alone) manufacturing sector?
Bottom line: They are displacing U.S. manufacturing activity
And you can prove this by showing our manufacturing output has fallen?
Plus, it is likely that Guiterrez's optimistic assertions don't comport with reality, as inflation is so grossly understated,
Says who? You and Paul Krugman?
Lets see, the dollar now is down to less than a eighth its value in what it was in the 50's. Just loverly for those that are in debt, not so good for those to whom that debt may be owed buying those goods.
Anyone one laying aside that penny and loaning it out against future need and financial independance would indeed be a fool such conditions.
Interesting direction leading to a dependant society rooted in service rather that substantive production looks to be the principle trend to me.
You'll have to explain why my service income is bad while your manufacturing (I'm assuming) income is better.
Yes, the government spends too much.
Lets see, the dollar now is down to less than a eighth its value in what it was in the 50's. Just loverly for those that are in debt, not so good for those to whom that debt may be owed buying those goods.
Yes, inflation sucks. I guess you shouldn't hold onto paper dollars then. Try investing them in something that earns a real (that's adjusted for inflation) return.
Anyone one laying aside that penny and loaning it out against future need and financial independance would indeed be a fool such conditions.
That's why you want to earn interest or dividends on your money.
Yes, the savings rate has dropped. We must be poor. Unless you look at our household net worth. Then you'd see that we're not so poor.
You'll have to explain why my service income is bad while your manufacturing (I'm assuming) income is better.
If you look into the inflation statistics, the service sector is the dominant factor in inflation. Dollars chasing dollars in a sevice economy does not portend a good end.
Yes, the government spends too much.
And growing without bound becoming ever more the dominant factor allocation of in national income as opposed to private purpose.
Yes, inflation sucks. I guess you shouldn't hold onto paper dollars then. Try investing them in something that earns a real (that's adjusted for inflation) return.
Like your service sector I presume, to assure even greater inflation in dollars chasing dollars as opposed to production.
That's why you want to earn interest or dividends on your money.
From what? That savings number is what is the percentage of after tax dollars not utilized in consumption. The trend is fewer dollars out of discretionary income going into investment in fact that trend has gone into negative territory. Not good for the future at all.
Yes, the savings rate has dropped. We must be poor.
Net worth today has nothing to do with the issue, we are speaking of where the nation is headed not where we at the current point.
Unless you look at our household net worth. Then you'd see that we're not so poor.
A spendthrift does not stay "not so poor" for very long. As a nation we are spendthrifts. A trend left unattended which will end poorly for the future economic health of this nation.
See you in the winter grasshopper.
"These transfers do not change your family net worth."
That's certainly good to know and I'm glad to hear that all these transfers are unnecessary so that we can merely stop making them and save all of those administrative costs do to governmental "management" of things.
I haven't the slightest doubt that we could do the same thing with the Medicare entitlements too since after all that money stays within the economy also. think of the savings!!! Those funds just get switched back and forth from one family to another anyway but don't really affect anything.
Come to think of it, we could just eliminate money, wages, investments, etc. None of that stuff matters as it just circulates around and everyone passes it back and forth among themselves. Hardly worth the effort, I'd say.
If the service sector makes up 70% of the economy, it makes sense that it makes up the larger portion of inflation statistics. Doesn't prove that service is bad and manufacturing is good. Try again?
Like your service sector I presume, to assure even greater inflation in dollars chasing dollars as opposed to production.
Services are inflationary? Manufacturing is deflationary? You're making less and less sense.
From what? That savings number is what is the percentage of after tax dollars not utilized in consumption.
Capital gains taxes are subtracted, capital gains are not added. The savings statistic as currently calculated leaves a lot to be desired.
Net worth today has nothing to do with the issue,
That's right. We're poor and $54 trillion in net worth won't convince you otherwise.
See you in the winter grasshopper.
Buy gold!!
Right - services the foundation of real wealth!!! Don't need to produce nuttin!!! Just keep buing services and get rich.
Are you claiming our economy is more sound now than in 1959?
We're together on the idea that Kotlikoff rightly pointed out the serious problems we face if we're not careful. He brought up the crazy song and dance about and America going bankrupt so people would put the rant on this thread.
It gets to be a real crock when Freepers take the doom'n'gloom shtick to an extreme with invasions from China. Reminds me of what's happening with natural resources-- an important issue that that global warmers take our focus away from. IMHO Kotlikoff does the same.
First, no way in hell is the US going bankrupt. Second, entitlement programs should, can, and will be cut --all without national bankruptcy. For all the possible benefits that might come about with this silly flatfairwhatever tax caper, there are a lot of other much simpler options; and they don't involve diverting our focus away from the very serious issue of entitlement management.
It's a comforting thought, and maybe we can just wash their cars in return to pay for all the planes, munitions, etc.?
You tell us --how do you measure economic "soundness". We got numbers on productivity, gdp, assets, liabilities, we can international threats, there are employment stats, levels of education, etc.
Pick what you like and then we can talk about it.
I never said they were unnecessary. They just don't reduce national wealth. I sure wouldn't mind if they were privatized.
If I promise to move $1 million from my left pocket to my right pocket on Aug 1st, I'm not suddenly bankrupt because I can't scrape together $1 million.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.
