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 nations economic future.
The paper offers three policies to eliminate the nations 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. Theyd 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 worlds 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 countrys 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 ones perspective on national insolvency and methods of measuring a countrys 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 countrys 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 countrys 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 Smetterss (2005) analysis of the countrys 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 governments arbitrarily labeled receipts and payments. Nevertheless, their calcu-lation of the fiscal gap is label-free because alter-native labeling of our nations 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 governments 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 ones 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 ONeill.
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 Smetterss $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 governments 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.
I can't do that because I don't think there's anything in any lockbox except some fedgov IOU's which is more debt that'll need repaid down the road.
Definitely no lockbox, it has all been spent as it comes in.
Any SS payroll tax revenues in excess of current benefit payments are spent on non-Social Security programs and activities by according to the Social Security Trust Fund trustees.
All social security monies have been spent. That's why Social Security obligations add to the government debt by the way, Congress borrows from the "Lockbox" by selling the Trustees certificates of indebtedness to draw against future general revenues and uses the SS payroll tax revenues to pay for other programs and functions of government.
As a consequence Social Security benefits, required to be paid by law, must be appropriated from the general revenues on and annual basis instead from the Social Security revenues in the trust fund established, supposedly, from payroll taxes.
My guess is those IOU's to SS is part of the "intragovernmental holdings" figure that toddster thinks is just being switched from one pocket to the other and isn't part of the national debt.......of course he's the only one that espouses that view as far as I can tell.
Sounds good --something you're in favor of for a change. Please check your link and repost:
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Sounds good --something you're in favor of for a change.
And why would you figure that I would not be in favor of something.
Obviously if one has a problem with what is, they must of necessity be in favor of some alternative condition otherwise there would be no gripe.
Every coin has two sides, some even manage to find an edge as well.
Please check your link and repost:
Let me introduce you to the WayBack machine.
When an old link fails from material having been removed from a website, there is the magical internet archive.
http://web.archive.org/web/20010622001806/http://www.heritage.org/events/2001/apr01/demint0405.html
Neat, thanks!
Ah. The quote about "a financial burden for this largess". We would do well to move beyond "a good start" and take on the hard work of making it happen. First we decided what we're fixing first --maybe we can take on the "Coming Crisis in our Democracy" that DeMint warned us about in 2001. Your view is that it's still on it's way, it's already happened, it was avoided, or it's going to arrive after another 5 years?
Tax and Social Security Reform: Thinking Outside the Box.
NCPA Study No. 275
Thursday, September 29, 2005
http://www.ncpa.org/pub/st/st275/
Today's Washington Times:
Social Security on back burner Some Republican lawmakers say President Bush should ease up on his calls for Social Security reform and focus on other topics this election year, depriving Democrats of the opportunity to claim that the administration wants to "privatize" the program. But Sen. Jim DeMint, South Carolina Republican, said Democrats would have tried to use the issue this year anyway, and he appreciates Mr. Bush's continual calls for reform. "I don't think it's a mistake," he said. "He's trying to do something constructive, and [Democrats] are just trying to obstruct." |
Apparently DeMint is still on target and we'd do well to encoruage his support of Bush's entitlement reform. IMHO if we throw up our hands in helpless complaining then we're just helping the Democrats.
LOL, fine.
However, I will continue with my advocacy of tax reform as as my primary focus myself.
Good day to you.
--and a good day for you and yours too. Ping me next time you see something else we can but heads over...
If I write a $1,000,000 IOU to myself and put it into the Toddsterpatriot lockbox, what do I have? According to Al Gore, I've saved $1,000,000 toward my retirement. Just look at that lockbox. Inside a note says, "I, Toddsterpatriot, promise to pay you, Toddsterpatriot, $1,000,000" I guess I can retire tomorrow, right?
I can't do that because I don't think there's anything in any lockbox except some fedgov IOU's which is more debt that'll need repaid down the road.
Hmmmmm...you don't agree that the lockbox holds real assets. I guess I'll have to go to work after all.
Oh, so you can't cite any instance where we were told our national debt is only 4.79T?........and here I was hoping beyond hope you're not as economically illerate(sic) as you've shown here ......sheesh, I am truly disappointed.
So I'm economically illiterate? According to your logic, the asset in my lockbox isn't real, but I still owe $1,000,000. The interest alone is going to cost be over $50,000 a year. All to pay for the asset you admitted wasn't real. Boy, I wish I hadn't written that IOU, because my assets used to be zero, but now I owe $1,000,000 and $50,000 a year in interest. I'm just glad I didn't write myself a $2,000,000 IOU, because then I'd really be screwed.
Hmmmmmm......your logic sounds wrong. What if we took Al Gore's idea, $1,000,000 in the lockbox is an asset and american spirit's idea, $1,000,000 IOU is a liability and add them together? $1,000,000 asset minus $1,000,000 liability equals zero. Hmmmmm......I can't retire but at least I don't need to repay $1,000,000 in debt (plus interest). I'm back to where I started, zero.
So who said two wrongs (american spirit + Al Gore) don't make a right (Toddsterpatriot)?
If I write a $1,000,000 IOU to myself and put it into the Toddsterpatriot lockbox, what do I have?
You aren't writing an IOU to yourself in the particular case, you have sold a non-negotiable certificate of credit to a trust fund promising to use future tax revenues to pay the trust back and have used the proceeds to buy that which is outside the trust fund.
You have a debt against future general tax revenues to replace funds back into the trust out of general revenues.
I guess I'll have to go to work after all.
More likely your children and grandchildren paying both SS taxes they are liable for plus additional taxes to pay off the non-negotialbe certificate of credit used for consumption today.
So I'm economically illiterate?
If you stick by your lack of logic, the case could be made.
What if we took Al Gore's idea, $1,000,000 in the lockbox is an asset
Obviously Al Gore is economically illiterate. You want to use him as your economic guide, all I can say is "Garbage in Garbage out."
http://www.heritage.org/Research/SocialSecurity/em940.cfm
Misleading the Public: How the Social Security Trust Fund Really Works In short, the Social Security trust fund is really only an accounting mechanism. The trust fund shows how much the government has borrowed from Social Security, but it does not provide any way to finance future benefits. The money to repay the IOUs will have to come from taxes that are being used today to pay for other government programs. For that reason, the most important date for Social Security is 2018, when taxpayers must begin to repay the IOUs, not 2042, when the trust fund is exhausted. |
http://www.heritage.org/Research/SocialSecurity/BG1176.cfm
Social Security Trust Fund Report Shows Need for Reform The 1998 Social Security Trustees Report, released April 28, 1998, reveals that the retirement program is actuarially bankrupt. The retirement program's real unfunded liability has expanded to $17.9 trillion, more than 6 percent higher than reported last year. Moreover, because the Social Security Administration's long-term life expectancy figures are flawed (the Bureau of the Census calculates that Americans will live nearly two years longer than under the figures used by Social Security), the actual long-term deficit is significantly higher. Opponents of Social Security reform say the report is good news because the bankruptcy date for the Trust Fund is 2032, three years later than predicted last year. But even if the figures in the Trust Fund Report are accepted as accurate, the prognosis for the program is grim. According to the six members of the Board of Trustees of the Social Security Trust Fund (which includes three members of President Bill Clinton's Cabinet):
The Trust Fund Report confirms that Social Security is in crisis and cannot be sustained in its present form. The trustees now indicate that the program's finances are in even worse shape than previously thought. Any efforts to close this funding gap, however, simply will drive Social Security's poor rate of return even lower. *** SNIP *** |
So the taxpayers have written the taxpayers an IOU.
If you stick by your lack of logic, the case could be made.
Be more specific, where was my lack of logic?
Obviously Al Gore is economically illiterate. You want to use him as your economic guide, all I can say is "Garbage in Garbage out."
Al Gore is in no way my economic guide. I just wanted to show that his error and american spirits error would cancel each other out.
I know that Social Security is a terrible investment, as currently structured. But thanks for the links and graph. Maybe american spirit will follow your links and figure out the truth.
The facts speak for themselves.
Good day to you.
Glad you agree.
Whatever you want to believe, you will.
Nothing to be gained in arguing with such a person.
Who's arguing?
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