Is the United States Bankrupt?

FEDERAL RESERVE BANK OF ST. LOUIS REVIEW ^ | July 1, 2006 | Laurence J. Kotlikoff

[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 CONDITION

As 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.

[ancient_geezer]

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.

[american spirit]

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.

[expat_panama]

A good start begins with revamping the current federal tax system...   James DeMint (R-SC).  

Sounds good  --something you're in favor of for a change.  Please check your link and repost:  

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[ancient_geezer]

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

[expat_panama]

the WayBack machine.... 

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?

[ancient_geezer]

It's well on its way if one looks at how the federal income tax is distributed across quintiles of comprehensive income, which is the primary focus of DeMint, Dr. Williams and many others as the measure by which most of the electorate perceive the cost of government in the personal finances.

Not a new focus by any means but one of substantial importance as this republic has grown and morphed across a 220+ year history.

[expat_panama]

Let's take time out from trying to describe this crisis that's "on it's way", and agree that Social Security and Medicare are problems now.   So far, this is the only solution that's ever gotten beyond the blog/rant stage.   I say we get on board until we see something better.

[ancient_geezer]

Fine, where's your introduced bills to accomplish your favorite crisis. I haven't seen much coming out of Congress myself.

I see tax reform to be better characterized and backed up by long standing and introduced solutions in the form of legislation to meet perceived issues myself.

But then there is no reason one may not chew gum and walk at the same time and deal with both since in manyways the both have common roots in the problems of how government and its programs are financed.

Tax and Social Security Reform: Thinking Outside the Box.
NCPA Study No. 275
Thursday, September 29, 2005
http://www.ncpa.org/pub/st/st275/

[Nowhere Man]

I'm no economic expert, but I think we are in trouble and have been since the 60's. Everything that fuels the economy is artificial and primarily not based on necessities.

The yuppie generation was not raised to pay-as-you-go, and it reflects in our policies. I don't know what they are thinking, that we will come out on top no matter what happens?

We are teetering on the brink but it could be a long, tortuous descent. Sure there will be the rich, and the rest will be their slaves, cast into a daily struggle for survival. We are seeing some of the symptoms in increased aberrant behavior, crime, drugs.

We are a sick society and those who are propping it up won't be able to keep it up forever due to an ever-increasing undertow.

Your father wasn't off by many years. He may have been right on. Wasn't 1973 Roe vs. Wade? It may seem irrelevant, but that marked the beginning of our slide into the abyss of open and ubiquitous moral degeneracy.

Well, I know 1973 was Roe v. Wade but also, IIRC from Chuck Harder's radio show,, that is when the middle class started to lose ground. I think though, with the economic chage then plus seeing the 1960's and what they have wrought, I think this influenced my father's thinking, and mine as well. I think he is amaxed how long the economy has kept going with what you said, being build up on a weak foundation with wants being the driving force over necessities. Yes, you will always have your items that are more wants and necessaries but when I see things like people going into debt to buy the latest HDTV, cars, and so on and tossing out perfectly good items. I know there are some electronics buffs like myself who find TV's in the trash to take home and repair, there are times, they work right away with no help at all. We are a wasteful society. I don't know, I turned 40 last Saturday and I vaguely remember the tail end of the era when color TV's were considered luxury items.

We may not be divided territorily, but we surely will be divided along economic class and cultural lines. People of such diverse cultures do not get along and are not going to learn to get along, no matter what cute little books they will read in school. Gangs are a symptom of cultural malaise.

Yeah, I think territory is not as important as cultural and economic factors in what is dividing us, but at some point in time territories will gel out but that is future speculative history.

There are two main things out there that we are lacking in society. First I'll tackle economics. I do decry the "hip/hop" rap gang culture in most major cities but if you are a black youth who is born to poor economic conditions and you see either thr rap stars and/or local drug dealers tooling around in pimped out cars with "bling" to the hilt and gold chains everywhere, that makes an impression on them. With lack of a good family and the good economic basis as foundations, that looks to them to be their only ticket out of the slums. The bad side is that there is a great chance that they will not live to 30 or 40, being shot by some gang members and/or strung out on drugs, but when all other alternatives look poor, well, there ya go.

That brings us to a lack of morals. From the 1960's onward, we have become weakened in our morals and ethics. With that, you end up with "free love" and other such things and then after that, you have a trail of misery that is left. Then you get things like the gang culture and so on. There is a segment though that does crave moral leadership but there is a vacuum in some areas. In many cases, the Churches are trying their best and there is some success there but other areas, the vacuum remains. This is where other religions like Islam comes in, Islam does have a high code of moral conduct although as we have seen, there are very bad parts of it too. I know if I didn't know any better and try my best to keep God and Jesus in my heart, Islam would look good to me if I was in such a vacuum.

Although I lay a lot of the blame on the political left with the lax morals that got us here, there are some on the right who share the blame too in the economic side who follow a sink or swim philosophy of "let them eat cake." We need to develop more of a sense of "right or wrong" instead of "left or right."

I dunno, maybe being the product of a single parent as a result of divorce as well as being on hard luck from time to time has shaped my independent conservative views. I'm certainly no Democrat, but I can't really say I'm a Republican at heart either. I'm registered Republican. I have very conservative views morally, militarily, foreign policy, and very pro-NRA but I also hold dear the "Four Freedoms" FDR outlined in his 1941 speech. Freedom of speech, freedom to warhip God in your own way, freedom from fear (of tyrants), and freedom from want (when it comes to the economy, jobs, and healthcare.) We need to be united more but it seems like there are some forces both on the left and right who end up dividing us.

[expat_panama]

I haven't seen much coming out of Congress myself.

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.

[ancient_geezer]

LOL, fine.

However, I will continue with my advocacy of tax reform as as my primary focus myself.


Good day to you.

[expat_panama]

--and a good day for you and yours too. Ping me next time you see something else we can but heads over...

[Toddsterpatriot]

Okay, here's my last attempt to show you the ignorance of your ways.

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)?

[ancient_geezer]

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
by David C. John
Heritage Foundation Executive Memorandum #940
September 2, 2004

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
by Daniel J. Mitchell, Ph.D. and Gareth G. Davis
Heritage Foundation Backgrounder #1176
May 04, 1998

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):

• Social Security benefits will exceed projected payroll tax collections in 2013. This annual deficit will explode quickly thereafter, climbing from $49 billion in 2015 to $684 billion in 2030.

• The total unfunded liability of Social Security, adjusted for inflation, is now $17.9 trillion --four times greater than the national debt.

• Because surplus payroll taxes have been spent on other government
  programs, the Trust Fund contains nothing but IOUs. To make good on those IOUs, politicians in the future will have to raise taxes or issue debt.

• Even if these IOUs are redeemed, the Trust Fund will go bankrupt in 2032. This is 4 years earlier than projected only five years ago and 16 years earlier than projected ten years ago.

• In order to keep the system solvent when the Trust Fund runs dry in 2032, payroll tax rates would need to increase by one-third or benefits would have to be cut by 25 percent.

• Social Security's crisis is driven by demographics. Today, there are 3.4 workers for every beneficiary. The Trust Fund report predicts that, because of longer life spans and lower birth rates, there will be only 2 workers for every beneficiary by 2030. As recently as 1960, there were more than 5 workers per beneficiary.

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 ***

[Toddsterpatriot]

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.

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.

[ancient_geezer]

The facts speak for themselves.

Good day to you.

[Toddsterpatriot]

Glad you agree.

[ancient_geezer]

Whatever you want to believe, you will.

Nothing to be gained in arguing with such a person.

[Toddsterpatriot]

Who's arguing?