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.
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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.
Ping to the Geezer. Actual data that shows that the "entitlement" side of the budget is driving the deficit (which remains under 5% of GDP -- of concern, but not the debacle that Hillary-Gore-Kerry-Pelosi-Reid would have us believe).
Now, if we can get a graph of US revenues, we will see that revenues are growing strongly. But, the Dems still want tax increases, and call reductions in the rate of spending "cuts."
Kudos for showing some actual data.
Yes. Baseline budgeting must be killed.
Yes! And get serious about sealing the border. Probably wishful thinking.
THEN we'll see some voter action to curb the runaway (and sometimes hidden) spending that we now have. And there's a tax system that will do this.
It's time for the FairTax!!!
There are huge bundles of information available about it and it is the most thoroughly economically-studied tax plan ever put before congress.
And here's the website with extensive economic data - the FairTax website.
There's lots of helpful information there on many, many different topics. Check the FAQs and Rebuttals for example.
ping
Agreed.
His "plan" to mobilize some national guard troops to free up INS agents is already proving to be nothing more that a political statement. He promised a few thousand, but we've only added a few hundred.
Why don't we just build the stinking fence??? Who gives a rat's ass if it offends the Mexicans? Right now the situation is kinda like that toll booth in the movie "Blazing Saddles." The illegals: "Badges?! We don't need no stinking badges!"
It only takes once. But, right now they are 0 for a gizzilion.
Yep, its bankrupt. Send me your worthless T-bills, bonds and paper money. I will buy them for 10 cents on the dollar.
You're right - and if we got the morality abd cultural factors straightened out, fiscal responsibility might follow.
The US owns about 65-70 percent of the land in the country. How much is that worth? We have over a trillion barrels of oil locked up in shale rock on government land. What is that worth.
I see only one solution. Allow 100 million more illegals in and chattel their future taxable income to the Federal Reserve so they can increase the federal debt and roll the interest over for another few years, -- or at least until after the election.
Thank you. I will check it out.
hey! Don't worry....the printing presses still work!
Ping
The several states and the US controls 100% of the land and resources on behalf of its citizens.
In any case, who am I to disagree with this very detailed and sourced paper? The US must be bankrupt if the author says so. Therefore, my offer stands. Send me your good for nothing, now worhtless T-bills, bonds and paper currency and I will do you a favor by giving you 10 cents on the dollar. But this offer is only good for a limited time.
Bump!
But don't hold your breath waiting for those checks to roll in.
Remember how grateful France has been since liberation in WW-II...
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