Is the United States Bankrupt?

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.

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.

We could tackle the parts of the problem, one at a time, beginning with the biggest problem first, which is actually Medicare and not Social Security. Medicare's long term deficits dwarf that of Social Security by a large margin.

The easist way to start to solve Medicare is to wrap it into Medicaid, which is not an entitlement for everyone, it is based on a means test - benefits go only to those whose incomes are low enough.

Why should a twenty-five year old accountant be paying higher taxes (Medicare already requires general revenue taxes) just so that Teddy Kennedy and George Bush can buy Viagra with Medicare's discount? They shouldn't. In my view no ones taxes should be going to help pay for any health care discount for anyone with the means of a Teddy Kennedy or a George Bush.

The Medicaid means test can be adjusted to achieve fiscal affordability for "national health care" assistance to "those most in need", not everyone; based on our economic ability to fund that level in pay-as-you-go terms, not based on our wishful thinking and not our willingness to pass our benevolence of today as debt to our grandchildren. We may not be able to bring that means test in line with 100% of that objective all at once. We may have to progress to it.

Those "qualifying income" adjustments will add to incentives for individuals and markets to push down health care costs that more individuals will have to pay out of pocket for. The biggest factor in health-care costs not being pushed down is that since everyone knows that someone will pay, no matter what (my employer's insurance, medicaid, medicare - anyone but me) market forces are not in play in too much of the health care industry.

(Doctor's visits should not be an "insured" item anywhere. Anyone who does not have the personal responsibility to defer gratuitous expenses and to save, so as to afford an occasional doctor's visit, deserves to be caught thinking the expense of visiting the doctor is a difficult one. Conversely, once doctors have a 100% individual out-of-pocket-expense market on their visits with patients, their charges will start coming down.)

Leaving everything as "entitlement" at public expense will produce the "cost savings" of enforced mediocrity of quality of health care for everyone, because any national plan enforced as a universal plan can only afford reduced coverage and quality for everyone; which every existing national plan is a testament to.

With the largest deficits, Medicare, brought under prospective control over time, we would have (1)working models and (2)a little more time to get Social Security brought under control.

The affect of this change would put the incentives (push) back on (1)employers to quit dropping their Medical Benefit plans for retirees, (2)increased use and higher limits for health savings accounts.

Increased savings, in all forms, will be required to be part of any antidote to our pending national debt crisis.

There is a fallacy in the "economic growth" as a primary form of our long term solution. It has not reduced the projected long term deficits accruing in Medicare and Social Security since the dire projections have been made. In fact the rosiest economic projections do not change, by very much, the fact that general revenue taxes will increasingly have to be devoted to both Medicare and Social Security, beginning in about seven years. The only benefit that higher economic growth has been able to demonstrate so far is various amounts of delay before the inevitable and none of those projections can delay increases in taxes, unless there is decreases in projected benefits as well.

We need to win the war that recognizes that benefits are going to be decreased, either because we reduce what level of benefits taxes will fund or because a fully taxpayer funded universal benefit will in fact include reduced benefits for most people who now have any form of insurance. Either we re-grow the private sector market forces involved in health care, or abolish them and live in English/Frech/Canadian/German/Japanese medical squaller (oh yes - in Japan the family is expected to provide everything but the medicine, the treatment and the bed and if its an outpatient procedure you can often forget any anesthesia).

Too bad that supposed Social Security "Lockbox" is just more debt.

http://www.ssa.gov/OACT/NOTES/note142.html
"The estimated tax transfers are allocated between the two funds in proportion to the statutory OASI and DI tax rates. The transferred funds are immediately invested in certificates of indebtedness, the special obligations that mature on the following June 30. Other trust fund income during the month is also invested in certificates of indebtedness immediately upon receipt.
All trust fund investment in special obligations is, however, subject to the statutory limit on total public debt outstanding. The gross Federal debt includes amounts owed to Federal trust funds, including the Social Security trust funds. New Treasury obligations cannot be issued to the trust funds if doing so would cause the debt limit to be exceeded"

An interesting statement considering that those supposed "contributions" appropriated into the "Trust Funds" add to the National Debt. Isn't it?

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