Skip to comments.Is the United States Bankrupt?
Posted on 07/10/2006 10:59:12 AM PDT by Paul Ross
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.
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 CONDITION
As 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.
As for the Government already maybe trying to inflate its way out of this mess of its own creation...
Is the Pope Catholic?
Ping for later reading.
I'd settle for cutting it 100%.
Even believing the bad numbers, a combination of solutions, including the one they didn't mention, economic growth, will get us out of this mess. Another possibility is producing cheap power from semconductors or nanotechnology (e.g. solar, depolymerization, etc)
One way to wrap ones head around $65.9 trillion? Even Algore's head ain't that big!.......
How much is gold an ounce?
I'd go for the 143% and ask for the bridges to nowhere nowhere money back.
Hmm, time for a road trip with a few cases of beer which won't help the problem but it would make us feel better. Or, maybe we need to just have a big garage sale? Maybe put the capital building and some other junk we don't need on ebay?
You'd eliminate our military, Coast Guard, any semblance of border control, default on our bonds, cut off Social Security, Medicaid, transportation funding, etc?
I think we should get the so-called "nondiscretionary spending under control." Our republican congress and republican president have failed in this regard. Naturally, the Dems would make it much worse, and try to solve all these problems with tax increases......
The ol' tried and true method. It works everytime it's tried......Remember WIN! ????.....
All those possibiliities are not ignored, and are indeed evaluated. Check into the guts of the paper, note the discussion pertaining to technology, productivity growth, and "capital deepening."
The populace can become impoverished, but talking about states as if they were large, generalized versions of individuals is reasoning by false analogy. Everybody should buy gold so when the state rounds up all the wealth of the populace they will find it all easier and more conveniently.
1 ounce of gold = 1 ounce of gold.........A=A.......
I've been reading articles reaching very similar conclusions for about 40 years.
The economy hasn't collapsed yet. (Which doesn't necessarily mean it won't tomorrow.)
However, the sky is falling types do not have a great record of successful prediction.
Sigh. The Beer Trip is beginning to sound better all the time, eh?
Paying interest isn't discretionary. Neither is Social Security. Is Medicaid? I didn't think so.
You're right, I wouldn't want to eliminate the military.
Ping. You have an ally here.
It appears the answer to the question is "yes", we just haven't declared it yet.