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.
_____________________________________________________
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.
This is supposed to be fun.
Hmm, looked up the rules of the site, didn't find that one there.
I did, however, find a statement of rather serious purpose in creating this website by JR.
I will submit that there is an unstated understanding that one should at least attempt to avoid the use of the tradition of dueling to settle points at issue.
Americans are good, strong and successful. About this notion that the US is going in the "direction of eventual fiscal collapse", maybe we could agree that the wording should be "possible--" or "risk of fiscal collapse". No way in hell should we ever just through up our hands and say a collapse is inevitable. We are not doomed.
You must walk before you can run. I'd settle for a freeze in the short term.
Of course the chances of anything even remotely like that are nil.
I would say the chances for a slowdown in the growth are practically nil. Neither party advocates it.
I sure disagree with the idiots that say America morally bankrupt and the way they harangue about the faults of the American people.
I see, Americans are the epitomy of perfection with no faults to be corrected. Strange how the Representatives we elect or more propertly allow to be elected to positions of power from among us can be so lacking isn't it.
Those Court decisions and acts of Congress that you were earlier complaining as not being in accord with Constitutional principles don't come for out of a vacuum my friend. They come form core failings in our own makeup that clears the path for such representation.
Americans are good, strong and successful.
And pretty much indifferent to there responsibilities in assuring good government.
No way in hell should we ever just through up our hands and say a collapse is inevitable.
So far I do not see anyone suggesting that is what we must do. I however do see many alert to a need for changes.
We are not doomed.
Without substantive change in the attitudes of the American people in regards their expectations of government and participation in the processes of government, I would say we are not in an upward path.
First change must come among the American people in core principals virtues that are being eroded and have resulted in the representation that we have elected to power in government.
We get the government we allow, for "they" come from us and are us.
It is insufficient to just sit back and let someone else take care of it, indifferent to the political process that puts them there.
"The only thing necessary for the triumph of evil is for good men to do nothing."
--Edmund Burke (1729-1797)"The penalty good men pay for indifference to public affairs is to be ruled by evil men."
- Plato -
To change that government that change must come first from within us as the electorate and thus responsible for the government that exists, there is no where else for it to come from.
I looked here.
Public debt, that's what the Feds actually borrow, rose from $4,601,238,726,062.64 on 9/30/2005 to $4,797,203,565,138.78 on 6/30/2006. An increase of $195,964,839,079.14 in 274 days. $715,200,142 a day. Not quite $2 trillion a day.
Your right, it's not 2 Trillion a day because I said approx. 2 Billion a day.......as far as your other assertion, every time I see the national debt referenced the figure is always in the 8T+ range not what you stated and even the fed's own debt charts show an increase of almost 500B in the last nine months so it's unclear what your point is here.....if there is one.
so it's unclear what your point is here
You said the Feds borrow $2 billion a day. Over the last 9 months they only borrowed $715,200,142 a day.
The feds own chart says the TOTAL debt figure is up almost 500B in the last nine months......so once again, what is your point?
Maybe I'm following you better now. I hear you saying you've screwed up because there's something wrong with your "attitudes" and "core principals virtues" and that this has ended up allowing a terrible state of affairs.
Personally, I seriously doubt that there's anything wrong with your virtues --although it's none of my business. What is my business are the fiscal and monetary polices that you and I have gotten the hired help in Washington to carry out. I agree that we have to keep a eye on them (it's so hard to get good help these days!) and personally I've been very pleased at the darn good job our government employees are doing.
OK, lot's of people don't think so and they whimper that government workers like these are no good but imho the professional complainers are idiots. America is a force for good. The way I see it, our parents gave us a country that's in better shape than the one they got, and we've done the same for the next generation that's currently taking over. They in turn, will continue the good work. I like what these kids are already doing on entitlements (more here) but we can get back to specifics later. The bottom line is that we've got a heck of a lot to be happy about. A gloomy attitude is bad for the gastro-intestinal, it's a pain in the but for others, and to complain in the face of our Creator's generosity is down right blasphemous.
OK, I like philosophy as much as the next guy but how about we please drop all this gush stuff and get to work naming specific proposed legislation that we want passed, or a specific executive orders we want given. Forget the SCOTUS.
I could explain what the term "Public Debt" means, but I'm not sure you'd understand. The public debt has increased by $715,200,142 a day over the last 9 months. So that's what the government borrowed, not $2 billion a day.
Just trying to keep people from spreading incorrect info.
Oh.....ok, so then you won't have a problem citing me one instance where any public official admits our national debt is ONLY the 4.79T held by the public?.......and I'm sure the fin'l markets will owe you a debt of gratitude for uncovering this remarkable fact.
OK, I like philosophy as much as the next guy but how about we please drop all this gush stuff and get to work naming specific proposed legislation that we want passed, or a specific executive orders we want given. Forget the SCOTUS.
A good start begins with revamping the current federal tax system to assure that the entire electorate participates in and perceives a proportionate personal burden in the costs of government.
James DeMint (R-SC)
United States House of Representatives
APRIL 5, 2001
- "There has been a shift in the relationship between individuals and government, he argues, such that fewer and fewer are paying taxes at the same time that more and more are receiving increasingly generous benefits. If it becomes the case that most voters do not bear a financial burden for this largess, then there will be little to restrain--and significant political incentives to encourage--the continued growth of government.
Or in Walter Williams' quaint way of putting it:
"It's like me in the restaurant: What do I care about extravagance if you're footing the bill? "
To remove perception of the tax burdens of the individual, is to remove the goad which assures accountability of government to the electorate. Federal tax rates are high and government grows ever larger because a majority of the electorate do not perceive proportionately the burden their demand for largesse imposes on the minority of citizens.
The siren call for representation without taxation is the formula that got us where we are at today. The ability to hide or disguise taxation from the view of large sectors of the electorate allows the Congress to get away with the creation of the evergrowing monster that it fosters.
Liberty and freedom have a price, responsibility. If the perception of burden laid by government is interfered with or avoided there are no brakes on the growth of government.
Bush touts relief as tax day looms
Another 3.9 million Americans will have their income tax liability completely eliminated, officials said.
That's 3.9 million Americans more added to the spending constituency of 70% of the public clamoring for more from government, figuring someone else foots the bill.
That's funny!
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 as you've shown here ......sheesh, I am truly disappointed.
I just hope my left pocket gets a job. The interest is piling up. LOL!
I'm just amazed that you're the only that realizes that and all these big $ fedgov analysts are just clueless......you're an amazing dude!
Maybe I'm following you better now. I hear you saying you've screwed up because there's something wrong with your "attitudes" and "core principals virtues" and that this has ended up allowing a terrible state of affairs.
If you choose to absolve yourself of any responsibility who am I to argue with you.
What is my business are the fiscal and monetary polices that you and I have gotten the hired help in Washington to carry out. I agree that we have to keep a eye on them (it's so hard to get good help these days!) and personally I've been very pleased at the darn good job our government employees are doing.
That's so very good of you not to complain of the government employees after all they are merely doing the job they have been assigned by your elected agents.
Seems you have neglected to mention a key link in the chain and that is our elected folks setting the fiscal and monetary policy you claim is your business. It would seem those whose business is the fiscal and monetary policies should be held to task, don't your think?
Seeing that those elected officials are merely implementing that which you have indicate is indeed your busines it would appear to me that that you need to worry more about those who are being sent to do your business in establishing fiscal and monetary policy, not the government employee who, afterall is merely trying to do the tough job your chosen agents in the drivers seat have set them.
The way I see it, our parents gave us a country that's in better shape than the one they got, and we've done the same for the next generation that's currently taking over. They in turn, will continue the good work.
Yep, amazing then how we still managed to end up with all those folks in Washington apparently using a different Constitution than you in their policy making and laws you were worried about back here, an here isn't it?
I like what these kids are already doing on entitlements (more here) but we can get back to specifics later. The bottom line is that we've got a heck of a lot to be happy about.
It good of you to mention that, unfortunately that which begins with words, and ends with words is of little value don't you think. Afterall them folks in the Whitehouse may have some great ideas, but great ideas don't amount to much when the folks responsible for establishing the laws and policy fail to do much in the way of authorizing such grand designs.
You are aware that Congress, our parents, and us, have elected or allow to be elected as the case may be, hold the keys to car.
"Grand ideas" Ain't going nowhere nohow without first getting through those we have placed in office for the purpose of establishing the fiscal and monetary policy of this nation in the form of acts of law.
A gloomy attitude is bad for the gastro-intestinal, it's a pain in the but for others,
Forebid that your gastro intestinal be ever upset over discussion of the failing of your self proclaimed business of fiscal and monetary policy. When are you going to take hold and actually implement your policy.
and to complain in the face of our Creator's generosity is down right blasphemous.
Hmmm, wasn't aware that we or the Congress we elect as our representation and agents in government to establish our fiscal and monetary policies were a function of our "Creators generosity". So now you blame the "Creator" for your lack of ability to do the business you have taken on yourself of fiscal and monetary policy. I am to blame the Creator for your lacks?
Sorry you have assumed the business of fiscal and monetary policy by declaring it your business. Trying to pass the buck to the "Creater" is abit ingenuous it seems to me.
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.
Interesting. You admit there are no assets in the lockbox.
On a balance sheet if you zero out an asset on the left side you have to reduce liabilities by the same amount on the right side. That's why our debt is $4,796,439,080,289.52. The Republicans (well not the ones in power now) benefit from using the larger $8,416,174,438,670.69 figure because they can say, look, the debt is enormous, we should spend less. The Democrats benefit from using the larger number because they can pretend the Social Security Trust Fund hasn't been spent (stolen). They can point at the $8,416,174,438,670.69 figure and say we should tax more.
Don't believe either one of them.
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