Is United States Bankrupt?

Laurence Kotlikoff of Boston Univ wrote this paper in 2006.

Is the U.S. bankrupt? Or to paraphrase the Oxford English Dictionary 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 findings:

The third section turns to economic measures of national insolvency, namely, measures of the fiscal gap and generational imbalance. This partial-equilibrium analysis 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 deepening can ameliorate the U.S. fiscal condition. While immigration shows little promise, productivity improvements can help, provided the government uses higher productivity growth as an opportunity to outgrow its fiscal problems rather than perpetuate them by effectively indexing expenditure levels to the level of productivity.

He suggests reforms in 3 areas:

The final section offers three radical policies to eliminate the nation’s enormous fiscal gap and avert bankruptcy. These policies would replace the current tax system with a retail sales tax, personalize Social Security, and move to a globally budgeted universal healthcare system implemented via individual-specific health-insurance vouchers. The radical stance of these proposals reflects the critical nature of our time. Unless the United States moves quickly to fundamentally change and restrain its fiscal behavior, its bankruptcy will become a foregone conclusion.

A good radical read on state of US public finances. He estimates the total fiscal gap to be USD 65.9 trillion including social security, medicaid etc payments. This was in 2006. I am sure the fiscal gap has increased much more because of the current crisis. There have been many studies lately on US public debt but I don’t really know whether they estimate all possible costs of US government.

Waiting for an update from Kotlikoff on the same.

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3 Responses to “Is United States Bankrupt?”

  1. Ramanan Says:

    Amol,

    Economists seem to live in the gold-standard. The hangover has not been over yet. Refer you to http://www.moslereconomics.com/wp-content/graphs/2009/10/SDF.doc The Seven Deadly Innocent Frauds.

  2. Three Good Reasons to Trade Up Now! | Connecticut Real Estate Says:

    […] Is United States Bankrupt? « Mostly Economics […]

  3. skyfotosystem Says:

    Luv this post… you give me a fresh information. Keep post, keep up your good works… thanx

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