With the U.S. borrowing so much, why aren't we broke?

[II_Gyan_II]

Laurence Kotlikoff asks the same question as in the title of this column, Is the United States Bankrupt?(PDF), in the Federal Reserve Bank of St. Louis Review (July/August 2006).

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 calculation of the fiscal gap is label-free because alternative 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 fiscalgap 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.

[John_W.Kennedy]

The column was written in 1991, with the insane policies of the Bushmeat gang still many years in the future.

[II_Gyan_II]

This article is a current review of the second question in the column; no implication made about its direct connection to the column.

[RiverRunner]

@II Gyan II

Laurence Kotlikoff asks the same question as in the title of this column, Is the United States Bankrupt?(PDF), in the Federal Reserve Bank of St. Louis Review (July/August 2006).

Loved the article, II Gyan II. Economic papers tend to send me into MEGO-land, but I managed to read most of it before I fell asleep and broke my nose on my desk.

Now all I have to do is figure out some way to get obscenely rich in the near future so I can afford to live 20 years from now. So far, my “Wait for someone to give me piles of money” strategy isn’t working.

RR

[Really_Not_All_That_Bright]

Essentially, because the dollar and the United States government have been stable for a very long time.

As long as people maintain enough confidence, the sale of Treasury bonds will be enough to finance our essentially permanent cycle of what in any other situation would be called bankruptcy.