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Is the U.S. Bankrupt?

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  • Laurence J. Kotlikoff

    ()
    (Department of Economics, Boston University and the National Bureau of Economic Research)

Abstract

Is the U.S. bankrupt? Or to paraphrase the Oxford Dictionary, is the U.S. 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 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 U.S. has a history of defaulting on its official debt via inflation, that the government has cut taxes well below the bone, that countries now holding U.S. government 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. It concludes that countries can go broke, that the U.S. 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. The 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 nature of these proposals reflects the critical nature of our time. Unless the U.S. moves quickly to fundamentally change and restrain its fiscal behavior, its bankruptcy will become a foregone conclusion.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2007-015.

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Length: 23pages
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:bos:wpaper:wp2007-015

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References

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  1. Christian Hagist & Laurence Kotlikoff, 2005. "Who's Going Broke? Comparing Growth in Healthcare Costs in Ten OECD Countries," NBER Working Papers 11833, National Bureau of Economic Research, Inc.
  2. Jagadeesh Gokhale & Kent Smetters, 2005. "Measuring Social Security's Financial Problems," NBER Working Papers 11060, National Bureau of Economic Research, Inc.
  3. Hans Fehr & Sabine Jokisch & Laurence J. Kotlikoff, 2005. "Will China Eat Our Lunch or Take Us to Dinner? – Simulating the Transition Paths of the U.S., EU, Japan, and China," Boston University - Department of Economics - Macroeconomics Working Papers Series WP2005-009, Boston University - Department of Economics.
  4. Jagadeesh Gokhale & Laurence J. Kotlikoff & Alexi Sluchynsky, 2002. "Does it pay to work?," Working Paper 0206, Federal Reserve Bank of Cleveland.
  5. Kotlikoff, Laurence J., 2002. "Generational policy," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 27, pages 1873-1932 Elsevier.
  6. Jagadeesh Gokhale & Kent Smetters, 2003. "Fiscal and generational imbalances: new budget measures for new budget priorities," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Dec.
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