NCPA - National Center for Policy Analysis

ICEBERG AHEAD

July 18, 2006

The Federal Reserve Bank of St. Louis has released an analysis with the attention-grabbing title "Is the United States Bankrupt?"  The author is Boston University economics professor and National Bureau of Economic Research associate Laurence J. Kotlikoff.

He says Washington "is, indeed, bankrupt, insofar as it will be unable to pay its creditors . . . current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds."

And he provides some scary data:

  • As Jagadeesh Gokhale, a Cato Institute senior fellow, and Kent Smetters, of the Wharton Business School and the American Enterprise Institute, have determined, our current "fiscal gap" -- the difference between all future government spending and debt service and all future revenues -- is now nearly $66 trillion.
  • That figure -- which many economists would consider an exaggeration -- is five times our gross domestic product (GDP) and double America's total wealth.

Kotlikoff says that basically leaves us with a choice of doubling personal and corporate income taxes or cutting Medicare and Social Security benefits by two- thirds -- unless we go in a bold new direction.

Yet, moving toward higher taxes, socialized medicine and state intrusion into the equity markets would be an economic disaster, says Investor's Business Daily (IBD).

The solution to out-of-control entitlement spending is individual empowerment.  With benefit cuts inevitable no matter who's in power, Americans need to control their own retirement accounts if they are to get a decent return.  Health Savings Accounts must be expanded to minimize third-party payment and better control medical costs, says IBD.

Perhaps most important, taxes and regulations have to be kept low so our economy is as vibrant as it can be.  It would be unwise to import European policies that ensure slow growth and high unemployment, says IBD.

Source: Editorial, "Iceberg Ahead," Investor's Business Daily, July 18, 2006; and Laurence J. Kotlikoff, "Is the U.S. Bankrupt?" October 2005.

For Kotlikoff study:

http://research.stlouisfed.org/conferences/policyconf/papers2005/kotlikoff.pdf

 

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