Transcript Is the U.S. Bankrupt?

Is the U.S. Bankrupt?
by
Laurence J. Kotlikoff
Boston University
Federal Reserve Bank of St. Louis
30th Annual Economic Policy Conference
Federal Credit and Insurance Programs
October 2005
Key Questions
• Can Countries Go Bankrupt?
(Yes!)
• Is the U.S. Going Bankrupt?
(Yes!)
• How Can One Best Assess Bankruptcy?
(Fiscal Relativity, GE Modeling, Scenario Analysis)
• Are there Economic Ways Out?
(Maybe!)
• Are there Policy Solutions?
(Yes!)
Can Countries Go Bankrupt?
Bankruptcy in a Two-Period Small, Open Economy
Co
h
Cy 
 wh
1 r
1 r
1 r
hw
r
There’s a limit to generational expropriation.
Access To Credit Matters
Bankruptcy in a Two-Period Closed Economy
kt 1  w(kt )  h
If h  wt ,
kt 1  0.
In a closed economy, it’s a lot easier to go bankrupt.
General Equilibrium Death Spiral
kt 1  w(kt )  h
If h is less than w(kt) but sufficiently large or if the initial capital stock is
sufficiently small, the economy goes broke over time.
Punch Line -- GE matters, and GE modeling is essential.
Pricing Risk ≠ Assessing Risk
• same two period model, same h policy, but
• two future states, one →bankruptcy
• complete claims market, no trade
• valuing liabilities doesn’t tell you the probs
Is the U.S. Going Bankrupt?
•
Fiscal Gap is PV expenditures – PV receipts
•
The Fiscal Gap is $65,900,000,000,000.
•
Eliminating the Gap – the Menu of Pain
a.
b.
c.
d.
Double income taxes
Cut Social Security and Medicare by two thirds
Cut discretionary spending by 143 percent
Double future generations’ lifetime net tax rates
Average Annual Healthcare Benefit Growth Rates, 1970 - 2002
Country
Rate
Australia
3.66%
Austria
3.72%
Canada
2.32%
Germany
3.30%
Japan
3.57%
Norway
5.04%
Spain
4.63%
Sweden
2.35%
United Kingdom
3.46%
United States
4.61%
Source: Hagist and Kotlikoff (2005)
Average and Marginal Net Fulltime Lifetime Work Tax Rates
Multiple of
Minimum Wage
Initial Total
Household
Earnings
Average
Lifetime Net
Tax Rate
Marginal Net
Work Tax
Rate
1
$21,400
-32.2%
66.5%
1.5
$32,100
14.8%
80.6%
2
$42,800
22.9%
72.2%
3
$64,300
30.1%
63.0%
4
$85,700
34.4%
59.1%
5
$107,100
37.8%
57.5%
6
$128,500
41.0%
57.5%
7
$150,000
42.9%
57.0%
8
$171,400
44.2%
56.6%
9
$192,800
45.1%
56.1%
10
$214,200
45.7%
55.7%
15
$321,400
48.4%
55.2%
20
$428,500
49.6%
54.7%
30
$642,700
50.8%
54.2%
40
$857,000
51.4%
54.0%
All amounts are in thousands of 2002 dollars. Present values are actuarial and assume a 5 percent
real discount rate. Source: Gokhale, Kotlikoff, and Sluchynsky (2003).
Fiscal Relativity
• Call h payment to time-0 old
“a transfer”
• Call h received from young
“borrowing of mth less a transfer of (mt -1)h”
• Call h paid to old at t > 0
“P&I of mth(1+r) less a net tax of -h + mth(1+r)”
Debt is In the Mouth of the Beholder
You Say
I Say
• “balanced budget policy”
mt=0 for all t
• “exploding surplus”
mt=-1 and mt+1=mt(1+g)
• “exploding debt”
mt=1 and mt+1=mt(1+g)
Economic Panaceas
• Immigration
• Help from Employers
• Help from Parents
• Help from Children
• Productivity Growth
China – Saver and Savior?
• China’s Population = 2.5 x U.S.+EU+Japan Pop
• China’s Saving Rate ≥ 35%, US Rate=2%
• Foreigners Invest More in U.S. than Americans
• Simulation Findings
• Unocal
Getting to Yes
• Federal Retail Sales Tax Plus Rebate
• Personal Security System
• Medical Security System
le Déluge
•
•
•
•
•
•
•
•
•
•
The street finally realizes U.S. is broke
Bankruptcy → printing money
China starts dumping its $500b in Treasuries
Dollar collapses
Bond market collapses
Nominal rates soar
Fed steps in (prints money) lower rates
Printing money → fuels inflation expectations
Off to the races, Do Cry for Me Argentina
PS, RYDUX