The U.S. Government is Bankrupt

by on February 27, 2004 at 8:09 am in Economics | Permalink

“…the U.S. government [is] effectively bankrupt”

“…when rational gloom sets in, the U.S. economy will likely ‘go critical.’”

“…the decline and fall of America’s undeclared empire will be due not to terrorists at our gates nor to the rogue regimes that sponsor them, but to a fiscal crisis of the welfare state.”

Who is making these wild statements? Is it a “not-to-be-trusted”, liberal economist like Paul Krugman or Brad DeLong each of whom have warned of an impending “fiscal train wreck” and “fiscal catastrophe”? No. The statements are from Laurence Kotlikoff, one of the world’s most prominent economists, and Niall Ferguson, one of the world’s most prominent historians – both are whom are considered to be conservatives (more on that shortly).

Kotlikoff and Ferguson base their gloomy forecast on a study commissioned by Paul O’Neill before he was booted out of the administration. The study says the following: we know that there will be a deficit this year and one next year and probably one after that – suppose we add up all the future deficits and surpluses for as far as we can see and discount these to present value. What do we get? The answer: 45 trillion dollars of debt.

We do not have 45 trillion dollars. What then can we do? Here is why conservatives should not ignore the warnings of Kotlikoff and Ferguson, even when they deride similar pronouncements from Krugman and DeLong, because Kotlikoff and Ferguson argue that taxing ourselves out of this mess is not a desirable option. Instead, they argue that we must a) “discipline Medicare spending” (this was written before the prescription drug plan passed!) by eliminating “entirely the traditional fee-for-service option and giv[ing] all Medicare participants a voucher to purchase private health insurance.” and b) “privatize social security.”

Kotlikoff and Ferguson are not optimistic about the political viability of these actions, hence the opening quotes.

I worry when intelligent people on both the right and left start to talk about the U.S. “going critical.”

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