Alex, citing Larry Kotlikoff, despairs for our fiscal future, read his earlier post as well.

I agree with the Krugman-DeLong-A.Sullivan-Tabarrok (if I may call it that) critique of current fiscal policies. But I don’t agree that our government is “bankrupt,” or accept the cited claim by Kotlikoff that “our country is in worse long-term fiscal shape than Brazil.” Neither is close to being true, check out Brazil’s BB bond rating for a start.

What is the real cost of our fiscal irresponsibility? First, we could be using current resources more effectively. But productivity trends have been strongly positive for some time now. So while things could and should be better, current magnitudes are not themselves evidence of disaster.

Second, when the time comes to pay off the debts, we will require some combination of inflation, spending cuts, and tax increases. Since most of the debt is short-term, inflation won’t do it. The real problem has to be taxes. Spending cuts Alex probably favors, at least I get that feeling reading the guy’s blog. The danger is that we will end up with Western European levels of taxation, stifling our entrepreneurial culture.

So the real cost of our current fiscal irresponsibility is the increase in deadweight loss, resulting from the required increase in taxation, as will be needed to pay off all those trillions. The real cost is not equal to the number of trillions that need to be paid back. And most of the associated transfers are within a generation (tax some living people to pay off bondholders, other living people at the time), rather than across the generations. Let’s not confuse the size of the deficit, or the debt, with the size of the intergenerational transfer.

Keep two other things in mind as well. First, there is some chance that the growth rate of the economy will exceed the real rate of interest. In that case we can simply grow out of our debt, which over time will become small relative to the size of the economy. It is irresponsible for a government to take the risk of spending on this basis. Nonetheless it is at least possible that, in technical parlance, “g > r”.

Second, America will likely experience favorable demographics. Here is Nicholas Eberstadt:

…the United States is envisioned to grow from 285 million in 2000 to 358 million in 2025. In absolute terms, this would be by far the greatest increase projected for any industrialized society; in relative terms, this projected 26 percent increment would almost exactly match the proportional growth of the Asia/Eurasia region as a whole. Under these trajectories, the United States would remain the world’s third most populous country in 2025, and by the early 2020s, the U.S. population growth rate – a projected 0.7 percent per year – would in this scenario actually be higher than that of Indonesia, Thailand, or virtually any country in East Asia, China included.

No, that won’t solve the problem but it is a help.

I should note that Alex and I probably do not disagree about the economics of the matter (if we do, you will hear from him soon enough). But I think he is neglecting the importance of the following:

The United States remains a strong and prosperous country. Our infrastructure, national culture of innovation, human capital, and economic dynamism are unparalelled in world history. The Bush fiscal policies, whatever their irresponsibilities, costs, and drawbacks, haven’t changed those core facts.

So I walked down to Alex’s office and issued him the following challenge: if you think I am wrong, sell all your stocks and go short on U.S. Treasury securities (and long on Brazil, if you wish!). With all the money you will make, you can buy out my half of this blog.

Years ago, the possibility of adopting a 28% “flat” tax on income (generally no deductions allowed) was seen as the solution for fixing the complex tax system. Today, there is outcry over a tax calculation that preserves a preferential 15% tax rate for dividends and capital gains, allows deductions for home interest and charitable contributions, but generally taxes income at 28%. A modified version of the flat tax? No, it’s called the AMT.

That is Kenneth Barkoff’s letter in the March 8 issue of Business Week, Barkoff is a tax specialist.

Some people complaining about the Alternative Minimum Tax may be objecting to its unfairness, as not everyone falls under its rubric. People with high deductions, as might arise from a second home, are the most likely victims. Other objections cite the height of the rate. Yet other critics may not like the process through which the AMT became so binding, namely the so-called Bush tax cuts, which made more people eligible for AMT status.

Gary Becker’s analysis suggests that a flat tax, if it is efficient, also will make government larger in size. Efficient taxation will make it easier to afford large government.

My take: I’ve never understood the conservative/right-wing obsession with flat taxation. I don’t favor arbitrary taxation per se, but we already have something resembling a flat tax right under our noses, and no one is very happy with it.

…Maybe it’s a sign of the times — or just a gimmick — but celebrities, athletes and high-powered business executives who want protection from potential rape or other sexual charges can now obtain consent forms for their would-be partner to sign, acknowledging the pair is about to engage in consensual sex.

“This really is for someone you don’t know,” said attorney Evan Spencer, who wrote the one-page, “pre-sexual agreement” form for Colorado-based Protect Condoms Inc. “If you’re a professional athlete on the road, and you encounter someone you don’t know, certainly a person who is a man of means will want to be protected by something like this.”

The company has sold more than 4,000 forms at $7.99 each, according to president Nelson Banes. The standard consent forms are one-page documents to be signed by two parties, both of whom agree “to engage in any and all sexual acts legally permissible under state and federal law with consentee,” according to the Protect Condoms form, which includes two condoms in its package.

Here is the story. This link will bring you back to previous installments of Markets in Everything.

A new essay from Clay Shirky is almost always blogworthy. Recently he offered up his treatment of VOIP. Here is his entree into the topic:

“When” could still be a very long time, however. The incumbent local phone companies — Verizon, SBC, BellSouth and Qwest — have various degrees of interest in VoIP, but are loathe to embrace it quickly or completely, because doing so means admitting to everyone — shareholders, regulators, customers — that both monopoly control and artificially high voice revenues are going away. (The fact that this is true does not much lessen the pain of saying so.) As a result, they will likely try to convince regulatory agencies, both the FCC and the states’, to burden competitive VoIP firms like Vonage with additional costs and rules, while delaying their own offerings.

Complicating this de facto Plan A, however, is the fact that VoIP isn’t a service, it’s just a set of protocols, meaning that competitors don’t have to set themselves up as upstart phone companies to deploy VoIP. If Plan A is “Replace the phone system slowly and from within,” Plan B is far more radical: “Replace the phone system. Period.”

Here are two excellent paragraphs:

The official tradeoff in current telecom regulation is service guarantees in return for monopoly control. Over the decades, though, a third part of the bargain has arisen. Phone companies tolerated high taxation as well, in part because it guaranteed continued freedom from competition. As a result, telephony is treated as a vice instead of an essential service — the taxes and surcharges on a phone bill are more in line with the markup on alcohol and tobacco than with gas or air travel.

However, monopoly control, essential for the current bargain, is ending. The cumulative threats of competitive local phone companies, the decrease of second lines due to DSL and cellphone use, and now VoIP have made the old deal unsustainable. The rise of a competitive market seems conceptually simple, but most parts of the US have had a phone monopoly for longer than they’ve had indoor plumbing, so the possibility of phone service without the incumbent phone company is hard for many observers to understand.

The bottom line:

I can’t do better than to quote Clay:

With railroad bankruptcies in the 1940s, no one thought that the tracks would be ripped up and sold for scrap. Similarly, the question of whether the incumbent phone companies can survive if VoIP pops the bubble of voice revenues is separate from the question of whether the wires in the ground will continue to exist. Someone will sell data transmission over copper wires, but there’s no reason it has to be the existing phone companies, in the same way that someone still runs trains from St. Louis to Chicago, but it isn’t the B&O Railroad anymore.

Clay makes blogging easy, though arguably less fun. Just quote him and say yup, yup, and yup.