Commentary on "Is the United States Bankrupt?"

Kotlikoff scoffs at the use of government debt or budget deficits as a measure of fiscal solvency because these measures are highly sensitive to the labels one attaches to what the government takes in as revenues and what it pays out to its citizens. A country can run budget surpluses and have no debt and yet be broke. The paper therefore suggests relying on generational accounting to examine the lifetime fiscal burdens facing current and future generations. It refers to a study by Gokhale and Smetters (2005) that calculated the U.S. fiscal gap, measured as the present value of the difference between all future government expenditures, including servicing official debt, and all future receipts. Gokhale and Smetters (2005) use the federal government’s definition of receipts and payments in their calculation, but alternative definitions would not change the final answer. According to the authors, the U.S. fiscal gap is $65.9 trillion. This is an astounding number because it is more than five times the U.S. gross domestic product (GDP) and a little less than twice the size of national wealth. Based on this, Kotlikoff concludes that the United States is truly bankrupt. The contributors to the fiscal gap are the familiar culprits—Medicare and Medicaid spending and to a lesser extent Social Security—combined with tax cuts. Kotlikoff considers many of the potentially counterveiling forces that could ameliorate the situation, such as immigration I n his interesting paper (Kotlikoff, 2006), Professor Laurence Kotlikoff confronts the provocative question suggested by his title. The answer the paper provides is strongly in the affirmative. And to bring home the point of what this means, Kotlikoff reminds us of a paraphrased version of the Oxford English Dictionary definition of bankruptcy: “at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors.” Although he does not do this, he could have underscored his point further by citing from Hemingway’s The Sun Also Rises: “‘How did you go bankrupt?’ ‘Two ways. Slowly, and then all at once.’” In any event, after making the case that the United States is bankrupt, the paper proceeds to examine policy responses that politicians might be tempted to adopt in response to the impending bankruptcy, which are summarily dismissed as economically disastrous. The paper ends with a discussion of the policy responses that Kotlikoff recommends. Thus, the paper can be viewed as having three main components: an examination of the relevant macroeconomic data to assess whether the United States is bankrupt in present value terms, an assessment of seemingly politically expedient policy responses that are likely to be economically devastating, and recommended policy responses. I will comment on each in turn.