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Is the U.S. Bankrupt? by Laurence J. Kotlikoff Boston University Federal Reserve Bank of St. Louis 30 th Annual Economic Policy Conference Federal Credit.

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Presentation on theme: "Is the U.S. Bankrupt? by Laurence J. Kotlikoff Boston University Federal Reserve Bank of St. Louis 30 th Annual Economic Policy Conference Federal Credit."— Presentation transcript:

1 Is the U.S. Bankrupt? by Laurence J. Kotlikoff Boston University Federal Reserve Bank of St. Louis 30 th Annual Economic Policy Conference Federal Credit and Insurance Programs October 2005

2 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!)

3 Can Countries Go Bankrupt? Bankruptcy in a Two-Period Small, Open Economy There’s a limit to generational expropriation.

4 Access To Credit Matters Bankruptcy in a Two-Period Closed Economy If In a closed economy, it’s a lot easier to go bankrupt.

5 General Equilibrium Death Spiral If h is less than w(k t ) 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.

6 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

7 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.Double income taxes b.Cut Social Security and Medicare by two thirds c.Cut discretionary spending by 143 percent d.Double future generations’ lifetime net tax rates

8 Average Annual Healthcare Benefit Growth Rates, CountryRate Australia3.66% Austria3.72% Canada2.32% Germany3.30% Japan3.57% Norway5.04% Spain4.63% Sweden2.35% United Kingdom3.46% United States4.61% Source: Hagist and Kotlikoff (2005)

9 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, %66.5% 1.5$32, %80.6% 2$42, %72.2% 3$64, %63.0% 4$85, %59.1% 5$107, %57.5% 6$128, %57.5% 7$150, %57.0% 8$171, %56.6% 9$192, %56.1% 10$214, %55.7% 15$321, %55.2% 20$428, %54.7% 30$642, %54.2% 40$857, %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).

10 Fiscal Relativity Call h payment to time-0 old “a transfer” Call h received from young “borrowing of m t h less a transfer of (m t -1)h” Call h paid to old at t > 0 “P&I of m t h(1+r) less a net tax of -h + m t h(1+r)”

11 Debt is In the Mouth of the Beholder You Say I Say “ balanced budget policy” m t =0 for all t “exploding surplus” m t =-1 and m t+1 =m t (1+g) “exploding debt” m t =1 and m t+1 =m t (1+g)

12 Economic Panaceas Immigration Help from Employers Help from Parents Help from Children Productivity Growth

13 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

14 Getting to Yes Federal Retail Sales Tax Plus Rebate Personal Security System Medical Security System

15 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


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