Economist Says Debt of “Bankrupt”United States Far Worse than Advertised

By: Randy Myers

Officially the federal debt at just over $14 trillion. In fact, says Boston University economics professor Laurence Kotlikoff, the real number is far, far higher—about $202 trillion.

“The United States is bankrupt,” Kotlikoff told participants at the 2011 SVIA Spring Seminiar. “The official debt doesn’t capture most of the action when it comes to our fiscal problems because most of our obligations are unofficial. We’ve been looking at these debt numbers and taking them seriously, and they’re not really telling us the whole story.”

Kotlikoff, the author of Jimmy Stewart is Dead (John Wiley and Sons, 2010), which charts a course for reforming the global banking system, attributes the discrepancy between the official federal debt and the true federal debt to semantics. Government accounting policy, he said, masks the country’s financial health by excluding from the debt many of its future liabilities, including those associated with programs such as Medicare, Medicaid, and Social Security.

A better way to measure the debt, Kotlikoff argues, is by calculating the present value of all projected government spending, excluding only interest expense, less all projected tax revenues. That is how he arrived at the $202 trillion figure, which he calls the “fiscal gap.”

To put the fiscal gap into perspective, the United States is on an untenable track even by conventional definitions of the federal debt. Extrapolating from the long- term projections of the Congressional Budget Office, Kotlikoff said, the debt-to-GDP ratio of the United States, which was 62 percent at the end of fiscal 2010, will exceed 90 percent in 2017. That’s four years earlier than a similar analysis had suggested just nine months before.

What’s more, a study of the most traumatic financial crises over the past eight centuries by economists Ken Rogoff and Carmen Reinhart has shown that once a country’s debt-to-GDP ratio exceeds 90 percent, countries get into trouble. “They don’t grow as fast, they have financial crises, they can’t borrow at the rates at which they had been borrowing,” he said.

He noted that Greece, to cite just one current example, has a debt-to-GDP ratio of about 120 percent right now.

The U.S. debt has ballooned into crisis territory, Kotlikoff said, in part because the country for decades has been transferring wealth from younger to older Americans through social programs. This has robbed the young of the ability to save. In 1965, he noted, the domestic savings rate was about 15 percent; in 2009 it was -1.7 percent. “This is just a chain letter, a Ponzi scheme,” Kotlikoff said. “But it’s a big-time Ponzi scheme, much more sophisticated than anything (convicted financier Bernard) Madoff could have come up with.”

The country’s lack of savings has led to a lack of investment, Kotlikoff added, which has held back productivity improvements and resulted in decades of stagnant wages in real, or inflation- adjusted, terms.

Kotlikoff observed that closing the fiscal gap simply by raising federal government revenues would require an immediate and permanent 77 percent increase in every federal tax, including corporate and personal income taxes, FICA taxes, excise taxes, and estate and gift taxes.

As that solution would be untenable to just about everyone, Kotlikoff said the only workable alternative is immediate radical reform not only of the tax code but also of healthcare, entitlement programs, and the nation’s financial system.

He has personally laid out roadmaps to two such reforms. On the healthcare front, he has pro- posed a progressive voucher system that he says is much like the ones used in Germany, Switzerland, Israel, and Holland. It is also similar to the one described in the recent 2012 budget proposal from Rep. Paul Ryan of Wisconsin, chair of the House Budget Committee.

Kotlikoff has also proposed creating a “limited-purpose” banking system, modeled on the mutual fund industry, in which banks would not hold loans and consequently would not be exposed to default risk. Instead, they would sell their loans to the public in much the same way mutual fund companies sell shares of their funds to the public. Under this model, banks also would be required to hold 100 percent reserves against checking account deposits.