Is the United States of America Bankrupt?

I'm finally getting around to reading the July/August issue of the FRB of St. Louis' Review publication. If you don't subscribe, I'd highly recommend it. You can subscribe for free by clicking here.

In this issue, Dr. Laurence Kotlikoff wrote a piece titled Is the United States Bankrupt? The piece is on the net here. In it he makes some interesting arguments.

1) Bankruptcy can occur even when a country has no debt. That's obviously true, but not something anyone ever talks about. As long as one has liabilities of any kind, bankruptcy is a possibility.

2) It then follows that debt ratios are not the ultimate measure of financial solvency. Particularly when the entity has a large number of long-term, non-debt, liabilities, such as Social Security. Debt as a percentage of GDP is bandied about alot, but isn't too meaningful. I will add that a nation's GDP is not the assets of the government, but of the people within the nation. It isn't a good measure of the government's assets.

3) Its challenging to get a handle on the solvency of a nation because national accounting isn't much like corporate or personal accounting.

4) Nations often lack the political will to deal with long-term financial issues, since often the "creditors" involved in programs like Social Security have considerable political clout. In addition, elections occur in the short-run, where the problems we're describing are long-term.

I'd make the following points. First of all, I think we'd all agree that the U.S. would be better off reducing its long-term liabilities. This would be achieved if we would simply run a balanced budget, including debt service and funding Social Security in some reasonable manner. Given our current situation, I'd agree with Dr. Kotikoff that eventually we'd go bankrupt.

However, I argue that no one is bankrupt until they've defaulted on some kind of payment. The U.S. will continue to be solvent until no one will extend us credit. At some point, the government will be forced to deal with the Social Security issue. I also think some party will run on a fiscal discipline platform in the near future, because I think Americans want to think of ourselves as responsible.

So in short, we won't go bankrupt. Not now anyway.

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Budget Deficit, National Debt