The US is Bankrupt – Kotlikoff

Bloomberg ran an article last month in which Boston University economics professor Laurence Kotlikoff makes what appears to be a hugely important argument. In his words, the US is bankrupt. To be perhaps a little more literal but no less disturbing, US fiscal policy is on a path that is profoundly unsustainable. His conclusion is that this will eventually end in one or more of three ways –

The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices.

A large part of his argument is based on the impact of rising Social Security and healthcare expenses on the federal deficit and he draws his conclusions largely from analysis contained in two documents –

Each of these reports looks at a couple of different future scenarios for government spending and revenue. I’m currently reading both of them to try to understand and evaluate Kotlifoff’s position.

Incidentally, Kotlikoff is also an advocate of the ‘FairTax‘ reform proposal (essentially replacing all income taxes with a retail sales tax) and also the idea of ‘Limited Purpose Banking‘ (essentially forcing banks to become pure mutual funds and take on no risk of their own).

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