Arnold Kling  

The Kotlikoff Budget Plan

My Student's Real Economist... French Labour Markets...

Laurence J. Kotlikoff writes,

the U.S. government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds.

Calling the U.S. bankrupt depends on calling future Social Security and Medicare recipients "creditors." But the government's extravagant promises can be taken away as well as given. The question is when and how. The government can wipe out its "bankruptcy" at the stroke of a pen by raising future retirement ages, although Kotlikoff probably would argue that for his tastes this does not shift enough of the burden onto the current wealthy elderly.

Kotlikoff proposes replacing Social Security going forward with mandatory personal accounts. He proposes replacing Medicare, Medicaid, and private health insurance with government vouchers that are based on expected personal health expenditures (if you have a chronic illness, you get a larger voucher). Finally, Kotlikoff proposes a tax reform not unlike Bleeding-heart Libertarianism.

The fundamental problem, which Kotlikoff expresses in somewhat different terms, is that there is no consumer protection agency for phony government marketing. If a private company tried something as unsound as Social Security or Medicare, it would be shut down and its officers put on trial. But the voting public is ignorant of government scams, and I see nothing that will change that. As my co-blogger points out, there is almost no incentive for the voting public to be anything but ignorant.

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COMMENTS (6 to date)
Tom Anger writes:

The federal government cannot go "bankrupt" as long as it retains the ability to tax.

I'm certainly not defending Social Security, Medicare, etc. Quite the opposite. But the notion of government going bankrupt strikes me as an incomplete analysis. On the one hand there is the present value of the "promises" made by government (which can be modified if not revoked). On the other hand there is the present value of future tax receipts, which can be increased by government, even at the expense of reducing aggregate output to levels lower than they might have been.

The ideal outcome, of course, is a combination of tax and welfare policies that increases aggregate output to levels greater than they would be, given present policies. If that's what Kotlikoff is on about, I'm all for it. But shifting tax burdens toward the "wealthy" is exactly the wrong way to get there. It is the "wealthy" who finance growth-producing capital investments.

Tom writes:

Do countries typically pay off debt? It seems most countries rely on debt-forgiveness or attempt to inflate their debt away.

dearieme writes:

They can renege on debt, as FDR did in "The American Default".

Lord writes:

If a private company tried something as unsound as Social Security or Medicare, it would be shut down and its officers put on trial.

They did this all the time in the past. And now they are shedding these promises through bankrupcy.

Barkley Rosser writes:

Oh Arnold, are you buying that bilge about social security being bankrupt? Of course medicare is in deep doo doo, and medicaid ain't doin' too hot either. But the SSA mid-range projections that show a deficit in 2017 and "bankruptcy" in 2041 are based on wildly pessimistic assumptions.

On much worse conditions than our current ones, the social security trust fund never runs a deficit. There is no crisis, period.

Jason Shafrin writes:

Healthcare vouchers are a great idea. They are one of the policies advocated by economist Mark Pauly at the Wharton School. By allowing the government to provide a minimum level of health insurance through the voucher, yet by permitting the private sector to offer a broad package of services, there will be a good balance of efficiency and equity in the healthcare market.

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