LOS ANGELES - Is Washington effectively insolvent?
Economist Larry Kotlikoff of Boston University thinks the unthinkable in his analysis of the long-term viability of federal spending obligations in the latest issue of The Milken Institute Review.
"With the new drug benefit," Kotlikoff writes, "the fiscal gap now totals roughly $51 trillion. Roughly speaking, that′s five times the United States GDP and — perhaps most chilling — far larger than total U.S. private wealth."
"Coming up with $51 trillion through any means will be extraordinarily unpleasant," he adds. "One way would be to raise federal personal and corporate income taxes immediately and permanently by 78 percent. Another option would be to cut all Social Security and Medicare benefits in half."
Also in this issue of the Review, Catherine Mann, an economist at the Institute for International Economics in Washington, deconstructs the United States′ "current account" — the most comprehensive measure of America′s financial stance in the global economy.
"Several factors point to the reality that other countries have a vested interest in large and chronic U.S. trade deficits — that the U.S. deficit persistence is linked to global co-dependency," she writes. They have made "a bargain with the devil in the sense that when their own currencies eventually do appreciate, not only will their exports fall, but so, too, will the value of the dollar-denominated assets in their portfolios."
Other highlights from the new Review:
- Robert Barro and Rachel McCleary of Harvard take a new look at a very old debate: the relationship between economic growth and organized religion. "The main impact of religion on growth is a positive response to an increase in believing relative to belonging (attending)," they write. "Note that our statistical estimates do not imply that greater church attendance has a net negative influence on economic growth. Rather, the net effect depends on the extent to which an increase in attendance leads to stronger beliefs."
- Jared Bernstein of the Economic Policy Institute in Washington examines the "living wage" movement — the grassroots effort to raise minimum wages to the level needed to support a family. "Advocates have been able to convince city officials that they will accomplish their stated goals without leading to significant layoffs, tax hikes, or reduced competition for contracts," he writes. "But the marginal coverage limits its impact to raising the living standards of a tiny fraction of America′s working poor and near-poor."
- Jim Barth and Rob Koepp of the Milken Institute, writing with Zhongfei Zhou of Shanghai University, offer a progress report on long-overdue bank reform in China. "Lately it has become fashionable to predict that China′s non-performing loan problem will gradually eat away at the economy′s performance," they write. "While critics are right to be concerned, they ignore the potential upside from successful banking reforms. Indeed, we believe that China′s banking sector has the potential to catalyze the next steps in the economy′s ongoing transformation."
- John Crudele, an economics writer for The New York Post, and Walter Williams, an independent economic consultant, offer a novel suggestion for boosting the impact of fiscal and monetary stimulus in an era of mega-deficits. "In addition to cutting interest rates or taxes," they suggest, "Washington could offer people limited-time-only access to their retirement savings accounts without penalties or tax consequences. This would augment private spending when the economy needs it, increasing demand directly for consumer goods and indirectly for new productive capacity."
- John F. McDonald, an economist and dean at the University of Illinois′ Chicago campus, challenges the fashionable view that it′s evening in America. "Yes," he writes, "the decade of supercharged economic growth and vanishing unemployment seems a distant dream. But, believe it or not, many of the social and economic challenges that seemed so formidable a few decades ago are becoming more manageable."
This issue includes an excerpt from The Two Percent Solution by Matt Miller, a plan to solve America′s festering economic problems at bearable cost; an mini-essay idea by Nobel Prize-winning economist Gary Becker on how to shorten the pipeline to life-saving pharmaceuticals; and Institute Senior Fellow Bill Frey′s charticle on the latest Census Bureau discovery, the micropolitan area.