Just Say It: “America is Bankrupt”

How much of a fiscal crisis does the federal government face in the coming years, and why haven't the nation's media outlets told us much about it?

The president says the national debt is under control, and while facts might prove otherwise, we can, to some extent, deal with that. What concerns us nearly as much is that the press corps is generally failing to crunch the numbers, talk to all the experts and then tell us, unequivocally, what the truth is.

That might sound bleak, but let’s not forget the spotty reporting we saw during the winter and spring of 2005 as the president peddled his convoluted version of Social Security reform. It was an ugly time, marked by debates over language (parsing the subtle nuances of “privatization,” “private accounts” and the ever-undefinable “trust fund”) and a noted lack of curiosity among journalists about the true scope of the problem in dollar terms.

The Social Security fight was, of course, only one chapter of the larger story about the national debt and its effect on the American economy — a subject that continues to be muddled by official spin and a sound bite-dizzy press.

The closest thing to a respite from this state of affairs is the brief attention that a smattering of media outlets have given to the analysis of Laurence J. Kotlikoff, a professor of economics at Boston University. We stumbled upon Kotlikoff’s body of work after it was referenced recently in the Telegraph, a British paper.

Turns out, the piece was essentially a rehash of a report (PDF file) that Kotlikoff submitted to the Federal Reserve Bank of St. Louis back in November. It is titled, “Is the United States Bankrupt?” and Kotlikoff’s answer is, essentially yes.

“The U.S. government is, indeed, bankrupt,” the report argues, “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.”

Kotlikoff’s analysis received further play in recent issues of Fortune, Forbes and Barron’s, among others. He also penned a short piece for the July 2 edition of Time wherein he said, “Let’s face it — Uncle Sam is broke. The gap between the U.S. government’s future expenses and tax receipts is $63.3 trillion.”

In fact, there have been plenty of other economists singing a similarly dour tune during the past five-plus years of financial recklessness. Which makes us wonder why the media coverage of this issue tends to be limited to intermittent news items on the latest report — whether it be from the government or academia. If the consensus is indeed that we are bankrupt, it seems to us that the latest report is not news. The crisis is the news.

You might say we’re getting hung up on semantics, or initiating some diabolical assault on the media’s standard operating procedures. But consider the difference between an occasional story that says, “one professor in Boston just said we’re bankrupt,” and articles (preferably a lot of them) that say, “we are bankrupt. Here is the latest information. Here’s what is being done about it. And here is why it matters.”

It is the difference between powerful messages delivered by living humans and carbon-copy stories, each doing a serviceable job of reporting a small and ultimately forgettable non-event — the “news pegs” without an answer to the question: “So what?”

Kotlikoff makes an awfully good case that the budget problem deserves treatment beyond reports on his reports. His posited $63.3 trillion “gap” between the government’s future expenses and tax receipts is actually taken from another paper (PDF file), “Fiscal and Generational Imbalances; New Budget Measures for New Budget Priorities,” by Jagadeesh Gokhale and Kent Smetters, published by the American Enterprise Institute in 2003. The report was originally commissioned by then-Secretary of the Treasury Paul O’Neill and (coincidentally?) shelved after he was fired.

Gokhale and Smetters based their research on a model that Kotlikoff himself pioneered as long ago as the 1980s. As Fortune reported in November 2003, the professor’s method of “generational accounting” revealed “the sheer enormousness of the financial hole the government would face,” if nothing were to be done about Medicare and Social Security expenses, which are increasingly as the Baby Boomers begin to retire.

In order to come up with as conservative a number as possible, Gokhale and Smetters, while sticking to Kotlikoff’s core principles, “took their numbers from the government’s own budget. In one particular case — medical costs — they chose a much more optimistic number, opting for 1 percent growth above GDP rather than the historical rate of 3 percent.”

And the number they got was a deficit of $44 trillion. (In an updated paper published just two years later, in August 2005, the number jumped to $63.3 trillion.) Moreover, Fortune noted, there has been “rare consensus among economists regarding the wisdom ” of Kotlikoff’s model.

If this is true, it is not terribly interesting that Kotlikoff has just said it again. What is news is that he had a strong theory decades ago, that his theory has for years been widely accepted as fact, and nobody has done a darn thing about it.

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Paul McLeary is senior editor of Defense Technology International magazine, and is a former CJR staffer.