Fiscal Solvency: Is the US Bankrupt?

Friday, 8 April 2011  Features

The Australian School of Business is to host a lecture series by Professor Larry J. Kotlikoff, one of North America’s most renowned economists.

A William Warren Fairfield Professor at Boston University, a Fellow of the American Academy of Arts and Sciences, and a Fellow of the US Econometric Society, he describes the American economy as "already unknowingly bankrupted, and engaging in Enron style accounting". He was one of the first to forecast the Global Financial Crisis in his book The Coming Generational Storm in 2004, where the argued that the economic future would be bleak for the United States without tax, health care, and Social Security reform. In his latest book, Jimmy Stewart is Dead he offers a solution to future financial crises, called Limited Purpose Banking.

Professor Larry Kotlikoff argues that conventional fiscal measures are incapable of measuring how well economic policy is working, and over several decades he has called for the development of generational accounting to directly measure the fiscal burden being placed on tomorrow's children. He wrote his seminal paper on intra-family risk-sharing - "The Family as an Incomplete Annuities Market" - in 1981.

Kotlikoff has done pioneering work testing intergenerational altruism. This is the proposition that cash will flow between generations within a family, with current generations caring about their descendants enough to ensure that government redistribution from their descendants to themselves will be offset by private redistribution back to the descendants in the form of bequests. He says "in life-cycle models without intergenerational altruism, the young are the big savers because of every dollar they receive, they save a larger percentage than do the elderly for the simple reason that the elderly are closer to the ends of their lives and want to ‘use it before they lose it’."

Together with Professor Alan Auerbach, Professor Larry Kotlikoff has also developed the first computable general equilibrium model of life-cycle economies. Their model is now used by economists around the world to forecast how well economies will do, for countries experiencing complex demographic and fiscal policy changes.

He will present three lectures at the University of New South Wales:

Tuesday 10th May at 3:30-5pm: Fiscal Solvency
Wednesday 11th May, at 9am-12noon: Fixing our Fiscal Institutions
Thursday 12th May, at 2-5pm: Limited Purpose Banking

He will discuss the gap between measured and real government debt or budget deficits, as a measure of fiscal solvency. As he recently posted in his blog he says "The fiscal gap is huge compared to the official debt because Uncle Sam has spent six decades accumulating massive obligations to make social insurance payments, which it carefully kept off the books."

For comment, interview opportunities and to attend the lecture series please contact the Australian School of Business Communications team on + 61 2 9385 4293.