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Tom Rekdal

Judge Posner presents a very precise and careful analysis of what it means for a nation to go broke.

I would offer a much shorter, less precise, answer to the question.

You know you are broke as a nation when the amount you must borrow (as a percentage of GDP) to cover the difference between this year's outlays and this year's revenues is more than three times the long-term growth of the economy, and you have no credible plan to reduce this discrepancy at any reasonably foreseeable point in the future. This comes under the heading of trying to fool all of the people all of the time, which is not a good plan, even in the bond market.

Secondly, you know you are broke as a nation when the present value of all future existing revenue streams does not begin to cover the present value of all future liabilities (whether those liabilities be legal contracts or "mere" promises like Social Security and Medicare). Obviously, the size of that gap depends upon discount rates and assumptions about economic growth, which are always controversial. But no responsible person who has looked at this problem finds the gap less than staggering or the politcal measures required to close it less than drastic.

So when the only remedies that will save us from outright default, or default through inflation, are themselves problematic, I conclude that, yes, we are broke. Now.


What would happen if the government just "printed" the money to pay all its debts and mailed every citizen a check for like $100,000? Seems to me this would stimulate the economy, people would have their 100,000 to insulate them a bit from the resulting inflation, which would sorta force deleveraging by making peoples mortgages and debts and entitlements be in smaller dollars. Peeps could pay off their debts and buy stuff again so demand would go up, and when demand goes up the labor market should tighten and we might see some less pathetic wage growth. Big losers would be Treasury and debt holders, but if you have an idea that doesn't do at least that amount of damage I'd like to hear it... Obviously in the future the government should be less incompetent and replace the tax code with a carbon tax and such but that's kinda a different issue.


“The major asset of any government is its taxing power,…”


Therefore, the asset of a nation boils down to the willingness of its citizens to work for someone else, someone unknown, as opposed to working for themselves and their families. Let’s be honest with ourselves, let’s look inside, and let’s be realistic. How much of that asset do we really posses?

So to rephrase it in more substantive terms I would say:

“The major asset of any government is its ability to exercise its taxing power, while at the same time convincing people to keep working ever more for someone else, someone unknown, as opposed to working for themselves and their families.”

Doable? You decide.


Applying the notion of solvency to the federal government, as if it were some giant corporation, is really is what philosophers would call a category mistake. The federal government is not a corporation and has no significant assets in any meaningful sense which can be balanced against its liabilities to make an assessment of solvency or determine whether or not it is "broke." Such talk is economic nonsense and political babble masquerading as science.

Does this mean there is no need to worry about the obligations the federal government has? Of course, not. But the incredibly low interest rates on treasuries tells me the time to worry is not now. Get back to me when interest rates start climbing.


Judge Posner,

Thanks for explaing all this in a way a layman can understand.

This is one of the top 3 blogs I like to read every week. Very educational for me.


Intuitively, the US government is broke and most of the public believes that except for the part of the public which does not know from where government assets are derived. And from a practical point of view, the consequences of what Posner decribes as government incompetence (I agree)is lack of confidence, lowering standard of living and social disintegration. Not to mention inability to execute foreign policy. One consequence of any remedial choices considered will be everyone being equally poor. Finally the equalitarians will have what they want. Even worse, because of their inability to monetize debt, the cities, counties and towns are broke (insolvent) and looking to the federal government to bail them out.
Worse yet, all of this can be laid at the feet of self serving political vote and power seeking and an uninformed voting public. Historically, the situation is mindful of Rome and the Ancien Regime
of Louis XVI. But then again, no one seems to learn from history.

Brian Davis, Austin, TX

I suspect a long and deep spell of deflation in monetized U.S. asset values will only make those assets more attractive for acquisition by foreigners and boost the appetite for asset fire sales by Americans who wish to preserve some position on the authoritative scale of wealth or the perception of access to wealth - i.e., to be a player. The crowd will predictably gravitate toward the proverbial lowest common denominator. It's the same behavior we see with the creditors Judge Posner talks about - the race to prime an insolvent debtor's assets ahead of other claimants - except this time we're the struggling debtor.

Joshua Norman

I wouldn't go so far as to say the US is broke and bankrupt, however I would not consider the US government (or most national governments for that matter) to be an investment grade credit. The US had an opportunity to roll back the big government tax, spend & borrow culture in 2001. Unfortunately Bush used 9/11 as an excuse to feed his urge to spend money.
I would consider the US to be a "special situation investment" in need of serious restructuring. I truly believe that most people in America are in favor of spending cuts by the government. However the advocates for bigger government are more organized & motitvated to preserve the status quo.
I have a number of ideas to cut spending to reduce deficits. However neither party has interest in cutting spending. Whether its the tax fattened hyenas of the Democrat party or its the wimpy weak willed go along to get along Republicans the politicians crave spending taxpayer money. It will take Americans putting down the channel changer and pressuring their elected officials to do the people's business instead of the lobbyists business.

Michael F. Martin

A federal workout is already underway. There are some reasons to be optimistic. New communications technology had not filtered into the public sector until the Obama administration, and there could be large cost-savings over the long haul in traditionally expensive government functions, such as recordkeeping and reporting.

But the risk of a default is not outside the pale for some states, such as California. The main difference between California and Greece is that Germany decided to bail Greece out whereas it's not clear that there would be political support for our federal government to do the same.


If Italy looks surprisingly good, that's because, unlike other Western countries that we would sooner associate with "good governance", it hasn't borrowed unholy amounts of money in this crisis to finance a stimulus package. Thus the Italian government comes out of this looking quite respectable, its indisputable incompetence and corruption notwithstanding. Some would say, though, that Italy's piggybacking on other nations' stimulus efforts is yet another example of its corruption...

Ed Hardy Jackets

Thanks for sharing.Great post, lets get some more.


Simple words to explaing complex question .That's great !

Simon Fellows

As flakey as this sounds (i'm something of a Darwinian though spent 2.5 years living in Zen and Thera Buddhist monasteries as well as a Benedictine monastery..Dad lives 9 miles from Down House too !) do either of the Gents have any time for the place when the brain is absent of thought, still etc ?
Thanks a lot

Krugman for dummies

Deficits are not a problem. They can be simply wiped out through international cooperation.

If governments worldwide simply start taking a lot of money from highly productive people, wealthy savers and investors and then distribute it to average people then …

You simply have the curious phenomenon whereby all of humanity all of a sudden starts being able to afford and enjoy a lot more goods and services without humanity actually having to produce more goods and services. Voila! The perpetual machine of prosperity! If we could only believe in “hope and change” it would actually be possible…


I feel sometimes we can overthink the real basic fundamentals of why a country can end up in financial trouble.

It is easy to lose sight of what a government actually is. The government is a representative of the people. Tax is our individual contribution to the collective "kitty" that the government is to then use to provide goods and services to society.

Therefore in the long run we only ever have two options, either a) be taxed more OR b) expect to be given less.

It sometimes seems to me that those that complain the most about tax are the same people that expect the most from the government, and often contribute less.

Perhaps you might think this is a simplistic view, but I believe in simple truths.

Tom Rekdal

"Broke" is a slang term for insolvency, the condition of having reached the limits of one's available resources and while still being unable to meet all of one's debt obligations. Because states, unlike individuals and corporations, can increase taxes and print money, it is far more difficult to tell when a state has reached the limits of its resources. Difficult, but not impossible. The concept of insolvency would be a "category mistake" as applied to states only if states never do in fact default. But of course they have and they do.

At the moment, the bond market is happy to lend us all the money we need at very low rates of interest, apparently confident of our ability to do whatever is required to remain solvent. I certainly hope that confidence is justified, but I am dubious. Many remedies that might actually work are simply not feasible politically. No doubt that is why public officials are always ready to call for another commision to study the problem, but never seem willing to actually do anything about it.

jaw crusher

I hope you happiness

Gordon Longhouse

This is a very good post because it recognises that the answers to the fiscal question will need to be found on both sides of the tax and spend equation and not on one side alone.

The U.S. government has far more economic capacity than Italty and Spain and ought to be at far less risk of default. Its biggest risk lies in the hollowing out of the political centre leading to political paralysis as sensible compromise is characterised (bastardised) as betrayal or worse.

This leads to the result that nothing substantial can be done to remedy the problem until the edge of crisis is reached and the US is close to default


I will start by stating that I have a lot of respect for both Becker and Posner. I must, however, be critical of the fact that Judge Posner implicitly assumes that all of the tangible assets of both the federal government and state and local governments have a value of zero. This is certainly not the case, as can be seen by the privatization efforts of states and cities regarding shipping docks, airports, toll roads, etc. I cannot even guess at the total value of such assets as government buildings, hospitals, military facilities (that can and have been converted to private sector uses), etc. One flaw in our federal budgeting is that capital expenditures and operating expenditures are all treated the same--as if they are all current costs for which there are no future benefits. In fact, the future benefits of a capital good or building purchased by a governmental entity to society are much different from a payment to a private citizen on Social Security (the future benefits of which are likely to be close to, if not equal to zero).

Like private corporations, governmental entities are able to "leverage" their equity through debt. Like Judge Posner, I do fear that we are attempting to over-leverage whatever governmental or public equity we have. I also doubt that the market for federal debt is so irrational and/or inefficient that the Treasury can continue to issue mountains of debt at low interest rates unless investors recognize the the federal government is not insolvent.

There is real equity in the form of tangible government assets that should also be shown on the balance sheets of American governmental entities, and this may be a reason why the federal government can continue to issue huge amounts of debt at low interest rates. And, like the case of Freddie Mac and Fannie Mae, state and local governments may be able to continue to issue large amounts of debt because investors in municipal securities believe that there is an implicit federal guarantee should any large state (i. e., California) be unable to find buyers for its new debt issuance.

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Chuck Beretz

Care to make any predictions about when the default will happen?


Whether it's the prospect of default, or whether it's a matter of what has to happen to incentives to produce in order to avoid default (taxes), the prospects are quite dismal.
America will have to descend to incentives to produce similar to what existed in the '70s except that in 2010 she will be doing so in a world where other, once basket-case nations, finally have incentives to produce, and thus compete with Americans. So Good luck!


How would all this relate to Hauser's Law "that, in the United States, federal tax revenues since World War II have always been equal to approximately 19.5% of GDP, regardless of wide fluctuations in the top marginal tax rate?"

It would seem that the federal government's "power to tax" is more or less an asset with a fixed value relative to GDP and that it's real asset is the ability to promote long term economic growth through low taxes, stable prices and a regulatory environment that is as simple as possible and gives both consumers and businesses a level playing field.


I live by the assumption that the answer is yes.

M Hoffman

Richard Posner, the usual sophistry. First, the dollar is backed by NOTHING. All government debt is denominated in dollars which can be produced at nominal expense. Deflation should therefore not be possible if the government is receptive to proper maintenance of adequate dollars in the hands of those who create demand for goods and services. Monetizing the debt will occur in any event. Who now benefits from this "economy"? The Jewish bankers and Federal Reserve banks who control the "money supply". Recently the Fed has been purchasing treasury debt in large quantities. This is a no lose proposition since the money which the government could create at nominal cost is instead "borrowed" from the Fed which also creates the "money" at nominal cost. Can the banker in Monopoly go broke when he controls the supply of money? The government is not a private entity and the analysis by Richard Posner is JUST PLAIN STUPID. The poster who suggested the current economic problems could be resolved by simply issuing checks in "dollars" to citizens has a rational working brain. The payments could be taxable which would immediately recover a portion of the funds and result in some progressivity. Citizens could then vote (supply and demand) on how to spend the money rather than have political considerations dictate. If we have a TRILLION dollars to fight surrogate wars for Israel (and give that criminal religious enclave as much as eight billion dollars a year), we must be extremely wealthy.

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