Will America Go Broke, Yes or No?

BY Paul Solman  December 21, 2012 at 1:25 PM EDT

Photo by Marc Grimberg via Getty Images.

Paul Solman answers questions from the NewsHour audience on business and economic news on his Making Sen$e page. Here is Friday’s query:

Ashok Rao — Chennai, India: I recently came across this Wall Street Journal article that argued that our $16 trillion dollars in debt is actually just the tip of the iceberg — that our real debt (measured by entitlement liabilities) was in the ballpark of $87 trillion dollars. Suffice to say, I was sufficiently scared if the argument is fair. They argue that even if we tax at 100 percent AGI (adjusted gross income) of all income over $65,000 (which reminds me of the Laffer Curve), we wouldn’t even be able to stabilize the growth in these liabilities.

Making Sense

I really hope there is something you can tell me to put me at ease… This is actually scaring me much more than anything else of financial concern to the United States of America.

Paul Solman: Dear Ashok, do not be scared. It is not good for you. Yes, our so-called “unfunded liabilities” are a lot greater than $16 trillion, as our own Ask Larry Kotlikoff, the Social Security guru, has for years insisted and as former Treasury Secretary Pete Peterson explained to me a dozen years ago and again during the 2004 Presidential campaign.

But the liabilities mainly consist of retirement promises we have made, as a nation, to seniors like myself in the form of Social Security and Medicare benefits. If you have been paying attention to similar pension promises to workers in Europe and here at home, you may have noticed that many of those promises are being trimmed.

That’s just what will happen here. Indeed, the Obama Administration let it be known this week that it was willing to begin altering the terms of those promises. The famous Bowles-Simpson fiscal compromise plan makes even more adjustments. Nobel laureate economist Peter Diamond of MIT laid out a prudent, non-drastic course of adjustment on this page back in the summer.

As for Medicare, America will tussle with what pills and procedures to pay for — and how much to pay — for the rest of my born days, and well beyond. The pull and tug will probably continue forever. But rest assured — or fidget anxiously: when government can no longer afford to cover certain expenses, it simply won’t.

So whenever you hear about how “broke” America is, as Larry Kotlikoff loudly declared on this page a week ago, realize that the looming liabilities are not necessarily as they seem.

Realize too that another of those liabilities, the debts we owe to creditors — and the interest on that debt — will be diminished by inflation. Borrowing money today and paying it back in devalued dollars years from now means the debt is less onerous than it seems. Yet another reason to think the sky may not be falling as fast as forecast.

You want to worry, Ashok? Then worry about continuing income and wealth inequality and what that might do to America’s social fabric. I doubt it will destroy us, but it’s a scarier prospect, to me, than the bankrupting of America.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions