Radical Capitalism: A Noble Experiment We Ought to Try

Earlier this month, Bloomberg published an article by Boston University economist Larry Kotlikoff in which he declared that the U.S. was bankrupt and headed toward an economic disaster that would be “worse than Greece”:

Last month, the International Monetary Fund released its annual review of U.S. economic policy. … the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

…Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising.

We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

In an article published in the July/August 2006 edition of the Federal Reserve Bank of St. Louis Review, Kotlikoff suggested that the only way to deal with the United States’ impending fiscal disaster would focus on productivity growth, which would translate to wage growth, combined with limited requisite tax hikes and an expanded tax base. While I can’t agree with all of Kotlikoff’s suggestions for reform (in particular his bid for mandatory enrollment in a universal health care system), he provides insight and intriguing options that the U.S. government must consider. One suggestion seems particularly viable: radically increase China’s ability to directly invest in the U.S.

It seems almost silly that up until this very day the federal government has hesitated to allow the second greatest holder of U.S. debt to directly invest in our economy. Presumably, allowing greater direct investment would increase China’s desire to see the US economy grow.

As I said, I certainly don’t agree with all of Kotlikoff’s suggestions, but he is is right in declaring that the time is now (or the time has passed) for U.S. regulators to take action to prevent economic collapse.

Perhaps it is time to take a chance on radical capitalism. It appears that the quality of life in the U.S. is bound to decrease no matter what steps we take to right the economy. So, is it not worth it to take a chance on radically cutting back government programs in an attempt to reduce the budgetary shortfall and see if the free market will pick up the slack?

There are plenty of books and articles that detail how capitalism has improved the quality of human existence, but perhaps it is time to consider how we might escape slipping into a fiscal dark-ages by letting the the invisible hand take the wheel of some of government provided services and focus government activity on protecting rights of individuals rather than directing lives and providing goods. Housing, education, retirement, food and drug oversight and enforcement–many of these services could easily be handled by free market enterprises and some shouldn’t be government priorities at all. If the quality of life in the U.S. is going to deteriorate one way or the other, why not give the open market a chance to assume the role as provider of some of these unessential goods and services. Who knows, it just might turn out that the quality of these goods and services increases rather than decreasing.