Deficit Accounting is a Generational
LAURENCE KOTLIKOFF, The Fiscal Times
county is in far worse fiscal shape than our politicians are
disclosing. Our official debt in the hands of the public is huge,
totaling 70 percent of GDP. But our official debt leaves
of our nation’s liabilities.
unofficial debts refer to our future
mandatory and non-mandatory spending
obligations. Mandatory spending references Social Security,
Medicare, Medicaid and other entitlement benefits. Non-mandatory
spending includes defense expenditures, civil servants' salaries,
highway and other infrastructure costs, and government-sponsored
the government can also count on future taxes to help pay these
bills. The difference between our government's total liabilities --
its official debt plus unofficial debt (measured in present value) --
less its official assets plus its unofficial assets (the present
value of projected future taxes) -- is called the
gap tells us whether our government's long-term finances are in
balance -- whether its assets can cover its liabilities.
Unfortunately, the answer is no. In fact, our country's fiscal gap,
calculated based on the Congressional Budget Office's June 22, 2011
long-term forecast (known as the Alternative Fiscal Scenario) is
simply enormous. It's $211 trillion or 14 times
gap is our nation's credit card bill. If we don't pay it or at least
interest on it, it will get bigger. And it is getting bigger. It rose
by $6 trillion between this year and last. Closing the fiscal gap
by raising taxes alone requires an immediate and permanent 64
percent increase in the personal income tax, the corporate income
tax, the FICA payroll tax, the estate and gift tax, and all federal
excise taxes. Closing the fiscal gap by cutting spending,
other than interest on official debt, requires an immediate and
permanent 40 percent cut in all mandatory and non-mandatory
relative to GDP, the U.S. may actually have the
largest fiscal gap of any developed country. By comparison,
Greece's fiscal gap is about 12 times GDP, and Germany's is about 3
times GDP. This is true notwithstanding our more favorable
Why is our
real fiscal gap so large? About 60 percent of
the gap reflects faster projected future growth in federal
healthcare spending than is projected
for GDP. The CBO projects spending on Medicare, Medicaid, Child
Health and Infant Protection, and the new Health Exchanges to rise
over the next seventy-five years, from 5.6 to 19.4 percent of GDP.
Hence, one painless way to cut the fiscal gap is to keep federal
healthcare spending even with the size of the economy.
the fiscal gap shown up in the official debt figures? Our politicians
have been very careful to keep most of the promises they've made us
off the books. They've done this by taking "taxes" from
young workers and promising them large benefits in retirement in
return. Had they called the monies so taken "borrowing,"
our official debt would be vastly larger than is now reported, an
estimated $211 trillion. Yes, trillion
economics, the debt is also a figment of
language rather than a
nothing in economics pins down how the government should label its
receipts and payments. This is called the economics labeling problem.
follow-up article, Kotlikoff offers a “plan to painlessly
end deficits forever” as proof of the mischief that the
economics labeling problem allows. -FNC] As
in physics, where time, distance, and mass all depend on the frame of
reference or language of the observer, in economics, the debt is also
a figment of language rather than a fundamental concept. The infinite
horizon fiscal gap, in contrast, is a fundamental concept. Its size
is invariant to the government's fiscal labeling conventions.
schemes rely on fraudulent accounting, and postwar generational
policy is a Ponzi scheme, plain and simple. This is not to deny the
enormous benefits provided to those on the receiving end of the
scheme, many of whom are highly deserving and would otherwise have
languished in poverty with little or no healthcare.
we treat our first, second, third, and
future borns -- is the
moral question of our day.
we are now reaching the end of the chain letter with too few young
workers earning far too little to buy into our politicians'
unaffordable promises. Whether or not you prefer my proposed means to
eliminate the fiscal gap, one thing is clear. We can't leave a $211
trillion bill to our children, grandchildren, and future descendants.
The bill is simply far too large for them to handle. And how we
respond to this crisis -- how we treat our
first, second, third, and future borns -- is the moral question of
How we got
here is instructive. But where we go from here is critical. Congress
and the White House are now engaged in a highly publicized effort to
achieve budgetary savings of $1.2 trillion over the next ten years,
while the fiscal gap just rose by $6 trillion
in a single year! They are getting away with their fiscal
child abuse by measuring our fiscal challenges based on
economically meaningless official debt figures rather than the fiscal
gap. The fiscal gap has its own challenges, relying as it does on
projections far into the future. But it
is the only measure of a nation's solvency that is free
of the labeling problem and, thus, the only reasonable guide
to the actual fiscal policy we are conducting.
To move away
from fraudulent federal bookkeeping and force politicians to focus on
the fundamentals of our generational policy, I’m asking readers
to endorse the Purple Generational Balance plan. Purple is the
combination of red and blue, and both red Republicans and blue
Democrats have an equal stake in and responsibility toward our
American's children. The Purple Generational Balance plan calls not
for meaningless budget balance. It calls for a) fiscal gap
accounting, b) generational accounting, which shows how both current
policy and proposed policy changes are impacting and will impact
current and future generations, and c) the adoption of policies that
achieve generational balance, which requires that each cohort
pay, over its adult lifetime, the same share of its lifetime labor
income in taxes net of transfer payments received.
No one can
get blood from a stone, and no economy can tax its young more than
100 percent of what they earn. We are not there yet, but we are
heading in that direction. Hence, achieving generational balance is
not only a moral imperative. It's a matter of economic survival.
addition to his current work on generational accounting, Lawrence
professor of economics at Boston University, has developed “Purple
taxes and healthcare.