On Sat, Jan 08, 2005 at 04:21:37PM -0600, Gary Denton wrote: > Accountants have denounced the infinite years PV method.
Do you have a cite of a mainstream accountant writing that present value accounting for infinite money streams is a "big lie" or totally meaningless? Respected economists have been using the technique extensively for over 15 years. It is not just a Bush administration invention. See, for example Laurence Kotlikoff _The Coming Generational Storm_ "Generational accounting may sound new, but it's been around for about fifteen years and has been applied in roughly thirty countries. The International Monetary Fund, the World Bank, the Bank of England and Her Majesty's Treasury, the German Bundesbank, the European Union, the Treasury of New Zealand, the Bank of Japan, and the Finance Ministry of Norway are some of the official institutions that have sponsored generational accounting studies." Dr. Jagadeesh Gokhale (former senior economic adviser to the Federal Reserve Bank of Cleveland) http://www.cato.org/people/gokhale.html Dr. Kent Smetters (Associate Professor at Wharton, former economist for the Congressional Budget Office 1995-98) http://www.wharton.upenn.edu/faculty/smetters.html http://www.aei.org/docLib/20030723_SmettersFinalCC.pdf "Many, if not most, analysts and policymakers use traditional fiscal measures such as debt held by the public, deficit projections over limited (usually five- or ten-year) horizons, or seventy-fiveyear estimates of Social Security and Medicare financial shortfalls. 2 Some budget analysts acknowledge that short-term measures such as national debt and deficits are inadequate, as they significantly understate the financial shortfall that the federal government faces under today.s fiscal policies.3 As a consequence, the degree to which current policy is unsustainable remains hidden from policymakers. In addition, we argue here, reliance on traditional measures introduces a policy bias favoring current debt minimization at the expense of policies that are sounder from a long-term perspective. Even under seventy-five-year budget measures, we believe the federal fiscal shortfall would be significantly understated, hindering objective fiscal policymaking. Nevertheless, official budgeting agencies continue to promote such measures: The recently published Budget of the United States Government, Fiscal Year 2004 (hereafter Budget) reports seventy-five-year .actuarial deficiency. measures for Social Security and Medicare. We propose that federal budget agencies such as the Office of Management and Budget and the Congressional Budget Office should begin reporting a pair of measures on a regular basis to track the true costs of current fiscal policy: Fiscal Imbalance (FI) and Generational Imbalance (GI). The FI measure for the federal government is the current federal debt held by the public plus the present value in today.s dollars of all projected federal non-interest spending, minus all projected federal receipts. The FI measure indicates the amount in today.s dollars by which fiscal policy must be changed in order to be sustainable: A sustainable fiscal policy requires FI to be zero.4 The GI measure indicates how much of this imbalance is caused, in particular, by past and current generations. The FI measure is similar to the standard perpetuity .open-group liability. concept that is sometimes used to analyze shortfalls in social insurance programs, while the GI measure is similar to the standard .closed-group liability. concept. The FI measure is also sometimes called the .fiscal gap. (see Auerbach, Gale, Orszag, and Potter 2003). We argue here that the FI and GI measures together possess several desirable properties, the most important being that they render policy decisions free of the aforementioned bias because they enable comparisons of alternative policies on a neutral footing. .... Of the current federal FI of $44.2 trillion, Social Security.s FI is about $7 trillion in present value. Medicare's FI is $36.6 trillion (for both Parts A and B), of which Part A (the Hospital Insurance program) contributes $20.5 trillion and Part B (the Supplementary Medical Insurance program) contributes $16.1 trillion.5 By contrast, the rest of the federal government.s FI is only $0.5 trillion, which comprises a $4.6 trillion surplus in revenues minus obligations to Social Security, Medicare, and publicly held debt of $5.1 trillion." If you are unsure of the meaning of the present value of an infinite stream of cash flows, then here is an equivalent phrasing: A deficit of $7 trillion in present value, at a nominal interest rate of 5%, corresponds to an annual deficit, every year, of $350 billion. In other words, if we don't fix social security by decreasing benefits sometime in the future, then we need to invest an extra $350 billion a year, every year, to be able to meet social securities obligations in the future. So, even if we fixed the budget deficit without touching social security, we would then have another $350B a year deficit (more than half the current budget deficit) to take care of. > The Bush tax cuts created an over $10,000,000,000,000 deficit by the > same method. Yes, they have (I saw your correction). The budget deficit urgently needs to be fixed. So does SS. So does Medicare/medicaid. Let's get to work. Bush won the election, so he gets to choose the order of attack. By the way, do you have a plan for fixing the budget deficit that is more coherent than "raise taxes on the rich"? Or do you just like to whine about Bush? -- Erik Reuter http://www.erikreuter.net/ _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
