Good stuff from Kotlikoff. And his book, "Jimmy Stewart Is Dead", is good, too.
There's also a good video clip today from James Mackintosh, FT's investment
editor as to the possibility of a permanent America deflation along
Japanese lines.
Keith
At 11:55 12/08/2010 -0700, you wrote:
-----Original Message-----
From: [email protected] [mailto:[email protected]] On Behalf Of
Sid Shniad
Sent: Thursday, August 12, 2010 10:56 AM
Subject: U.S. Is Bankrupt and We Don't Even Know It
<http://www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and-we-don-t-even-know-commentary-by-laurence-kotlikoff.html>http://www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and-we-don-t-even-know-commentary-by-laurence-kotlikoff.html
Bloomberg
Aug 10, 2010
U.S. Is Bankrupt and We Don't Even Know It
By Laurence Kotlikoff
Bloomberg Opinion
Lets get real. The U.S. is bankrupt. Neither spending more nor taxing less
will help the country
<http://www.bloomberg.com/apps/quote?ticker=FDDSGDP:IND>pay its bills.
What it can and must do is radically simplify its tax, health-care,
retirement and financial systems, each of which is a complete mess. But
this is the good news. It means they can each be redesigned to achieve
their legitimate purposes at much lower cost and, in the process,
revitalize the economy.
Last month, the International Monetary Fund released its
<http://www.imf.org/external/np/sec/pn/2010/pn10101.htm>annual review of
U.S. economic policy. Its summary contained these bland words about U.S.
fiscal policy: Directors welcomed the authoritiescommitment to fiscal
stabilization, but noted that a larger than budgeted adjustment would be
required to stabilize debt-to-GDP.
But delve deeper, and you will find that the IMF has effectively
pronounced the U.S. bankrupt. Section 6 of the July 2010
<http://www.imf.org/external/pubs/ft/scr/2010/cr10248.pdf>Selected Issues
Paper says: The U.S. fiscal gap associated with todays 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.
The fiscal gap is the value today (the present value) of the difference
between projected spending (including servicing official debt) and
projected revenue in all future years.
Double Our Taxes
To put 14 percent of gross domestic product in perspective, current
federal revenue totals 14.9 percent of GDP. So the IMF is saying that
closing the U.S. fiscal gap, from the revenue side, requires, roughly
speaking, an immediate and permanent doubling of our personal-income,
corporate and federal taxes as well as the payroll levy set down in the
Federal Insurance Contribution Act.
Such a tax hike would leave the U.S. running a surplus equal to 5 percent
of GDP this year, rather than a 9 percent deficit. So the IMF is really
saying the U.S. needs to run a huge surplus now and for many years to come
to pay for the spending that is scheduled. Its also saying the longer the
country waits to make tough fiscal adjustments, the more painful they will be.
Is the IMF bonkers?
No. It has done its homework. So has the Congressional Budget Office whose
<http://www.cbo.gov/doc.cfm?index=11579>Long-Term Budget Outlook, released
in June, shows an even larger problem.
UnofficialLiabilities
Based on the CBOs data, I calculate a fiscal gap of $202 trillion, which
is more than 15 times the
<http://www.treasurydirect.gov/NP/BPDLogin?application=np>official debt.
This gargantuan discrepancy between our officialdebt and our actual net
indebtedness isnt surprising. It reflects what economists call the
labeling problem. Congress has been very careful over the years to label
most of its liabilities unofficialto keep them off the books and far in
the future.
For example, our
<http://www.socialsecurity.gov/mystatement/fica.htm>Social Security FICA
contributions are called taxes and our future Social Security benefits are
called transfer payments. The government could equally well have labeled
our contributions loansand called our future benefits repayment of these
loans less an old age tax,with the old age tax making up for any
difference between the benefits promised and principal plus interest on
the contributions.
The fiscal gap isnt affected by fiscal labeling. Its the only
theoretically correct measure of our long-run fiscal condition because it
considers all spending, no matter how labeled, and incorporates long-term
and short-term policy.
$4 Trillion Bill
How can the fiscal gap be so enormous?
Simple. 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 todays dollars. Yes, our economy will be
bigger in 20 years, but not big enough to handle this size load year after
year.
This is what happens when you run a massive Ponzi scheme for six decades
straight, taking ever larger resources from the young and giving them to
the old while promising the young their eventual turn at passing the
generational buck.
<http://search.bloomberg.com/search?q=Herb%20Stein&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja>Herb
Stein, chairman of the Council of Economic Advisers under U.S. President
<http://search.bloomberg.com/search?q=Richard%20Nixon&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja>Richard
Nixon, coined an oft-repeated phrase: Something that cant go on, will
stop.True enough. Uncle Sams Ponzi scheme will stop. But it will stop too
late.
And it will stop in a very nasty manner. The first possibility is massive
benefit cuts visited on the baby boomers in retirement. The second is
astronomical tax increases that leave the young with little incentive to
work and save. And the third is the government simply printing vast
quantities of money to cover its bills.
Worse Than Greece
Most likely we will see a combination of all three responses with dramatic
increases in poverty, tax, interest rates and consumer prices. This is an
awful, downhill road to follow, but its the one we are on. And bond
traders will kick us miles down our road once they wake up and realize the
U.S. is in worse fiscal shape than Greece.
Some doctrinaire Keynesian economists would say any stimulus over the next
few years wont affect our ability to deal with deficits in the long run.
This is wrong as a simple matter of arithmetic. The fiscal gap is the
governments credit-card bill and each years 14 percent of GDP is the
interest on that bill. If it doesnt pay this years interest, it will be
added to the balance.
Demand-siders say forgoing this years 14 percent fiscal tightening, and
spending even more, will pay for itself, in present value, by expanding
the economy and tax revenue.
My reaction? Get real, or go hang out with equally deluded supply-siders.
Our country is broke and can no longer afford no-pain, all-gain solutions.
(<http://search.bloomberg.com/search?q=Laurence%20J.%20Kotlikoff&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja>Laurence
J. Kotlikoff is a professor of economics at Boston University and author
of Jimmy Stewart Is Dead: Ending the Worlds Ongoing Financial Plague with
Limited Purpose Banking.The opinions expressed are his own.)
To contact the writer of this column: Laurence Kotlikoff at
<mailto:[email protected]>[email protected]
!DSPAM:2676,4c643785177553611930706!
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Keith Hudson, Saltford, England
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