Waging war on our children

Call it the “fiscal gap.”

Prof. Larry Kotlikoff (photo credit: Courtesy)
Prof. Larry Kotlikoff
(photo credit: Courtesy)
Boston, MA-  “We shall not cease from exploration,” the American-born poet T.S. Eliot wrote, “and the end of all our exploring will be to arrive where we started –   and know the place for the first time.”
Here at Boston University, I spoke with Prof. Laurence J. Kotlikoff about a powerful economic idea he originated, known as “generational accounting.” My hair is salt-and-pepper – but listening to this soft-spoken economist, I expect it will turn white soon.
More than 30 years ago, Kotlikoff pioneered a simple concept – generational accounting. Calculate, as a present value, what each working-generation person pays in net taxes, now and in future; calculate everything governments are obligated to spend (education, health care, defense, debt service, etc.) now and in future; and compute the difference between these two sums. Call it the “fiscal gap.”
This is the true, accurate measure of what governments owe.
The Jerusalem Report
: Larry, what is America’s current fiscal gap?
Kotlikoff: “More than $200 trillion. We are waging fiscal and economic war on our children. Because they will have to cover the fiscal gap if current adults do not.”
This staggering amount is more than ten times the US annual Gross Domestic Product. And it is ten times the US gross public debt, now $20 trillion. One reason the fiscal gap is so large is our take as you go financing of Social Security and government-provided old age health care. The baby-boom generation is now retiring. Their children and grandchildren are being saddled with this bill.
After the 2017-18 Trump tax cut that slashed corporate tax revenues by 31%, the US government budget deficit soared to $779 billion in fiscal 2018 and is predicted to reach $1 trillion in fiscal 2019. Those deficits have alarmed even some Republicans, who helped create them. But the fiscal gap dwarfs even those sums.
How could such an enormous generational debt occur? Kotlikoff’s answer is “Enron accounting.”
Enron, a US energy company, used accounting loopholes to illegally hide billions of dollars in debt. Its audit company, Arthur Andersen, failed to reveal those debts. When the hidden debts were uncovered, Enron’s stock plummeted. Once worth over $60 billion, Enron was acquired at the end of 2001 for only $8 billion. Shareholders lost a fortune.
Incidentally, Arthur Andersen went out of business, too. In 2002, the company gave up its licenses to practice accounting after being found guilty of criminal charges relating to its flawed Enron audit.
Kotlikoff argues that nations do similar Enron-type accounting by failing to calculate and reveal, on an ongoing basis, their future obligations – obligations that are locked in by laws as well as political reality. These are debts, just as much as conventional US Treasury bonds. But, like Enron, they are not shown on the US government’s “books”.
What happens to nations with huge fiscal gaps? Kotlikoff cites Argentina as an example. A century ago, Argentina was one of the world’s richest countries, exporting meat and grain. Its GDP was 10th in the world and its trade was 7% of total world trade. Argentina’s per capita income was higher than France’s, twice that of Italy, and five times that of Japan.
Today? Argentina’s spend-and-borrow fiscal folly has brought another in a succession of fiscal crises, and its GDP per capita is only $15,000 (less than half Israel’s), or 55th in the world. Argentina is broke and becoming poor.
Does the same fate await the US?
As an economist and journalist, I have at times tried to sound the alarm, with words, when I felt national policy was wrong (see The Report, “Don’t count on your pension,” September 3). But Kotlikoff acted far more effectively.
He ran for President of the United States – twice! Once in 2012, and again in 2016. “I think I may be the first economist to run for president,” Kotlikoff said in 2012. “We see economists now running Greece and Italy. It’s not every day that an economist decides to work this way for his country – but I’m one of those cases.”
At the time he sought a place on the 2012 ballot as an independent through a new online nomination site, AmericansElect.org. His bid ended when Americans Elect chose not to field a candidate.
And in July 2016, he told the Huffington Post, “I’m running for president as a write-in candidate. My vice-presidential candidate is Edward Leamer, a highly distinguished economist at UCLA. My campaign website provides a 157-page platform book. The book tells you something you haven’t heard in all the mindless presidential debates – the full truth about our nation’s domestic and international challenges. The book also lays out simple, concrete solutions, not sound bites, to deal with our nation’s problems.”
Kotlikoff’s platform, called the Purple Plans (see www.purpleplans.org and note that the color purple is the combination of red, for Republicans, and blue, for Democrats), covered education, energy, taxes, health care, banks and the financial system, and social security. Neither the Democratic nor Republican candidates offered anything like it.
Here is how Kotlikoff introduced his Purple Plans policies.
“As you know, our country is at a critical juncture. Last year’s national saving rate was 0.1%, and our net domestic investment rate was 4.4%. Saving nothing means we have nothing to invest in our country. Those investing in our country are foreigners, which explains our huge current account deficit. It’s easy to blame foreigners for our problems, but without their investment, our net domestic investment rate would also be 0.1%.
“Most Americans have experienced no growth in their real take home pay in decades. Those who are doing well are doing better, with income and wealth growing more unequal over time.
“And our government is broke. Based on the Congressional Budget Office’s latest projections, the fiscal gap separating the present value of projected non-interest spending plus the official debt and the present value of projected taxes totals $211 trillion.
“This is the mountain of obligations we ignore while focusing on the…. ‘molehill’ of official debt held by the public. Decades of Enron-style accounting has permitted both parties to keep the vast majority of the government’s debts off the books.
“Our fiscal gap is 14 times GDP – a larger ratio than prevails in Greece or, it appears, any other developed country. Eliminating the fiscal gap without structural reform would require either an immediate and permanent 64% increase in all federal taxes or a 40% cut in all federal non-interest spending. Delaying such adjustments leaves an even bigger bill for our children.
“We need fundamental structural reforms of our fiscal and financial institutions to kick-start our economy and protect our children from an economic future we would not seek for ourselves. Our tax system is a disgrace. Our Social Security system is an inefficient and inequitable morass of incomprehensible rules.
“Moreover, Social Security is in worse fiscal shape than in 1983 when the Greenspan Commission ‘fixed’ it. The costs of Medicare and Medicaid continue to explode, and the new Health Exchanges, while promising to do tremendous good for tens of millions of uninsured, could easily face explosive costs.
“Our future lies in one place and one place only – in the well-being of our children. Our sacred duty as adults is to protect their welfare. We have failed in that responsibility. Our politicians, in both parties, care, it seems, much more about the next election than the next generation.
“President Kennedy said, ‘Our problems are man-made, therefore they may be solved by man. No problem of human destiny is beyond human beings.’
“Were he with us today, he would not sit silent while Washington continues to do too little too late.”
Kotlikoff has calculated what has to be done to close the fiscal gap: “Uncle Sam needs to raise taxes by 10% of each future year’s GDP or cut spending by 10% of each future year’s GDP to eliminate its fiscal gap.” He adds, “…federal revenues are 17% of GDP, and 10 divided by 17 is close to 60%. Federal outlays are 21% of GDP, and 10 divided by 21 is close to 47%!
Contrast these words with President Donald J. Trump’s claim: “We have the strongest economy in the history of our nation.”
Do you believe Trump? Or Kotlikoff?
During my stay in the United States, I was dragged kicking and screaming to shopping centers. I realized why I hate them so viscerally. They represent a society that acts as if it had no future.
In our spend-and-borrow economy, people work hard at jobs they mostly dislike, to earn money to buy stuff they don’t really need – and wonder why they are not happy. The result is crumbling bridges, terrible schools and impoverished elderly. And it is hard to see a way out. If we all stopped spending, the wheels of the economy would grind to a halt. And why should governments stop spend-and-borrow when it seems to get them re-elected, and in any case when they are pushing us citizens to do the same?
In a research paper, Kotlikoff and co-authors noted that “national saving rates differ enormously across developed countries. But these differences obscure a common trend, namely a dramatic decline over time. France and Italy, for example, saved over 17% of national income in 1970, but less than 7% in 2006. Japan saved 30% in 1970, but only 8% in 2006. And the U.S. saved 9% in 1970, but only 2% in 2006.” Israel’s net national saving is about 10% of GDP.
In Western nations, and in Israel, the future is simply not what it used to be.
So far, most of the numbers I cited refer to the United States. Do they apply to Israel, too?
At first glance, perhaps not. Israel’s national debt is only 60.7% of GDP, an all-time low, while that of the US exceeds 100%, and Israel’s government budget deficit is 3% of GDP compared with about 5% for the US. But I am certain that when it is properly calculated, Israel’s fiscal gap, too, will prove to be enormous.
Like the US Social Security system, bankruptcy looms for Israel’s National Insurance fund, too. So we, too, are waging fiscal and economic war on our children. They will bear the burden.
Prof. Kotlikoff explained in clear language why America is dead broke. Once it is done for Israel, the same calculation, I’m certain, will reveal that Israel is rather broke, too.
As a result, when I return home, I will see Israel’s society and economy with fresh, anxious eyes.
The writer heads the Zvi Griliches Research Data Center at the S. Neaman Institute, Technion and blogs at www.timnovate.wordpress.com