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Very interesting article and more than a bit scarey. This government with its runaway spending from both parties has set us up for hard times.
The sad part is our children will be paying for it.
Quote:
Anna Bernasek
Fortune Magazine
Last fall Paul O'Neill, then Secretary of the Treasury, wanted a simple answer to a thorny question: How prepared was the nation today to pay all its future bills? Two government experts worked for months to calculate the answer. Their findings, which shocked even them, were never published—the Bush administration made sure of that. The reason for the silence was that by the time the two researchers had completed their study, O'Neill had been thrown out of the Treasury and replaced by the more politically astute John Snow. No savvy administration power player would dare point out, right in the middle of tax-cut season, that there was a huge hole in the country's finances—a $44 trillion hole.
That's the kind of Washington tactic that makes Larry Kotlikoff angry. So angry, in fact, that the normally composed and carefully spoken academic starts ranting about a government conspiracy to keep us all in the dark. He even refers to this particular episode as "the great Treasury cover-up." And once you start Kotlikoff on the subject, it's hard to stop him. "I hate politicians," he says, without pausing for breath. "These people are so focused on the next election, they don't care about the next generation. The thing that really turns my stomach is that they have the opportunity to do good, and they know they're doing bad, and it's okay. It's immoral."
Gulp!
Larry Kotlikoff isn't some soft-headed, liberal, ivory-tower type. It's true his Boston office does resemble a tower, or at least a turret, with rounded windows overlooking the Charles River and with a view across it to those two bastions of economic thought, Harvard and MIT. But Kotlikoff is a mathematically minded, mainstream economist who heads the economics department at Boston University. He has also taken on the role of fiscal crusader. (At last count, he'd written some 11 books, 66 chapters, 80 journal articles, and 37 op-ed pieces about our financial mess.)
Two decades ago Kotlikoff, who's now 52, pondered the impact the baby-boomer generation would have once it retired. He realized the government had a looming financial crisis on its hands because, in calculating its budget, it considered only current-year Medicare and Social Security payouts—and ignored its massive future obligations. That means, absurd as it sounds, that the government doesn't know what it really owes. And a government that doesn't know what it owes has no way to judge whether it can pay up.
So in the mid-1980s Kotlikoff pioneered a new way of accounting that could do the math, and it quickly won the approval of his profession. (Jargon-loving economists call it "generational accounting.") Kotlikoff's work revealed the sheer enormousness of the financial hole the government would face. Back then it all seemed a long way off, but today, with the first boomers reaching retirement age in five years, his message has taken on new urgency. In the intervening years he's been writing books, testifying before Congress, and doing everything he can to get the message out, but still nothing has been done to resolve the problem. In fact, the way Kotlikoff sees it, we're making matters worse.
Before you dismiss Kotlikoff as a lonely prophet of doom, let's get back to that government report that never saw the light of day. The authors of the report, Kent Smetters and Jagadeesh Gokhale, had intimate knowledge of Kotlikoff's work. (Smetters had collaborated with Kotlikoff on several research projects over the years; Gokhale had been one of Kotlikoff's graduate students.) Both economists were excited by the chance to combine Kotlikoff's cutting-edge economic thinking with government policy. If President Bush published their findings in his 2004 budget, it would be the first time an administration acknowledged how big the fiscal problem facing the nation really was. It would also be the first step toward a solution.
Using the basic principles of Kotlikoff's generational accounting, they added up everything the government expects to spend—Social Security benefits, debt-service payments, salaries, and so forth—far into the future and put it in today's dollars. Then they added up all the income the government expects to earn—taxes, income from government assets—in the future in today's dollars. To perform the calculations, Smetters and Gokhale had to make certain key assumptions about the rate of growth in government spending, taxes, medical costs, and hundreds of other things. Since they wanted to be as conservative as possible, they took their numbers from the government's own budget. In one particular case—medical costs—they chose a much more optimistic number, opting for 1% growth above GDP rather than the historical rate of 3%.
The gap between payments and income came in at $44.2 trillion. Think about $44 trillion for a moment. It's probably the biggest thing you've never heard of—and certainly the biggest number FORTUNE will publish in its pages this year. It's more than four times the size of our GDP, and 1 1/2 times the size of the entire world's GDP. If we had a fire sale of all our nation's assets today—stocks, bonds, and real estate—we could just about pull in $44 trillion.
Just to be clear, that number is not a bill that comes due on a certain date. What it shows is the debt that would accumulate over years of deficits if we continue as we are. It is an honest measure of the inexorable pressure on the government's future ability to spend. This amounts to a massive weight on the economy.
Worse than that, it's getting bigger. Every year the government sits on its hands, that $44 trillion grows by about $1.6 trillion. Remember, Kotlikoff's generational-accounting technique estimates the present value of our future needs. It's exactly like saving for retirement—the later you start, the more you have to save each year. So if nothing is done this year, the gap will widen to nearly $46 trillion next year.
Worse still, Smetters's and Gokhale's numbers may be on the low side. Take another look at how important the assumption about medical costs is. What Smetters and Gokhale discovered was that the two biggest factors making up the $44 trillion black hole were Medicare and Social Security. If they assumed a growth rate above GDP for medical costs of 1.5% instead of the 1% they used in their calculations, that $44 trillion gap would become $65 trillion.
After O'Neill was fired, Smetters and Gokhale were left holding a controversial report that they had thought was supported at the highest level of government. And once it was clear their work would never go anywhere in Treasury, they published their findings in a conservative journal put out by the American Enterprise Institute, and returned to their pre-Treasury employers. Smetters is back at the University of Pennsylvania; Gokhale, at the Cleveland Fed.
There is rare consensus among economists regarding the wisdom of generational accounting. But some, notably Harvard economist Martin Feldstein, see the problem as just that—a problem, not an apocalypse. Feldstein was Kotlikoff's dissertation advisor and remains a close friend. He wields considerable influence with the current administration and has seen many of his ideas incorporated into its fiscal policy. "What Larry has done is to say what happens if we don't do anything to fill the gap," Feldstein explains. "That's not what will happen. Either we'll raise taxes, cut benefits, or change the way we finance the system. Or it will be some combination of all three." Feldstein points to President Bush's policy proposal to privatize Social Security as evidence that the government is committed to dealing with the problem.
That may be, but it will require a great deal more courage than any politician has shown so far. In their report, Smetters and Gokhale calculate it would take a 69% hike in all federal taxes or a 95% hike in payroll taxes to close the $44 trillion gap. Or, if you prefer spending cuts, a 100%-plus cut across all discretionary federal spending (which, of course, is impossible) or a 45% cut to Social Security and Medicare. Solving this problem will hurt like hell.
What about economic growth? Can't that help reduce our debt? Kotlikoff shakes his head again. Growth, in fact, makes this particular problem worse, because when the economy grows faster, so do Social Security and Medicare. Kotlikoff reels off a long list of "painless" solutions he has considered: technological progress, asset sales, greater use of capital, foreign investment, inheritance, employer-based retirement plans, delaying the retirement age, increasing immigration, eliminating government waste, and on and on. He explains how each one is a drop in the bucket or counterproductive or just plain unpredictable.
One aspect of this problem that everyone agrees on is that it is so huge that no single segment of society can bear it alone. It's going to be felt across the board by all Americans. Seventy-seven million baby-boomers are going to start retiring in five years' time. As they do, the number of retirees in America will double. At the same time the workforce supporting them will grow by a mere 15%.
The longer you talk to Kotlikoff about this subject, the more dramatic his rhetoric becomes. "We're setting our kids up for a great fall," Kotlikoff says bitterly. "We were left with a much better situation than our parents and their parents before them—it's the American dream. But instead, we're leaving our kids with a fiscal crisis." He's particularly critical of the Bush administration and believes it has made matters worse by cutting taxes by so much and increasing spending so sharply. For instance, he points to President Bush's proposed prescription-drug benefit (the Democrats also back it), which could cost between $400 billion and $1 trillion over ten years. By his reckoning, that raises the $44 trillion fiscal gap by another $6 trillion.
The way Kotlikoff sees it, we're heading for a crisis with no escape. He believes that one day financial markets will wake up to the size of the problem and send interest rates through the roof. When that happens, the government will be forced to get its house in order—i.e., raise taxes and cut benefits. It will also rely on higher inflation to help reduce the debt problem. If that all sounds bad for the economy, well, it will be. "I'm scared," says Kotlikoff, "but I don't know what to tell my 13-year-old son. All I can do is try and save more. But what can you leave your children that won't be eaten up by taxes and inflation?"
It's clear nobody can solve a $44 trillion-sized problem overnight. Yet in Washington, generational accounting is as popular as a skunk at a garden party. The real question is, Do we continue an Eyes Wide Shut fiscal policy or—and this is a huge "or"—admit there's something really big and ugly staring us in the face?
Copyright 2003 Fortune Magazine
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“votes are collared under democracy, not by talking sense but by talking nonsense.” ~H. L. Mencken
But I thought deficit spending was good??? Thats what reagonomics teaches us doesnt?
Im not trying to be snide here. I honestly dont know for sure. If it does indeed say that, then this blows a pretty huge hole in that premise. It might be good in the short term, but the long term effects could potentialy be catastophic. There goes my SS benefits
Originally posted by schutd But I thought deficit spending was good??? Thats what reagonomics teaches us doesnt?
Im not trying to be snide here. I honestly dont know for sure. If it does indeed say that, then this blows a pretty huge hole in that premise. It might be good in the short term, but the long term effects could potentialy be catastophic. There goes my SS benefits
Not really, Reaganomics or Supply side says that a lowering of taxes spurs investment which grows the economy and creates jobs. This means an increase in tax revenue because more people are paying in.
The problem in the 80's was the spending increases blew away the revenue increases.
I think GW thinks, or has been convinced, the tax cuts will increase revenue by spurring the economy. So now he is just spending on what ever sounds good or more importantly gets him re-elected.
It is like buying the new car before you get the raise when you should be using the raise to pay off your credit card.
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“votes are collared under democracy, not by talking sense but by talking nonsense.” ~H. L. Mencken
Here is the reader digest version from Radley Bilko at the agitator.
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The $44 Trillion Hoax: A (Mild) Defense of Paul O'Neill
It's funny to watch conservatives give the former Treasury secretary the "Nurse Ratched at low tide" treatment. It really reveals how conservatives have managed to divorce themselves (pun fully intended) from any notion of limited government advocacy. They like Bush because he kills would-be terrorists, and because he'll appoint judges who support the pledge, uphold the ten commandments, and ban butt sex. If that means bloated government too, so be it.
O'Neill's a budget hawk. And President Bush probably wouldn't be facing the deficit and political turmoil he is today if he'd paid O'Neil a bit more heed. Against O'Neil's advice, for example, Bush doubled foreign aid outlays. Against O'Neill's advice, he imposed those dastardly steel tariffs. And as Gene points out, O'Neil also advised -- back in the surplus days -- that President Bush devote a trillion dollars to fully privatizing Social Security, an idea Bush apparently shrugged off.
But most disconcerting, even downright scary, is the report O'Neill commissioned shortly after taking his position from economists Kent Smetters and Jagadeesh Gokhale (disclosure: Gokhale was an economist with the Cleveland federal reserve at the time -- he's now a senior fellow at Cato).
You might know that the federal government doesn't factor its future obligations into its annual budget. In fact, it oftentimes shifts massive amounts of money from previous years into future years, and then shifts it all back again, all in an effort to stuff big numbers into small spaces.
Given the impending Boomer retirements, the coming ailing of those Boomers, ever-expanding entitlements, and the federal government's creative accounting methods (commonly known in the private sector as "fraud"), O'Neill worried that the federal government was facing a massive revenue shortage, yet was choosing to remain blissfully ignorant of it by only looking at its budget from year to year.
So he commissioned said report, which employed a method known as "generational accounting," whereby Smetters and Gokhale added up all of the federal government's obligations over the coming years, added up all of its projected revenues, then factored the difference.
Here's the stunner: The federal government faces a projected 44 trillion dollar deficit.
That's trillion. That's really not a number any of us can effectively wrap our brains around. It is one-and-a-half times the GDP -- of the entire world. It is basically the sum total of every asset owned by the U.S. government. And it gets bigger every year.
O'Neill was fired before the study was completed. And the Bush administration, trying to push a tax cut and a new $400 billion entitlement program, never let it see the light of day.
Fortune magazine has the details. The abstract is here. A reprint that I'm fairly sure violates copyright law can be found, for now at least, here.
Oh, I thought the Democratic party had the lable of "tax and spend".
Last I checked, the Republican party or the "fiscal conservatives" controlled both houses of congress as well as the White House. Thus, they could end the "run away spending that the afore mentioned "tax and spend" party is clearly responsible for.
Originally posted by WizardOfAz Oh, I thought the Democratic party had the lable of "tax and spend".
Last I checked, the Republican party or the "fiscal conservatives" controlled both houses of congress as well as the White House. Thus, they could end the "run away spending that the afore mentioned "tax and spend" party is clearly responsible for.
Exactly why the fiscal conservatives in the Republican party and elsewhere are upset with the current Presidents spending proposals.
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“votes are collared under democracy, not by talking sense but by talking nonsense.” ~H. L. Mencken
Originally posted by WizardOfAz Oh, I thought the Democratic party had the lable of "tax and spend".
Last I checked, the Republican party or the "fiscal conservatives" controlled both houses of congress as well as the White House. Thus, they could end the "run away spending that the afore mentioned "tax and spend" party is clearly responsible for.
you do understand it doesnt have as much to do with domestic spending as it has to do with imports vs exports. We buy more than we sell to others. Did the democrats EVER sell more than they bought? Ever? Have the republicans? EVER? no.
Crawl out of your liberal shell man!
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