munKNEE.com Your Key to Making Money
Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country 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… otherwise we are going to see dramatic increases in taxes, interest rates and consumer prices [with a resultant major decrease in our standard of living] and a dramatic increase in [the number of Americans living in abject] poverty. Words: 835
So says Laurence J. Kotlikoff in a recent Bloomberg article*. Below Lorimer Wilson, editor of www.munKNEE.com, presents further reformatted and edited [..] excerpts from the article for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Kotlikoff goes on to say:
U.S. Fiscal Situation is Dire
The International Monetary Fund recently released its annual review of U.S. economic policy in which it effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates” adding that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.” The fiscal gap they are referring to is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.
The Logical Solution
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. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.
The Congressional Budget Office’s latest Long-Term Budget Outlook shows an even larger problem and, based on their data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness reflects what economists call the labeling problem where Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future. The fiscal gap, however, isn’t affected by fiscal labeling. It’s 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.
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 today’s 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.
The Likely Probability
Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough.
Uncle Sam’s Ponzi scheme will stop but in a very nasty manner with the future possibility of:
1. massive benefit cuts visited on the baby boomers in retirement
2. astronomical tax increases that leave the young with little incentive to work and save
3. dramatic increases in interest rates
3. vast quantities of money being printed by the government to continue paying its bills and
4. major increases in prices all resulting in a
5. dramatic increase in poverty.
*http://www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and-we-don-t-even-know-commentary-by-laurence-kotlikoff.html (Laurence J. Kotlikoff is a professor of economics at Boston University and author of a number of books including “The Coming Generational Storm – What You Need to Know about America’s Economic Future” (with Scott Burns). Kotlikoff can be contacted at kotlikoff@bu.edu.)
Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
– Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
– Sign up to receive every article posted via Twitter, Facebook, RSS feed or our FREE Weekly Newsletter.