Remedies to Fiscal Gap Guarantee Hyperinflation! (+3K Views)

Lorimer Wilson November 14, 2010 Comments Off on Remedies to Fiscal Gap Guarantee Hyperinflation! (+3K Views) 4,952 Views

Boston University economist, Prof. Lawrence Kotlikoff, maintains that the U.S. cannot end its fiscal crisis by doubling taxes, as the International Monetary Fund suggests, or further stimulus spending [as Bernanke is doing] because it will simply increase the debt. [Instead he has some radical proposals of his own. Read on!] Words: 704

So reports Neil Reynolds (www.theglobeandmail.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Reynolds goes on to report:

Writing in the September issue of Finance and Development, a journal of the International Monetary Fund (IMF), Boston University economist, Prof. Kotlikoff, says the IMF itself has quietly asserted that “The U.S. fiscal gap** is huge… [and] closing [it] requires a permanent annual fiscal adjustment equal to about 14 per cent of U.S. GDP” which is equal to all current U.S. federal taxes combined. (** the difference between a government’s projected revenue, expressed in today’s dollar value, and its projected spending also expressed in today’s dollar value – which, by this measure, puts the United States is in worse shape than that of Greece.)

The IMF’s Suggested Fiscal Fix

The consequences of the IMF’s suggested fiscal fix, a doubling of federal taxes in perpetuity, would be appalling according to Prof. Kotlikoff who says: “The IMF is saying that, to close this fiscal gap [by taxation], would require an immediate and permanent doubling of our personal income taxes, our corporate taxes and all other federal taxes… and would appear to be impossible without immediate and radical reforms to its health care, tax and Social Security systems – as well as military and other discretionary spending cuts.”

Kotlikoff cites earlier calculations by the Congressional Budget Office (CBO) that concluded that the United States would need to increase tax revenue by 12 percentage points of GDP to bring revenue into line with spending commitments. The CBO calculations, however, assumed that the growth of government programs (including Medicare) would be cut by one-third in the short term and by two-thirds in the long term and this assumption, Prof. Kotlikoff notes, is politically implausible – if not politically impossible. If the fiscal gap is not closed the country’s spending will forever exceed its revenue growth, and no one’s real debt can increase faster than his real income forever.

Kotlikoff’s Suggested Fiscal Fixes

Kotlikoff maintains that the U.S. cannot end its fiscal crisis by increasing taxes and further stimulus spending because it will simply increase the debt. He does suggest reforms that would help, namely:

1. that the government give every person an annual voucher for health care, provided that the total cost not exceed 10 per cent of GDP (U.S. health care now consumes 16 per cent of GDP),

2. that all current federal taxes be replaced with a single consumption tax of 18 per cent,

3. that the government set up government-sponsored personal retirement accounts, with the government making contributions only for the poor, the unemployed and people with disabilities.

Kotlikoff concluded that without drastic reform:

The likely fiscal fix is massive QE – and hyperinflation!

*http://www.theglobeandmail.com/report-on-business/commentary/neil-reynolds/the-scary-actual-us-government-debt/article1773879/print/

(Prof. Kotlikoff is a noted economist and research associate at the U.S. National Bureau of Economic Research. He is a former senior economist with then-president Ronald Reagan’s Council of Economic Advisers and has served as a consultant with governments around the world. He is the author (or co-author) of 14 books and his most recent book, “Jimmy Stewart Is Dead” (2010), explains his recommendations for reform.)