The True Fiscal Gap of the United States, Adapted from a Discussion by Laurence Kotlikoff

by morganschapiro

Fixing the U.S. Economy: A discussion by Laurence Kotlikoff

Laurence Jacob Kotlikoff (born January 30, 1951) is a William Warren FairField Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Research Associate of the National Bureau of Economic Research, a Fellow of the Econometric Society, a former Senior Economist and President’s Council of Economic Advisers among others.

 

All words below are paraphrases by Prof. Kotlikoff and may not be used as direct quotes. I lacked the resourced to properly record his statements with the accuracy required for quotes. I also re-organized them to make the summary more fluid. Boston University: School of Management, however, may have the discussion on file as a video if you choose to contact them.

 

 

 

  • The Real Budget Deficit of the United States
    • The current deficit numbers are meaningless. The United States has, originally unintentionally, hid the true size of its debt and kept it off the books.
    • Instead of its current method which relies too much on labeling the U.S. should use infinite horizon fiscal gap calculation to determine its true debt.
      • This calculation reveals that the United States has a Fiscal Gap (On book obligations + off book obligations) of 211 Trillion USD.
        • This number indicates a fiscal gap of 14x GDP, Greece is currently at 12 and Germany at 3.
      • What would be required to fix this?
        • For the United States: 64% permanent hike in federal taxes or a 40% cut in all non-interest federal spending
        • For Germany: A 13% permanent tax hike or 11% cut in transfer payments
  • Social Security
    • When all the major benefits are combined a baby boomer will receive, on average, $40,000 a year in todays dollars. This will represent about 80% of per capita GDP in 2020.
    • The Social Security Administration’s Trustees’ Report disagree with the Congressional Budget Office that they are sufficiently funded
      • Table 4B6
      • Social Security is underfunded by 29%, it must be cut by 22% just to continue to function.
    • This has essentially created a ponzi scheme and in the process wiped out the U.S. savings due to increased old age consumption. The net national savings rate (as opposed to the meaningless personal savings rate) is next to zero. Net investment rate is next to zero.
      • This means investment is made up by foreign investors in the U.S. and the current account deficit.
  • How the U.S. kept this off the books
    • How did this happen?
      • This originally started under Eisenhower when he created Social Security as a tax instead of recording it as a loan. They promised each person that they would receive the principal plus more. This allowed the U.S. to keep this debt off the books. Eventually healthcare benefits were added too.
      • In order to prove his point, Prof. Kolikoff showed that he could create a scheme that would eliminate the entire U.S. deficit overnight without any money actually changing hands, requiring only the change of language used.
        • His point was that the current deficit numbers are meaningless, but people are unable to look past them because it is easier. This is why infinite horizon fiscal gap should be used instead. With finite horizon it can simply be a language game.
    • Censorship
      • Both Republicans and Democrats have censured this.
        • Both Clinton and Bust W. Bush’s administrations outright
        • Obama Administration fudged the results by calculating as if Medicate and Social Security don’t exist.
  • Private And Public Sector Examples
    • When you adjust U.S. earnings for inflation and exclude fringe benefits they are no higher today then in 1964.
      • Many companies had a defined benefit plan similar to the Social Security model, however, they are now receiving considerably less then they were originally promised (ex. Delta Airlines).
    • The markets value the fact that the U.S. can print money, but this is not the panacea it is proposed to be. Already the fed had printed enough money to quadruple the M1, but banks are sitting on it. We may see prices increase four fold.
      • Russia printed in the 1990s to cut real salaries of government employees and pensioners, it solved the government’s problem, but many starved and died.
  • The instability of the U.S. Financial System as a whole
    • In the U.S. the FDIC has only 3 Billion dollars to ensure 6 trillion dollars worth of deposits.
    • One crash can have a ripple effect, such as Lehman.
  • His solution
    • Limited Purpose Banking, where investment banks become only middle men and are equity funded only.
      • He details this more in his book Jimmy Stuart is dead.
    • The Purple Plans
      • Bi-partisan plans that can be found online.

 

Next Week I’ll start to go over the purple plans and limited purpose banking and post up what I find here. I’ll attempt to reach Professor Kotlikoff for comments as well.

 

Do I completely agree? Not necessarily, I wonder about how the nation could be left uncompetitive by a move to limited purpose banking. I also wonder if it will be as easy for people to invest their savings, I doubt it does us any good if everyone just sits on their savings instead of investing them.  I need to look into this issue much more before I make an opinion, but Professor Kotlikoff does an excellent job of highlighting the problems that many people, and especially our government, like to ignore.