Thursday, March 14, 2013

"This is fiscal child abuse pure and simple . . .

. . . and [Paul] Krugman should be ashamed of his contribution to it."

So says Laurence Kotlikoff (who was a third-party presidential candidate in 2012). More:

The U.S. fiscal gap of $222 trillion is enormous and totally unsustainable. But rather than discuss the fiscal gap, Krugman discusses the official debt which is one-twentieth as large and . . . a measure of the government's words, not its policies.

Of course, once you have the emperor convinced that his new clothes are for real, you can take full advantage of his ignorance. Krugman is doing this with his readers. He's taking advantage of their ignorance by showing that a non-measure of government sustainability, intentionally designed to be as small as possible, is not of major concern. And in claiming that the long-run is distinct in terms of policy from the short run and can be ignored until we reach it, he's persuading his readers that they needn't worry about the fiscal Sword of Damocles suspending over our children's heads. . . .

There is not a single dynamic model of the economy's dynamic transition being published in leading economics journals that doesn't include the constraint that the fiscal gap be zero. But Krugman simply discards what we academic economists call the government's intertemporal budget constraint.

Let's be clear. Generationally speaking, paying for the government's spending is a zero sum game. Eliminating the fiscal gap -- satisfying the government's intertemporal budget constraint -- requires either a) an immediate and permanent 64 percent hike in all federal taxes or b) an immediate and permanent 35 percent cut in all projected government outlays including those called "interest and principal." If we wait a decade to take our medicine, these figures become 70 percent and 38 percent respectively. And, guess what? In that case, our children will face even higher taxes or lower spending over their precious lives.
To put the fiscal gap of $222 trillion in perspective, the whole United States GDP is only about $15 trillion. Kotlikoff adds:
These aren't my estimates of the fiscal gap or what's needed to close it. They are my calculations based on the Congressional Budget Office's long-term fiscal forecast called the Alternative Fiscal Scenario. The CBO publishes this forecast in June each year. Last June the fiscal gap was $222 trillion. In June 2011 it was $211 trillion. It rose by $11 trillion between 2011 and 2012, which is the same amount as the entire stock of federal debt! The reason, in large part, is that baby boomers got one year closer to cashing in on all those Social Security, Medicare, and Medicaid payments which they are owed, but which have conveniently been ignored in tallying up federal debt.
Here's Kotlikoff talking about this problem with Glenn Loury: