Bankrupting Our Children
U.S. official net debt – the debt in the hands of the public, i.e., the debt that hasn’t been bought up by the Federal Reserve with newly printed money — stands at $13 trillion. This is a huge sum, equivalent to three quarters of U.S. GDP. But it’s just the tip of the iceberg when it comes to actual U.S. red ink. As I mentioned earlier, our politicians have kept most federal obligations off the books and, therefore, out of sight.
Take your future Social Security benefits. Uncle Sam owes you this money no less than he owes you coupon payments on the U.S. Treasury bonds you might possess. But not a penny of his obligation to send you your Social Security checks is added to the $13 trillion when Uncle Sam reports his net debt.
The method of deception is simple. Congress calls your future Social Security benefits a “transfer payment,” whereas it calls your future Treasury coupon payments “debt service.” Then it declares that only the present value of future debt service (this is the aforementioned $13 trillion) constitutes official debt. Present value simply refers to the financial method of calculating what a dollar either paid or received in the future is worth today.
But what words Congress uses to call the dollars it takes in or hands out doesn’t change economic reality. No matter what Congress calls Social Security payments, it owes you, me and everyone else this money just like it owes you, me and everyone else future payments on the Treasury bonds we hold. All of these future payments represent government I.O.U.s.
Even those payments that are far in the distant future are obligations, which can be ascribed a present value. Of course, a dollar that the government will need to pay in, say, 500 years, won’t have much of a present value today. But it won’t be zero and it can’t be ignored in the accounting.
How much should we add to the $13 trillion if we want to include our government’s Social Security debt? The answer, according to the system’s actuaries, is $26 trillion. This figure looks at the infinite horizon, but does proper present value accounting. It also nets out the present value of all future taxes and the value of the system’s trust fund. If we add the $26 trillion in Social Security red ink to the $13 trillion, we get $39 trillion, which is more than triple the official debt held by the public!
But why stop with Social Security I.O.U.s? What about Uncle Sam’s commitment to pay us Medicare benefits? Projected Medicare benefits also have an actuarial present value, which can be measured and put on the books. In fact every dollar the government is projected to spend, whether the dollar is labeled “debt service,” “transfer payments” or “discretionary spending” (such as defense expenditures or interstate highway repairs), represents a government liability. And every dollar the government projects collecting in taxes represents an offsetting government asset.
Economics tells us we should put everything on the books, including the present value of every dollar the government expects to pay in the future net of every dollar it projects to receive. We economists call this difference the fiscal gap, which I previously mentioned.
The fiscal gap is the true measure of a country’s financial condition. It boils down in a single number the extent to which the government’s finances don’t add up. It tells us how much we need to raise taxes to cover all the spending the government has planned. Alternatively, it tells us how much we need to cut that spending to live within the taxes the government expects to collect.
So how big is our government’s fiscal gap?
Yes, you read that correctly. Our true fiscal indebtedness is 15 times larger than the $18 trillion you’ve been told our government owes. Its tremendous size can be summarized with these five words: Our government is dead broke.
The fiscal gap is, in essence, our nation’s credit card bill. Like our own credit card bills, it can’t be wished away and keeps getting bigger, thanks to interest charges, if it goes unpaid. In fact, it’s growing at about $5 trillion a year.
There are different ways to close the fiscal gap. One is to permanently raise, starting today, every single federal tax by 53 percent. Alternatively, we could cut all federal expenditures by 34 percent. A third option is to combine a smaller tax hike with a smaller spending cut.
Yes, we can keep waiting to address our fiscal shortfall. But the longer we wait, the more we put future generations on the hook. If, for example, we wait 20 years to act, the required across-the-board tax hike will be 69 percent, not 53 percent. Or if we wait 20 years to cut spending, the required across-the-board spending cut will be 42 percent, not 34 percent.
Herb Stein, President Nixon’s chief economist, famously said, “Things that can’t go on will stop.” This quaint phrase suggests that it makes no difference when we get our fiscal house in order. Nothing could be further from the truth. Here’s the truth. Things that can’t go on will stop too late, especially for our children.
We Americans are a moral people. We believe in doing the right thing. Waiting to close the fiscal gap is highly immoral. The longer we wait, the bigger the tax hikes or spending cuts our children will bear and the more of these burdens we will escape. And make no mistake, forcing, for example, our kids to face 69 percent higher taxes than we’ve been paying is an act of absolute immorality. It’s also destined to destroy their economic lives.
How did the fiscal gap get so large? It didn’t happen overnight. Each administration and Congress, going back to the Eisenhower presidency, has done its part to exacerbate our financial shortfall. Much of the fiscal gap is the result of politicians running take-as-you-go policy. The policy works like this. The politicians take money (e.g., Social Security contributions) from young people, give it to old people in cash or healthcare benefits, but keep the young people happy by promising them large benefits when they’re old. (Note that the pols don’t call this current borrowing and future debt service. Rather they call it current taxation and future transfer payments.)
If there were always enough young people coming along and if they were always earning enough to fully pay off the contemporaneous old people, there’d be no impact on the fiscal gap. But our postwar intergenerational chain letter is failing like all chain letters do, eventually. Ours is running into the baby boomers’ baby bust, which refers to the fact that the massive baby boom generation chose to have fewer children per person than its parents did. This is reducing the number of young people relative to old people through time. In addition, real wages have, at least on average, stopped growing.
Yes, the 1 million or so in annual immigration is bolstering the work force. But it’s not helping us with our chain letter. Immigrants, given their skill composition, cost our country roughly as much in benefits as they contribute in taxes.
Ironically, the politicians’ take-as-you-go Ponzi scheme has, in part, self-destructed because they didn’t understand that their scheme would affect real wage growth. Taking more money that young people would otherwise have saved and invested and giving it to older people to spend has gradually, but relentlessly, reduced national savings and domestic investment. The lack of investment has, in turn, adversely affected worker productivity and, therefore, what the young earn. This string of events is exactly what economic theory suggests would have happened and is fully supported by the data.
Why Aren’t Congress or the Administration Disclosing Our Massive Fiscal Gap?
You won’t find the $199 trillion fiscal gap on any government website. Why not? Why aren’t our main fiscal watchdogs – the Congressional Budget Office (CBO), the Office of Management and Budget (OMB) and the General Accountability Office (GAO) – not disclosing the fiscal gap? Calculating it takes just five minutes based on the CBO’s long-term spending and tax projections.
Here’s why. All three agencies are run by political appointees. And, to paraphrase Jefferson, their bosses care more about the next election than the next generation. I experienced this personally in working with OMB and other outside economists in President Clinton’s first year of office. We prepared a fiscal gap analysis to be published in the President’s 1994 Budget. The picture it painted wasn’t pretty. It completely contradicted the narrative that President Clinton was a strong fiscal conservative. As a result, the document we prepared so carefully over several months was censored two days before the budget was published.
The same thing happened under President George W. Bush. In 2002, then-Treasury Secretary Paul O’Neill commissioned a fiscal gap analysis for inclusion in the President’s 2003 Budget. On December 7, 2002, Secretary O’Neill was summarily fired and the Treasury economists preparing the analysis (two of whom are former co-authors) were immediately informed that their year-long study would never see the light of day. In President Bush’s case, the concern was passage of Medicare Part D. The Bush Administration wanted nothing in the press to suggest that our children couldn’t afford paying for the existing Medicare system, let alone a major expansion.
Neither Secretary Clinton nor Mr. Trump have mentioned the fiscal gap once during their campaigns. Either they don’t understand the concept and, therefore, don’t comprehend our nation’s fiscal insolvency or they do and are afraid to tell the truth.
How Can Anyone Running for President Not Discuss Our Fiscal Gap?
Being ignorant or feigning ignorance of the fiscal gap is not easy. Given the labeling problem, it’s the only means of assessing a country’s solvency. I co-developed fiscal gap analysis in 1989 — that’s almost 30 years ago — with University of California at Berkeley economist Alan Auerbach and Cato Institute economist Jagadeesh Gokhale. We did so under the heading of Generational Accounting.
Governments all over the world have been doing comprehensive fiscal gap accounting on a routine or periodic basis. The same is true of the International Monetary Fund, the World Bank and the European Commission. Two prominent left- and right-leaning think tanks — the Brookings Institution and the Cato Institute — are also producing fiscal gap analyses, typically every year. For my part, I’ve been discussing our fiscal gap in public forums and with the media for years.
Unlike Secretary Clinton and Mr. Trump, not all politicians are ignorant or dissembling about the true state of our fiscal affairs. In 2014, Senator John Thune, a Republican from South Dakota, and Senator Tim Caine, a Democrat from Virginia, introduced The Inform Act. I was heavily involved in conceiving and drafting the bill, while a millennial group called The Can Kicks Back did the yeoman’s work to make it a reality. The bill would require that the CBO, GAO and OMB do fiscal gap accounting on a routine basis. Were this to happen, the press would be forced to cover the public releases of the fiscal gap measurements, and the politicians would be forced to address the problem.
Senators Thune and Cain sent a joint letter to all 98 of their colleagues asking them to co-sponsor the bill. Only a handful of Democrat and Republican senators, five to be exact, agreed.
My reaction was to ask economists for help. I sent an email to every economist I knew requesting they endorse The Inform Act at www.theinformact.org. And I asked them to forward the email to every economist they knew. To date, over 1,300 economists have endorsed the bill, including 17 Nobel Laureates and almost every American who has received the prize in economics. The endorsers span the entire political spectrum and every top economics department in the country. They also include very senior former government officials.
Once the endorsements came in, I, together with the leaders of The Can Kicks Back, raised over $50,000 to run a full page ad in the New York Times containing a letter to the President and members of Congress asking them to pass The Inform Act. Each and every endorser of the bill was listed in the ad, which ran in The Times on October 22, 2013.
The reaction from President Obama? Not a word. The reaction from members of his administration? Not a word? The reaction from members of Congress who hadn’t sponsored the bill? Not a word. What about the media? Did anyone in the press write a single word about the bill or its overwhelming endorsement by the economics profession? Not a word.
As President, I would seek immediate passage of The Inform Act, which represents the only way we can gauge our or any country’s true fiscal condition.
Closing Our Fiscal Gap
Here’s the bottom line. Our country is broke. It’s not broke in 50 years or 30 years, or 20 years or 10 years. It’s broke today. And we have to act today so we don’t confront our children with even bigger tax hikes or benefit cuts in the future.
My plans for fixing taxes, healthcare, Social Security and energy policy will collectively eliminate our fiscal gap. They will do so with maximum efficiency and the least disruption to peoples’ economic lives. My package of reforms will also provide the financial headroom for essential investment in infrastructure, basic research and education. Equally important, they will resurrect our economy. They will produce many more higher-paying jobs, far higher national saving, massive domestic investment and rapid economic growth.