Posted on Thursday, February 17, 2011
THE US has a fiscal gap—the present value of all its future spending (including servicing its official debt) less all its future taxes of $202 trillion—almost 14 times GDP. Greece, by comparison, has a fiscal gap of about 11 times GDP. To close the US fiscal gap would require raising all federal taxes, immediately and permanently by almost two thirds!
The Economist as well as all other financial media as well as virtually all economists (academic and business) and policymakers are focusing on the official debt. For the US, the official debt is $9 trillion. This is minor compared to the fiscal gap, which includes all liabilities, official and unofficial. The fiscal gap is huge compare to the official debt because Uncle Sam has spent six decades accumulating massive obligations to make social insurance payments, which it carefully kept off the books.
My paper with Jerry Green makes clear that, from the perspective of economic theory, the deficit is a number in search of a concept—that what we report as official versus unofficial debt is purely a matter of the words we choose; i.e., the debt measures/reflects our fiscal language, not our fiscal policy.
This labeling problem—that current taxes can just as well be labeled "current government borrowing coupled with future taxes" and current transfer payments can just as well be labeled "current government lending coupled with future transfer payments", means that "the" deficit is up for grabs. Each of the billions of people on this planet is free to use different words to differently, but consistently, re-characterise past US government receipts and payments and arrive at whatever size current US debt he or she wishes to report.
As a simple example, if we classify this year's FICA contributions as "government borrowing" rather than "taxes" and call the future promised benefits "repayment of the borrowing less a future tax", the same amount of money will move from the public to the government this year and the same amount of money will move from the government to the public in the future, but we'll increase this year's reported official deficit from 9% to 15% of GDP.
Time is not well defined in physics. The debt is not well defined in economics. Both are functions of frames of reference, i.e., language. Neither tells us about reality.
Focusing on the debt, as virtually everyone is doing, is straight out of "The Emperor's New Clothes". If everyone continues to do so, there will be no crisis, at least not for a while. But if enough people start looking at the only measure of fiscal solvency that is label-invariant, namely the infinite horizon fiscal gap (finite horizon fiscal gaps suffer fully from the labeling problem), they will realise that the US is bankrupt—not in 30 years, not in 10 years, not in 5 years, but today. When that happens, the crisis will follow immediately.
As for how to fix the fiscal mess, we need immediate and radical reform. On this score, please read " Jimmy Stewart Is Dead", particularly the Afterword, which lays out in a few pages how to fix the healthcare system, the Social Security system, and the tax system. Alternatively, read my op eds on these topics posted at www.kotlikoff.net.
Laurence Kotlikoff, THE ECONOMIST