Paul Solman: “Ask Larry” Kotlikoff is a hot commodity here on Making Sense, not only as our (and your) Social Security sherpa, but as a sometime commentator on economics, which is how he’s known to the rest of the world, especially for his writing on what he has called “the coming generational storm.” Though a member of Ronald Reagan’s Council of Economic Advisors early in his career, Larry eludes political categorization. I try to elude it as well. I am not sold by his “War on Our Children” argument. Neither, however, do I think it ridiculous.
This post, then, begins with Larry’s bitter denunciation of the fiscal cliff deal and ends with a sparring match in which I question his argument, he questions my questions, etc. Let’s begin with the denunciation:
Larry Kotlikoff: The “grand” bargain forged by Congress and the Administration to keep us from falling off the so-called fiscal cliff — a conveniently manufactured crisis if ever there was one — represents the latest victory in the war on our children.
Although the budget fight has been posed as one between the rich and the poor, this has been a sideshow to divert attention from the real fight – the fight between the old and the young. In this fight, both Republicans and Democrats are on the same side, joining forces, as they have for decades, to gang up on our kids.
According to the Congressional Budget Office’s most recent long-term projection, there is a $222 trillion present value gap separating all projected future expenditures and all projected future taxes. Eliminating this gap requires cutting spending or raising taxes to the tune of 12 percent of GDP this year and every year in the future.
In terms of greenbacks, that’s $2 trillion this year, $2 trillion times 1.05 (the sum of the inflation rate plus growth rate) next year, $2 trillion times 1.05 squared in 2015, etc.
Over the next decade, these adjustments, which are essential to remove the fiscal sword of Damocles suspended over our children’s slender necks, total $25 trillion. Yet the tax changes just enacted raise only $600 billion over this period!
Furthermore, Congress and the Administration will likely take steps to permanently reduce the automatic spending cuts that are now scheduled to kick in. Indeed, the midnight fiscal “rescue” includes a two-month postponement of these cuts. If that happens, the 10-year savings will be even smaller.
The intergenerational blinders with which Washington is choosing to operate are as thick as they get. The fiscal gap — the standard measure economists use to analyze fiscal sustainability and intergenerational equity — is just one of many inconvenient truths Washington is ignoring. Here are some more.
Generational policy is a zero-sum game. Waiting to get our fiscal house in order lets more current generations off the hook and puts our kids further on the hook.
The $222-trillion fiscal gap is, in effect, our nation’s credit card bill. If we don’t pay at least interest on it, it gets bigger.
The $222-trillion fiscal gap grew by $11 trillion over the last year, an amount that equals the size of all the official debt in the hands of the public.
Washington’s artful “accounting” has put only $11 trillion of our nation’s fiscal gap on the books and kept $211 trillion, represented primarily by entitlement obligations, off the books. Yes, entitlement commitments aren’t legal obligations, but try telling that to an 80-year old collecting “her” benefits.
When the 78 million baby boomers are fully retired they will collect, on average, $40,000 measured in today’s dollars, in Social Security, Medicare, and Medicaid benefits. This bill will total over $3 trillion per year.
Expenditures on Social Security, Medicare, and Medicaid, measured as a share of GDP, grew 20 percent over the past four years. And the baby boomers are just starting to retire.
Entitlement spending is not the only problem. We are spending more on our military than the next 10 countries combined and still hear calls for more.
Our six-decade long policy of take-as-you-go — letting each older generation take from the young while promising the young their own turn, when old, to expropriate their children — has financed a fantastic spending spree by oldsters? This spending has driven our national saving rate from 14 percent in the fifties to 1 percent now.
Countries that don’t save, don’t invest. Our country is now investing a paltry 5 percent of its national income (down from 14 percent in the fifties), with 4 of those 5 percentage points representing investment not by Americans, but foreigners?
Our sustained low rate of domestic investment has had its own generational impact. Real weekly take-home pay per worker hasn’t risen for decades?
Countries that get overcommitted resort to printing money. And the Federal Reserve has been printing money at mind-boggling rates to pay Uncle Sam’s bills. Twelve cents of every dollar spent these days is simply printed, either physically or electronically. The monetary base, which measures all the money the government has ever printed, has grown $2 trillion — by a factor of 3.5 — since 2007. This has set the stage for a more than tripling of the price level.
Maybe no one in Washington knows these things. Or maybe the war on our children is being waged on purpose? Maybe America’s oldsters, who do a lot of the voting, don’t care about America’s youngsters for a reason. Maybe they don’t see them as their children. Maybe they see them as someone else’s children and ripe for the picking.
Whatever the reason for our immoral generational policy, there is one thing everyone should know. We are on a course of fiscal and economic ruin, which will destroy not only our children’s futures, but ours as well.
Larry Kotlikoff of Boston University is a noted economist, prolific author and frequent contributor to Bloomberg and Forbes.com, among other venues.
Paul Solman: Larry advanced a draft of the above to friends for comment. I responded with the questions which he then parried, below. If I knew anything about fencing, it might be appropriate to say that I riposted, he counter-riposted — and maybe one of us scored a palpable hit — or maybe not. You be the judge.
Anyway, here’s what I wrote as a response, conjuring up ten possible mitigating factors to Larry’s doomsday scenario and asking one final question. Our exchange is included after each.
Editor’s note: Here is Paul’s excerpted correspondence with Larry:
I was reading one Ed Dolan, quoting one L. Randall Wray: “Wray compares the discussion of unstable debt dynamics to speculation about what would happen to a person who constantly consumes more calories than he burns. Mathematically, such a person would eventually ‘explode,’ yet we have never seen an exploding person. Something else always happens first.”
Imagine many if not all of the following things “happening first,” though in no particular order:
1) The Social Security age is again, as in ’83, extended, as suggested by Bowles-Simpson;
LK: Very small potatoes.
PS: Depends on how much, when.
LK: Yes, but they will phase in any such age increase and it won’t matter much in present value. SS is in worse shape — scaled by the economy — then in 1983. So ’83 is not a good reference for you to use.
2) The payroll tax ceiling is lifted to again encompass 90 percent of national income (also in Bowles-Simpson);
LK: Very small potatoes.
PS: Sounds like Glenn Hubbard,* who told me that Bush tax cuts didn’t matter because they only represented 10 percent of future liabilities.
LK: Glenn speaks with forked tongue. This might save $5 trillion in present value. We need $222 trillion.
3) The chained Consumer Price Index adjustment is made, lowering the Social Security inflation adjustment;
LK: Very small potatoes.
PS: Every little bit helps.
4) All Social Security benefits are fully taxed;
LK: Very small potatoes.
PS: See, 3, above.
5) Gradually, Medicare (and Medicaid) payments become more and more limited with regard to new procedures and medications;
LK: My Purple Health Plan, in effect,. You support vouchers. Good to hear. Yes, big potatoes if done right.
PS: Color me purple if you wish, but do not take this as support for vouchers. I simply think we’ll stop paying for fancy stuff. See 6, below.
LK: You support vouchers, just not the use of the word. [Larry was a mule in a former reincarnation.]
6) Gradually, America moves toward single-payer economies of scale, thus lowering health care administrative and marketing costs;
LK: Very small potatoes.
PS: Not by my reckoning. I’ve done a lot of reading on this. Estimates vary enormously, but given that the US per capita health bill is double that of other OECD countries, I think a 25% reduction isn’t outlandish. Small potatoes? Stupendous spuds, I’d say.
LK: I think it’s 20 percent and, yes, I was off. This is big spuds. I agree.
7) Taxes are raised further on higher incomes;
LK: Pretty small potatoes.
PS: Let me amend this one: “Taxes are raised on all incomes above the median, in a variety of subtle ways.”
LK: [No answer.]
8) Spending cuts are enacted;
LK: Not big enough by a mile.
PS: Depends on the size of the cuts.
LK: Was thinking about the cuts now going into effect.
More significantly [I concluded]:
9) The U.S. inflation rate continues to outpace the cost of borrowing money — at the moment, 1.8 percent per year versus .17 percent per year;
LK: Can’t help much. Most liabilities are inflation indexed. Eventually we get hyperinflation.
PS: 1.8 percent per year is hyperinflation?
LK: Eventually is not right now. Patience, my boy.
10) GDP continues to grow (nominally) faster than the cost of borrowing money;
LK: It’s not the explicit debt. It’s the implicit debt that’s the problem.
PS: But we would then have more to spend on future liabilities.
LK: The liabilities are explicitly indexed to real growth in wages in the case of SS and implicitly in the case of Medicare and Medicaid and the Health Exchanges. And don’t forget defense. Soldiers’ salaries are connected to real wages in the economy.
Final question: Have no steps been taken? Does this deal preclude all others?
LK: This deal is a cop out, plain and simple. To think they will raise taxes even more or cut spending for real, when they are now postponing the minor spending cuts is something only a true optimist of your ilk could conceive. No offense. I find your delusions a powerful antidote to reality.
PS: And I find your forecasting confidence, if not delusional, then at the very least presumptuous.
*Glenn Hubbard is the Dean of the Columbia Business School. He served as the head of President George W. Bush’s Council of Economic Advisors.
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions