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Why the Sequester Won’t Solve America’s Debt Problems

While Congressional leaders attempt to find a solution to upcoming sequester, Making Sense contributor Larry Kotlikoff says that the United States has bigger financial problems to solve, including ones that could affect generations to come. Photo by Dave Reede/Getty Images.

Paul Solman: With the sequester just days away, we could have bombarded you with opinions from economists of various stripes. But everyone’s doing that. So instead, we give you the most opinionated economist we know and yet love: Making Sense stalwart Larry “Ask Larry” Kotlikoff, whose Social Security Q-and-A is published every Monday.

Larry has been warning that our national debt is unsustainable for almost as long as I’ve been at PBS NewsHour. And I started in 1985!

Personally, I think Larry is a little bit of an alarmist and we have argued about our debts and prospects in 2010 and again recently, when Larry described Congress’ deal to stop the so-called fiscal cliff the “latest victory in the war on our children.”

In short, I would read Larry’s post with a grain of salt, but I still recommend the read.

Larry Kotlikoff: The story line of the week is the terrible spending cuts about to be visited on our poor defenseless country by hapless politicians with no regard for the country’s economic welfare. The truth is much different and far darker.

The hue and cry about the fiscal cliff is, in fact, a side show for yet more fiscal child abuse. Like all budget “fights” over the last 40 years in which contemporaneous “adult” generations come up with excuses for far more spending and far less taxes than our children can afford, this battle will leave the American dream where it found it — down the tubes.

This year’s official deficit will total $845 billion, or 5.3 percent of GDP, according to a Congressional Budget Office report published in February 2013. This sounds like progress compared with, say, the 2009 deficit of $1.4 trillion that totaled 10.1 percent of GDP.

But the official deficit measures only the increase in official debt. What it misses is the massive annual increases in our government’s unofficial debts.

Take a look at the next retiree you see. That person is collecting Social Security, Medicare, and Medicaid benefits that will average, this year, over $30,000. That person and the 33 million retirees like him have been promised these benefits for the rest of their lives. This is a massive debt that’s as real, indeed far more real, and far greater than the $11 trillion in Treasury bills and bonds held by the public.

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Now look at the next baby boomer you see. There’s 78 million more of these folks. By the time they all demand their promised benefits, the average benefit level will be $40,000, in today’s dollars. Paying this obligation will cost $3 trillion per year — another colossal debt that Uncle Sam has kept off his books.

Now take a peak at the defense budget. Yes, it’s being snipped. But we fully intend to spend more than the next 10 countries combined on our mission to save the world not just this year, but for the indefinite future. I’m all for saving the world, but I say put this debt on the books and all the other debts the government is hiding in a system of accounting that does only Charles Ponzi, Jed Shilling, and Bernie Madoff proud.

My personal opinion is of no matter. What’s important is what economics says to measure.The answer is unequivocal.

It’s the fiscal gap — the present value difference between all projected future spending (including official debt service) and all projected future taxes. Our fiscal gap in 2012 was $222 trillion. In 2011 it was $211 trillion. So our true debt, not our phony debt, grew by $11 trillion in one year!

The fiscal gap grew, in large part, because unlike Treasury bonds, future spending commitments, like Social Security benefits, are, in effect, zero coupon bonds that don’t pay interest. Instead, they make a single balloon, as in big, payment. And the closer one gets to getting paid these big payments, the larger is the present value of the obligation.

Anyone familiar with economic theory, and there are precious few in Congress or the Administration that fit this description, will tell you that what gets recorded as official debt and what does not is a linguistic, not an economics choice. They will also tell you that the fiscal gap is the only measure of fiscal sustainability recognized by economic theory.

In short, we are having a political food fight over a number — the official deficit — that has no intrinsic economic meaning except in its ability to conceal our true fiscal condition.

Our true condition is that of a cancer patient whose tumor is growing, but whose doctors are too afraid to operate because the patient doesn’t like pain. The patient will eventually die, but each doctor will claim to have done his best given his constraints.

My question is where are the responsible adults? A responsible politician is clearly an oxymoron. But what of the economists working in Washington?

Are their really none brave enough to tell the President and the Congressional leadership that we are bankrupting our children, that resolving our fiscal gap requires running a 5 percent of GDP surplus this year, not a 5 percent of GDP deficit, and hiking taxes or cutting spending by $25 trillion over this decade, not one tenth this amount.

Where are the marchers, the protestors, the outraged parents, and the youth of America whose future is being decimated? Where is the generational accounting that documents what today’s fiscal policy means for today’s newborn? Where is the fiscal gap accounting that should inform each and every fiscal decision?

There are no marchers, no protestors, no parents worth their titles, and no kids knowledgeable enough to say, “Enough.”

Yet how we Americans are treating our children is the unspoken moral issue and outrage of our day. And let there be no mistake. We are destroying our children’s environment, both physical and economic, on a daily and accelerating basis. We should be ashamed.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions

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