$11 Trillion

[Tigermike 3,426]

Blink! U.S. Debt Just Grew by $11 Trillion

By Laurence Kotlikoff and Scott Burns Aug 8, 2012 5:30 PM CT

Republicans and Democrats spent last summer battling how best to save $2.1 trillion over the next decade. They are spending this summer battling how best to not save $2.1 trillion over the next decade.

In the course of that year, the U.S. government’s fiscal gap -- the true measure of the nation’s indebtedness -- rose by $11 trillion.

The fiscal gap is the present value difference between projected future spending and revenue. It captures all government liabilities, whether they are official obligations to service Treasury bonds or unofficial commitments, such as paying for food stamps or buying drones.

Some question whether “official” and “unofficial” spending commitments can be added together. But calling particular obligations “official” doesn’t make them economically more important. Indeed, the government would sooner renege on Chinese holding U.S. Treasuries than on Americans collecting Social Security, especially because the U.S. can print money and service its bonds with watered-down dollars.

For its part, economic theory sees through labels and views a country’s official debt for what it is -- a linguistic construct devoid of real economic content. In contrast, the fiscal gap is theoretically well-defined and invariant to the choice of labels. Each labeling choice changes the mix of obligations between official and unofficial, but leaves the total unchanged.

Dangerous Growth

The U.S. fiscal gap, calculated (by us) using the Congressional Budget Office’s realistic long-term budget forecast -- the Alternative Fiscal Scenario -- is now $222 trillion. Last year, it was $211 trillion. The $11 trillion difference -- this year’s true federal deficit -- is 10 times larger than the official deficit and roughly as large as the entire stock of official debt in public hands.

This fantastic and dangerous growth in the fiscal gap is not new. In 2003 and 2004, the economists Alan Auerbach and William Gale extended the CBO’s short-term forecast and measured fiscal gaps of $60 trillion and $86 trillion, respectively. In 2007, the first year the CBO produced the Alternative Fiscal Scenario, the gap, by our reckoning, stood at $175 trillion. By 2009, when the CBO began reporting the AFS annually, the gap was $184 trillion. In 2010, it was $202 trillion, followed by $211 trillion in 2011 and $222 trillion in 2012.

Part of the fiscal gap’s growth reflects changes in policy, such as the Bush and Obama tax cuts, the introduction of Medicare Part D, and the expansion of defense spending. Part reflects “natural” growth of existing programs, including growth in Medicare and Medicaid reimbursement rates. And part reflects the demographic time bomb U.S. politicians are blithely ignoring.

When fully retired, 78 million baby boomers will collect, on average, more than 85 percent of per-capita gross domestic product ($40,000 in today’s dollars) in Social Security, Medicare and Medicaid benefits. Each passing year brings these outlays one year closer, which raises their present value.

Governments, like households, can’t indefinitely spend beyond their means. They have to satisfy what economists call their “intertemporal budget constraint.” The fiscal gap simply measures the extent to which this constraint is violated and tells us what is needed to balance the government’s intertemporal budget.

The answer for the U.S. isn’t pretty. Closing the gap using taxes requires an immediate and permanent 64 percent increase in all federal taxes. Alternatively, the U.S. needs to cut, immediately and permanently, all federal purchases and transfer payments, including Social Security and Medicare benefits, by 40 percent. Or it can mix these terrible fiscal medicines with honey, namely radical fiscal reforms that make the economy much fairer and far stronger. What the government can’t do is pay its bills by spending more and taxing less. America’s children, whose futures are being rapidly destroyed, are smart enough to tell us this.

(Laurence Kotlikoff, an economist at Boston University, and Scott Burns, a syndicated columnist, are co-authors of “The Clash of Generations.” The opinions expressed are their own.)

To contact the writers of this article: Laurence Kotlikoff at kotlikoff@gmail.com

To contact the editor responsible for this article: Katy Roberts at kroberts29@bloomberg.net

http://www.bloomberg.com/news/2012-08-08/blink-u-s-debt-just-grew-by-11-trillion.html

Hope and Change

[icanthearyou 4,468]

Interesting. Sounds as though we are hopelessly locked in a death spiral as long as we have one party that will not reduce spending and one party that won't stop cutting taxes.

[au2004ece 30]

Interesting. Sounds as though we are hopelessly locked in a death spiral as long as we have one party that will not reduce spending and one party that won't stop cutting taxes.

Actually, the problem is that one party won't cut domestic spending and the other party won't cut military/foreign spending. Spending is the problem, not revenue.

[icanthearyou 4,468]

Interesting. Sounds as though we are hopelessly locked in a death spiral as long as we have one party that will not reduce spending and one party that won't stop cutting taxes.

Actually, the problem is that one party won't cut domestic spending and the other party won't cut military/foreign spending. Spending is the problem, not revenue.

In principle, I totally agree. However, being 16 trillion to the bad, I think we are going to have to attack this problem from both sides. I get the dangers of the "fiscal cliff" but I can't help but believe we owe it to our children and their children to take our medicine now rather than pass it on to them. It's a difficult set of circumstances. Either course of action could easily do a lot of damage. I think we could do it, I just don't think we have the political will right now. Our political will is still being used to consolidate power rather than solve the problems.

[AURaptor 1,137]

In principle, I totally agree. However, being 16 trillion to the bad, I think we are going to have to attack this problem from both sides. I get the dangers of the "fiscal cliff" but I can't help but believe we owe it to our children and their children to take our medicine now rather than pass it on to them. It's a difficult set of circumstances. Either course of action could easily do a lot of damage. I think we could do it, I just don't think we have the political will right now. Our political will is still being used to consolidate power rather than solve the problems.

If you're talking raising taxes, then no, we really don't. Raising more revenue? Yeah, but not taxes.

[around4ever 4,139]

Flat Tax on all income for everyone and I mean everyone, no exceptions.

[icanthearyou 4,468]

In principle, I totally agree. However, being 16 trillion to the bad, I think we are going to have to attack this problem from both sides. I get the dangers of the "fiscal cliff" but I can't help but believe we owe it to our children and their children to take our medicine now rather than pass it on to them. It's a difficult set of circumstances. Either course of action could easily do a lot of damage. I think we could do it, I just don't think we have the political will right now. Our political will is still being used to consolidate power rather than solve the problems.

If you're talking raising taxes, then no, we really don't. Raising more revenue? Yeah, but not taxes.

Exactly the point. Too many people who are quick to blame everyone else and wont make the sacrafices necessary to solve the problem, too many people more interested in politics than the future of America. I suppose you believe cutting taxes will pay the debt.

[icanthearyou 4,468]

Flat Tax on all income for everyone and I mean everyone, no exceptions.

I would favor a consumption tax with different rates for necessities, consumer goods, luxuries, and a negative rate for capital goods. Purchases of capitial equipment are closely linked to job creation. This type of tax break would encourage real economic investment here and would reward for jobs actually created not just for the hope of creating jobs. Regardless A4E, I agree with you. We need a fair and far less bureaucratic tax system. This is one of those things that people from both parties seem to agree on and yet Washington never listens.

[AURaptor 1,137]

Exactly the point. Too many people who are quick to blame everyone else and wont make the sacrafices necessary to solve the problem, too many people more interested in politics than the future of America. I suppose you believe cutting taxes will pay the debt.

There is the law of diminished returns, yes. But that's not my main point. This idea, the pretense of 'fairness', that we all need to " make sacrifices ", and " pay our fair share ", is little more than top down propaganda.

WE aren't the ones who over spent the people's money, so WE shouldn't be forced to pay for the screw up of our Federal Govt. Listen, not giving ENOUGH of our money isn't the problem. It's that too much of it has been wasted, buying votes, lining the pockets of politicians and their friends, and what do we have to show for it ?

I see the levee system of New Orleans. Corners cut and monies redirected , with catastrophic results. Which ends up costing us a LOT more. And that's just 1 of many countless examples.

Paying off the debt will have to come from cutting govt services, and in a HUGE way. There's no mathematical way around it.

[icanthearyou 4,468]

Exactly the point. Too many people who are quick to blame everyone else and wont make the sacrafices necessary to solve the problem, too many people more interested in politics than the future of America. I suppose you believe cutting taxes will pay the debt.

There is the law of diminished returns, yes. But that's not my main point. This idea, the pretense of 'fairness', that we all need to " make sacrifices ", and " pay our fair share ", is little more than top down propaganda.

WE aren't the ones who over spent the people's money, so WE shouldn't be forced to pay for the screw up of our Federal Govt. Listen, not giving ENOUGH of our money isn't the problem. It's that too much of it has been wasted, buying votes, lining the pockets of politicians and their friends, and what do we have to show for it ?

I see the levee system of New Orleans. Corners cut and monies redirected , with catastrophic results. Which ends up costing us a LOT more. And that's just 1 of many countless examples.

Paying off the debt will have to come from cutting govt services, and in a HUGE way. There's no mathematical way around it.

You pose a great question here. Are we the government? Are we responsible for the debt? Should we sacrafice to bring financial stability back to the government. No, we didn't spend the money. We did elect the people who did. Does that mean anything? If government has been hijacked by the PACs and lobbies, maybe they are responsible. I think this is a much better discussion than the moot political ideology debate. From Washingtons perspective, I would guess it's their government and our debt.