Home > Solution-Problem, Unintended Consequences > Kotlikoff on U.S. Fiscal Bankruptcy and Partisan Ideological Bankruptcy

Kotlikoff on U.S. Fiscal Bankruptcy and Partisan Ideological Bankruptcy

Laurence Kotlikoff, economics professor at Boston University, has an editorial article in Bloomberg that begins right off the bat with a frank admission that “The U.S. is bankrupt.”  Thank you.  Fortunately, this is not a new sentiment among those of us who are not simply partisan political hacks. (I’m looking at you, Krugman.)

Unfortunately, what usually follows the frank admission of our country’s bankruptcy is one of the two partisan “solutions” that have been beaten like the proverbial dead horse for the past several decades.  If the writer comes from the left, what follows is most often a plea for huge tax increases in a tone which imitates the reasonable.  This will devolve fairly quickly into class warfare.  I stop reading whenever I hear the phrase “fair share.”  Or just as ridiculous, you’ll sometimes hear the idea that we can spend ourselves into prosperity if we just print enough money.  (I’m looking at you again, Krugman.)

It’s really no better on the right, where what follows the initial admission is some sort of plea to the base gods of the Laffer Curve.  If only we lower taxes, the story goes, the tax cuts pay for themselves.  Except that in most cases they don’t.  Even assuming perfect correlation with a parabolic curve, Laffer’s thesis is widely misunderstood; lowering taxes doesn’t raise revenue unless a country’s tax rates are beyond the point of maximum tax efficiency and the populace has responded with avoidance.  For marginal income tax rates the United States is not there yet, and lowering taxes lowers revenue.  All that Laffer’s curve tells us is that the corresponding drop in revenue will be less than the drop in marginal rates (e.g., you may get something like 15% less revenue for a 20% drop in tax rates).

Where does that leave us?  Well, for one thing, we have one hell of a gap that isn’t being properly addressed by either ideological response:

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt.  This gargantuan disparity between our “official debt” and our actual net indebtedness isn’t surprising.  It reflects what economists call the labeling problem.  Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.  (Emphasis added.)

I’ve said it before, and I’ll say it again.  A nation with a $14.6 trillion GDP can handle a $13.3 trillion debt burden.  We can’t handle $200 trillion!  (We can’t even handle the somewhat more conservative estimates of total debt that end up in the $120 – 150 trillion range.)  What Kotlikoff says sums up the problem and its ultimate denoument nicely:

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

So let’s see.  If we don’t stop living in our fantasy world, our choices are (1) having nothing left in a matter of years, (2) astronomical tax increases that kill the economy, or (3) hyperinflation, like what happened in Germany … you know, right before the Nazis took power.

Our “solutions” to the ersatz problems of the past will very soon bring more pain than if we had just left them alone.  Now where have I heard that before

Kotlikoff again:

Demand-siders say forgoing this year’s 14 percent fiscal tigtening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.

My reaction?  Get real, or go hang out with equally deluded supply-siders.  Our country is broke and can no longer afford no-pain, all-gain “solutions.”

Ultimately, we could submit to a permanent, immediate, and stratospheric increase in taxes.  But somehow I doubt that we as a country would be willing to take on the highest taxes in the world outside of dictatorial communist regimes.  And of course that ignores the fact that high tax rates lead to marginal decreases in economic productivity and ultimate output, meaning high tax rates will soon require even higher tax rates to maintain.

Alternatively, we can face facts and cut spending.  It’s time to cut spending.

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