The U.S. in 2010: Bankrupt and Clueless

One of my favorite authors, Laurence Kotlikoff, penned an op-ed piece for Bloomberg today entitled 'U.S. is Bankrupt and We Don't Even Know It.' It pulls together published information from the IMF, CBO, and makes the case that our current national debt, unfunded future liabilities, and low growth rate combine to create a completely untenable long-term picture.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

He is also big on calculating the present value of future entitlements, net of related taxes/income, to see just how big the hole is.

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 discrepancy 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.

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The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

I've read many times that the net present value of liabilities (net of projected income) was in the $60-80 trillion range, but never this high. If it helps to visualize what $202 trillion in debt represents, consider that it equals roughly $600,000 or so for every man, woman, and child in the country.

Feel better now?

Quick Link: Get Ready for Increased Taxes

In our personal lives, when expenses exceed income, we have two choices if we want to avoid debt: spend less or make more. We don't usually have the option of "making more" whenever we want, so we learn to budget, live within our means, and spend less.

The government has the same problem (in spades!) and the same two options, and it sure looks like the Obama administration is opting to increase taxes in lots of sneaky ways rather than find any real savings:

I’ve noted any number of times that government taxes comprise 14% of the national income and government spending is at 25% of the national income.  That’s as high as its been since WWII I believe.
The point, of course is there are three obvious choices here – cut spending to the income level (and beyond, really, if you plan on paying off debt) or increase taxes to the spending level (and beyond, again, if you plan on paying off the debt) or a combination of both.
Watching this current administration, it appears option two is in the works.  Lots of lip service about “unsustainable” spending, etc., but the only movement I’ve seen is legislation that increases that.  And, also, plans to increase taxes.
The health care bill is chock full of new taxes.  If you don’t believe it, review these two listings of the new taxes to be found in there.
Cap-and-trade, and now “Son of Cap-and-Trade” being sponsored by Senators Lindsey Graham and John Kerry significantly raises taxes on utilities (which means everything will cost more for consumers).

We've gotten to the point where the big-ticket spending items are off limits, taxes are being paid by a shrinking pool of people, and an entrenched government is more interested in protecting their position and power than in governing and serving. Any wonder I'm pessimistic?