U.S. facing $44 TRILLION deficit? Report suppressed? What's it mean for us?

[Leaper]

This article in Forbes deals with a report partially instigated by former Treasury Secretary Paul O’Neill, calculating what would happen financially when the Baby Boomers retire. The result that the report came up with: a $44 TRILLION dollar deficit. It is implied that the Bush Administration, wanting to justify its tax cuts, suppressed this report (though obviously this problem, if it’s this big, has existed for quite a while, and frankly isn’t horribly difficult to forsee, though perhaps not to this magnitude).

Unfortunately, the article above is only an abstract, since the full thing is only available to magazine subscribers; I learned about it here, and it has a link to the full story, but probably unfortunately violates copyright. Still, the main blog post does have a little more detail on the methodology and all.

Whaddya think, if true? Will this be the ultimate test of whether deficits really matter? If the deficit really gets that big, will it EVER go away? Does it matter if it does? What does this mean for those Baby Boomers, and those of us who are somewhat younger?

So many questions, so few answers…

[PatriotX]

:eek: :eek: :eek:

Apparently, here’s a link to the report itself:

http://www.aei.org/docLib/20030723_SmettersFinalCC.pdf

from here:
http://www.aei.org/publications/bookID.426,filter./book_detail.asp

Here’s Kotlikoff’s homepage:
http://econ.bu.edu/kotlikoff/

Here’re some other relevant links:
http://www.brook.edu/views/papers/orszag/20040105.htm

Truth and Transparency: The Federal Government’s Financial Condition and Fiscal Outlook." (.pdf)
by
David M. Walker, the **Director of the U.S. General Accounting Office (GAO) and Comptroller General of the United States ** SEPTEMBER 17, 2003

from Mr. Walker’s remarks

"Importantly, while we are starting off in a financial hole we don’t really have a very good picture of how deep it is.

"Specifically, there are a number of very significant items that are not currently included as liabilities in the federal government’s financial statements; for example, several trillion dollars in non-marketable government securities in so-called `Trust Funds.’

"In the case of the Social Security and Medicare Trust Funds, the federal government took in taxpayer money, spent it on other items and replaced it with an IOU. Given this fact, why aren’t the amounts attributed to such activities shown as a liability' of the U.S. Government? At the present time, they are not! Does this make sense, especially when the government continues to tell Social Security and Medicare beneficiaries that they can count on the bonds in these Trust Funds’? …

"The current U.S. government liability figures also do not adequately consider veterans’ health care benefit costs provided through the Department of Veteran’s Affairs, nor do they include the difference between future promised and funded benefits in connection with the Social Security and Medicare programs.

"These additional amounts total tens of trillions of dollars in discounted present value terms. Stated differently, they are likely to *exceed * $100,000 in additional burden for every man, woman and child in America today, and **these amounts are growing every day ** … The burden of paying for these is not a very nice present for a child born today!

"…*n my view, the federal government’s current financial statements and annual reports do not give policymakers and the American people an adequate picture of our government’s overall performance and true financial condition. This is a serious issue.

"As Thomas Jefferson once noted, an informed electorate is the basis for a sound democracy. But how can the American people and their elected officials make sound decisions if they aren’t given timely, accurate and useful information?

"The recent accountability failures in the private sector serve to re-enforce the importance of proper accounting and reporting practices. It is critically important that such failures not be allowed to occur in the public sector …

"In this regard, earlier this year GAO was unable to express an opinion as to whether the U.S. Government’s consolidated financial statements were fairly stated for a sixth consecutive year. I can assure you that the U.S. Government will not receive an opinion on its financial statements from the GAO until it earns one!

"… It’s true that deficits are understandable and sometimes necessary in times of recession and/or war. However, while it may not seem like it to those who are out of work or underemployed, we have not been in a recession for almost two years. In addition, the current and projected deficits far exceed the costs associated with Iraq, the global war against terrorism and any incremental homeland security costs.

"The bottom line is, there is little question that deficits do matter, especially if they are large, structural and recurring in nature. In addition, our projected budget deficits are not manageable' without significant changes in status quo’ programs, policies, processes and operations …

"In less than 10 years, due primarily to the retirement of the baby boom generation, the United States will be hit by a huge demographic tidal wave that is not expected to ever recede! This is unprecedented in the history of our nation …

"We cannot simply grow our way out of this problem … The ultimate alternatives to definitive and timely action are not only unattractive, they are arguably infeasible.

"Specifically, raising taxes to levels far in excess of what the American people have ever supported before, cutting total federal spending by unthinkable amounts, or further mortgaging the future of our children and grandchildren to an extent that our economy, our competitive posture and the quality of life for Americans would be seriously threatened …

“While many members of Congress and other key policymakers and opinion leaders agree that we have a major fiscal challenge that must be dealt with, many do not want to talk about it publicly. Many believe that we will ultimately act to address this imbalance, but when will we start? Other nations have already started to address their long-range imbalances. When will we?”

from the recent IMF report U.S. Fiscal Policies and Priorities for Long-Run Sustainability

"U.S. government finances have experienced a remarkable turnaround in recent years. Within only a few years, hard-won gains of the previous decade have been lost and, instead of budget surpluses, deficits are again projected as far as the eye can see. The deterioration has not been restricted to the federal budget but has also taken place at the state and local government levels. As a result, the U.S. general government deficit is now among the highest in the industrialized world …

"[T]he return to large deficits raises two interrelated concerns. First, with budget projections showing large federal fiscal deficits over the next decade, the recent emphasis on cutting taxes, boosting defense and security outlays, and spurring an economic recovery may come at the eventual cost of upward pressure on interest rates, a crowding out of private investment, and an erosion of longer-term U.S. productivity growth.

“Second, the evaporation of fiscal surpluses has left the budget even less well prepared to cope with the retirement of the baby boom generation, which will begin later this decade and place massive pressure on the Social Security and Medicare systems. Without the cushion provided by earlier surpluses, there is less time to address these programs’ underlying insolvency before government deficits and debt begin to increase unsustainably …”

[sibyl]

Tossing barrels of money at programs that need reform and reforming programs that desperately need money.

The current administration is the definition of Big Government. They don’t fit the bill of economic conservatives whatsoever. Being young myself, I find it imperative not to give them another four years of free reign over MY future tax dollars.

[PatriotX]

This is worth quoting from the Fortune article

If they assumed a growth rate above GDP for medical costs of 1.5% instead of the 1% they used in their calculations, that $44 trillion gap would become $65 trillion.
In their report, Smetters and Gokhale calculate it would take a 69% hike in all federal taxes or a 95% hike in payroll taxes to close the $44 trillion gap. Or, if you prefer spending cuts, a 100%-plus cut across all discretionary federal spending (which, of course, is impossible) or a 45% cut to Social Security and Medicare.
What about economic growth?
Growth, in fact, makes this particular problem worse, because when the economy grows faster, so do Social Security and Medicare.

[PatriotX]

@sibyl

Tossing barrels of money at programs that need reform and reforming programs that desperately need money.

The current administration is the definition of Big Government. They don’t fit the bill of economic conservatives whatsoever. Being young myself, I find it imperative not to give them another four years of free reign over MY future tax dollars.

Neocons are about **Big Government Conservatism**, whatever-the-fuck that is.

Neocons are a very odd sort of conservative it seems.

[Brutus]

A rebutal to the hysteria.

The first thing to know is that this $44 trillion figure is based on projecting taxes and government spending under current law in perpetuity — two-thirds of the debt comes more than 75 years in the future. To put the numbers into today’s dollars, they are adjusted both for inflation and the rate of interest. When calculating figures this way, very small changes in assumptions can radically alter the results.

[GIGObuster]

Check the date on your link Brutus: June 9, 2003

In addition, there was a caveat:.

If anyone really cares about the federal government’s indebtedness, they should oppose new entitlement programs, such as the prescription drug plan being considered in Congress, as strenuously as possible.

Too late!

I don’t think we will see such humongous deficit in our lifetime. However, it is worrisome that the current government doesn’t care about our economical future, or that they are not listening to sound advice.

[Brutus]

I agree with you, Gigobuster, that we should eliminate/drastically curtail entitlement programs.

From the same cite:

Nevertheless, the figures reveal important imbalances in our largest entitlement programs. The study shows that the biggest fiscal problem we have is in Medicare. It accounts for $37 trillion of the $44 trillion debt. Almost all the rest is accounted for by Social Security, which has promised benefits $7 trillion greater than future revenues will support

And non-entitlement budget items are not to blame:

Interestingly, the non-entitlement portion of the budget — national defense and everything else the federal government does — runs a substantial surplus. Future revenues are estimated at $85 trillion and spending at $80 trillion. When one throws in the national debt, as conventionally measured, the non-Social Security, non-Medicare portion of the budget is roughly in balance.

The problem, of course, is that once a block of voters starts to get a check from the bottomless pockets of Uncle Sam, they are loathe to give up that money. Shrug

Still, the problem is potential, not acual, for now. (Maybe, of course, since the actual figures used for that estimate may have been too low or too high, making the problem go away or become even worse.)

[PatriotX]

Thanks for that Brutus

[Brutus]

No problem. This whole ‘prjected deficit’ issue looks like a job for means-testing, if only a politician would have the yarbles to bring that up.

[ITR_champion]

The first thing to know is that this $44 trillion figure is based on projecting taxes and government spending under current law in perpetuity — two-thirds of the debt comes more than 75 years in the future. To put the numbers into today’s dollars, they are adjusted both for inflation and the rate of interest. When calculating figures this way, very small changes in assumptions can radically alter the results.

It is a fact that attempts to approximate the growth of the deficit always turn out to be far off the mark. Just consider the fact that we went from 3.1 trillion projected surplus in 2000 to 1.7 trillion projected deficit in 2003 (both projections were for the period 2000-2010). Those who are crunching the numbers can’t know what new spending will be approved over the next few decades, whether taxes will be raised or lowered, whether the average retirement age will shift, and countless other factors. However, we can say with confidence that the U.S. has no ability to pay off the amounts promised for retirees over the coming decades. A deficit of twenty trillion could wreck the economy just as effectively.

[Desmostylus]

@Brutus

I agree with you, Gigobuster, that we should eliminate/drastically curtail entitlement programs.

From the same cite:

Nevertheless, the figures reveal important imbalances in our largest entitlement programs. The study shows that the biggest fiscal problem we have is in Medicare. It accounts for $37 trillion of the $44 trillion debt. Almost all the rest is accounted for by Social Security, which has promised benefits $7 trillion greater than future revenues will support

And non-entitlement budget items are not to blame:

Interestingly, the non-entitlement portion of the budget — national defense and everything else the federal government does — runs a substantial surplus. Future revenues are estimated at $85 trillion and spending at $80 trillion. When one throws in the national debt, as conventionally measured, the non-Social Security, non-Medicare portion of the budget is roughly in balance.

The problem, of course, is that once a block of voters starts to get a check from the bottomless pockets of Uncle Sam, they are loathe to give up that money. Shrug

Still, the problem is potential, not acual, for now. (Maybe, of course, since the actual figures used for that estimate may have been too low or too high, making the problem go away or become even worse.)

This part of the cite, unfortunately is rubbish.

Kent Smetters actual testimony was this:

In order to significantly increase the effectiveness of this Amendment, I would, though, urge you to first reform the flawed cash-flow accounting system that is currently being used by the federal government and upon which H.J. Res 22 is necessarily based. The government reports that the national debt in 2003 was about $3.8 trillion in the form of government “debt held by the public.” But that number ignores massive imbalances in the Medicare and Social Security programs and the government’s other programs. When the liabilities associated with those programs are taken into account, the nation’s fiscal policy is currently off-balance by over $43.4 trillion in present value, a number that is not reported in standard budget documents. So, a balanced budget amendment that fails to include the present value of the future shortfalls would miss over nine-tenths of the burden that must be paid in the future in the form of tax increases, benefit cuts, or both. In fact, by focusing only on the traditional measure of debt, as does H.J. Res 22, it could actually make it harder to reduce the true total liabilities facing our country.

Kent is saying that the debt is larger than usually reported because of a failure to account properly for a portion of the spending.

Assume for the moment that Kent is correct in what he says. The National Review is incorrect in interpreting Kent’s comments to mean that the cause of the huge debt is solely due to the bit that’s not being properly accounted, rather than any other bit.

The government has income from various sources, and it spends that income in various ways. Deficit comes from overall imbalance in that income and spending.

To use an analogy:

Ripoff.com went belly-up after the great tech bubble. Investigators subsequently found that whilst Ripoff.com had properly disclosed spending on the CEO’s yacht and chalet in France, it had failed to properly account for the money spent on computers. What caused the failure? The spending on the yacht and chalet, or the spending on computers?

Most real world examples are more complicated than that, of course. Spending is either appropriate or inappropriate in any given circumstances. Failure to properly account for spending is always inappropriate. But failure to properly account for expenditure on a given item says nothing whatsoever about the appropriateness or otherwise of the spending on that given item.

Settle that jerking knee down a bit.

[Brutus]

@Desmostylus

To use an analogy:

An analogy that completely misses the point.

Settle that jerking knee down a bit.

Snarkiness ahoy!

Some snippits from a reprint of the FT interview for you to feast on:

FT-KS: So there wasn’t any high-level conspiracy?

KS: No, there wasn’t. This point has to be really emphasised. In fact, if you look at this framework, the tax plan looks great. You see 99 per cent of all the liabilities are Social Security and Medicare. That’s even after including the president’s original $750 tax-cut plan proposal. The estimates correspond directly with the OMB budget so it includes all the policy proposals he originally wanted. It included the full elimination of the dividend tax. Only a very small part of the imbalance actually comes from the rest of the government - only $600bn of the $44,000bn. Almost all of it is Social Security and Medicare. This is hardly stuff the Administration would kill because they’re afraid of the tax plan looking bad.

Bolding mine.

Regardless, this is a wonderful analysis of the actual issue.

The basic assumption at work here is that SS/Medicare costs will grow at x, and that income will grow at y. Hardly shocking news, and remediable by a politician with the minerals to whack away at the entitlement programs. It is only reasonable that if more and more people expect more and more checks from the government, that the government is fucked. Programs which were originally intended to provide some sort of safety net for the bottom of the barrel are now being used by those who simply don’t need them. Want them? Sure. Need them? No.