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Kotlikoff: America in Worse Financial Shape than Russia or China - Peter Diekmeyer (24/10/2017)

Kotlikoff: America in Worse Financial Shape than Russia or China - Peter Diekmeyer (24/10/2017)
By Peter Diekmeyer 3 years ago 83312 Views 17 comments

October 24, 2017

America’s 2017 fiscal gap will come in near $6 trillion, nine times higher than the $666 billion deficit announced by the US Department of the Treasury last week, says Laurence Kotlikoff, an economics professor at Boston University.

“Our country is broke,” says Kotlikoff, who estimates total US government debts at more than $200 trillion, when unfunded liabilities are included. “We are in worse shape than Russia, China or any developed nation.”

Worse, says Kotlikoff, who has testified before Congress, government officials are well-aware that many of America’s debts and accruing liabilities are being written off the books.

However, for the most part, they are keeping their mouths shut.

A two-tier reporting system

The upshot is a de facto “two-tier” financial reporting system, in which politicians and insiders have access to key data buried in footnotes about unfunded liabilities, which indicate that there are huge problems in the economy.

The public, on the other hand, in slews of Presidential and Congressional Speeches and publications, is led to believe that while things are tough, overall everything is OK.

According to Kotlikoff, a long-time activist for fiscal rectitude, the problem stems in large part from the fact that the US government has been spending almost all of Americans’ approximately $795 billion in social security payroll taxes to pay current bills, rather than investing them to fund retirees’ benefits.

The upshot is that on a net basis, the US government has no money to pay all the benefits that have been promised. Politicians know that defaults will occur, they just haven’t figured out how to finesse this.

Fiscal gap accounting: telling Americans how much government has borrowed

Kotlikoff, unlike most, has a solution. He believes that the US government should adopt what he calls “fiscal gap accounting”, which involves putting all future receipts and expenditures on its books.

The idea is that if Americans knew about all the money that their politicians were borrowing and spending, they would be able to make better decisions as to the usefulness of those policies.

They would also be able to better protect themselves.

If the US government produced a financial statement that listed the $200 trillion in unfunded liabilities that Kotlikoff says it owes, workers might make different decisions about how much they will save for retirement.

Sadly, current de facto US government practice - inspired by Keynesian thinkers such as Paul Krugman - is for governments to spend, tax, borrow and print as much money as possible, in an effort to keep the economy perpetually running at full steam.

The idea is to leave future generations to deal with the problems.

The Clinton coverup

Kotlikoff and many others have been trying to change this.

More than 1200 of the country’s top economists have endorsed a bipartisan bill that requires the Congressional Budget Office to do both fiscal gap and generational accounting on an ongoing basis.

David Howden, a professor of economics and academic vice-president of the Ludwig von Mises Institute of Canada, describes economic theory as crystal clear as to how to measure government liabilities, namely using the infinite-horizon fiscal gap. He says that Kotlikoff’s reasoning is “pretty sound.”

In fact, the methodology has been tried before, by George Bush the Elder, who included fiscal gap accounting in some of his budgeting.

However, the Clinton Administration killed the practice and scored huge political points in the process.

Even today, decades later, few people realized that the only reason that the Clintons were able to balance their budgets was by not recording all of the US government’s debts.

Republicans weren’t stupid, though.

When they saw that there was no political penalty to be paid for cooking the books, they jumped on the bandwagon, a policy that the Trump Administration continues to this day.

Information asymmetry: keeping Americans uninformed

There are few pleasant takeaways from all this. True, some alternate fiscal gap accounting calculations suggest that things may not be as bad as Kotlikoff says.

Others says that the problem does exist, but by eliminating the pensions of those who earn above a certain level, or by postponing retirement dates, the system could be set straight again.

However even in the best of cases, Kotlikoff is correct on one crucial point: America is unable to meet its obligations as they become due. That is the definition of bankruptcy.

In a sense, it should hardly come as a surprise that politicians are hiding this fact.

Because if America is indeed in worse economic shape than Russia or China, voters might think twice about who they want to lead them.

Peter Diekmeyer is a business writer/editor with Sprott Money News, the National Post and Canadian Defence Review. He has studied in MBA, CA and Law programs and filed reports from more than two dozen countries.

The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

Deficit Owls 3 years ago at 11:21 AM
"US government has no money to pay all the benefits that have been promised"

Excuse me?? This is the US government we're talking about. It's where the US dollars come from. It can't "have no money." We could talk about whether inflation may or may not be caused if the government stands by these financial commitments, but "have no money"? "Defaults"? Pure fantasy, simply wrong, out of paradigm stuff. The government is the currency issuer, not a currency user.
Peter Diekmeyer 3 years ago at 4:48 PM
On paper you are right.

However for a pensioner a government paying a pension in a deflated currency is a default.

Consider this argument from a previous article:


Another tactic used by government officials and pension fund managers to avoid paying out pensioners is to inflate away the problem. As John Maynard Keynes, the great economist, noted: inflation is an excellent way to extract wealth, because not one man in a hundred will understand how it was done.

Here is how it works: governments promise pensioners that their benefits will be indexed to protect beneficiaries against rising prices. But they then use selected or massaged statistics to back out.

In Canada, federal (CPP) pension plan recipients will see their benefits rise by 1.3% during 2016. But food prices, according to Statistics Canada, rose by 3.7% last year. House prices rose by 12% up to December 2015 according to the Canadian Real Estate Association.

The controversial John Williams of Shadow Statistics provides credible research about how the data massaging works in the United States.

The effects of prices rising faster than benefits, over time, can be dramatic. If prices rise by 2% faster than pensions each year, then by the 20th year of retirement, beneficiaries will be losing 40% of their purchasing power (I am calculating using a straight line basis for simplicity).

In short, most pensioners won’t have a clue what hit them.
Deficit Owls 3 years ago at 1:23 PM
It's not very rigorous to ASSUME that standing by these financial commitments will DEFINITELY cause inflation. One could easily make the argument that they won't: calculate by what percentage the labor force will fall when Boomers will retire en masse, plus the percentage that labor productivity is supposed to grow by, and factor in current levels of un- and under-empeloyment as well as below-average capacity utilization, to see what our productive capacity is expected to be like at that time. Next consider the real living standards the benefits promise, and compare them to that productive capacity. If the productive capacity is expected to be greater than the real benefits, then obviously it can't cause inflation, and your argument is invalid.

Or, if you'd like to hear Alan Greenspan say the same thing, it's here: https://www.youtube.com/watch?v=QuUx3IL0a-0
The Truth 3 years ago at 10:37 AM

You just have to know where to look for inflation! Tell Greenspam, too!
Christoph Weise 3 years ago at 12:34 AM
This comment is nonsense. Currency is issued by the central banks. Issuance and ownership are different matters. If, as you say, debt would not matter, the US government had no reasons to cook the books.
Christoph Weise 3 years ago at 12:30 AM
"If the US government produced a financial statement that listed the $200 trillion in unfunded liabilities that Kotlikoff says it owes, workers might make different decisions about how much they will save for retirement." Unfortunately a worker can not safe enough money for retirement in a zero interest environment. At pension age 90% of the people globally will be poor or extremely poor.
The Truth 3 years ago at 3:40 AM
Good website for keeping track of the real amount govt. owes--see your "share":


Remember, China owns much of that debt--they have even increased their purchases lately--how does that make them "in better economic shape?"
Peter Diekmeyer 3 years ago at 11:04 PM
Many thanks Truth Dude. I'll definitely follow these guys for while and will report back.
DoDeals 3 years ago at 9:38 AM
This discussion reveals a profound misunderstanding of how the fiscal monetary system works. The solution to our economic and social problems is a Job Gty as part of a Full Employment Fiscal Policy. The dog bullet points it for us here:
Kay 3 years ago at 10:43 AM
Social security is NOT the problem.

The Truth 3 years ago at 12:14 PM
The government has taken money withheld from you and I for Social Security and used it for wars and general expenses--they have placed non-negotiable government promises "guaranteeing" that somebody will have to pay in the future (LOL). Great point Kay!
DoDeals 3 years ago at 12:53 PM
FALSE: See my blurb above. The gove doesn't need money from SS, taxes, or borrowing, in order to spend.
The Truth 3 years ago at 2:44 PM
Is your dog named John Law?
Joseph H. Marren 3 years ago at 11:53 AM
While Professor Kotlikoff is correct that the federal government is broke he has overstated the amount of the nation's unfunded liabilities. The federal government only has legal liability for the programs that Congress has enacted and for which it has put in place appropriations. The good professor includes in his $200+ trillion liability figure promises enacted into legislation but for which Congress has not appropriated any funds. Unless and until Congress appropriates funds the federal government has no legal obligation to follow through on its promises.
Peter Diekmeyer 3 years ago at 5:26 PM
Thanks for your comment Joseph. You are of course correct.

Congress could easily not default on pensions, medicare or other obligations and other by simply not authorizing the funds or passing new laws. Alternately they could inflate away the debt.

However there is a significant presumption among many Americans that they will get those pensions.

Indeed unfunded liabilities calculations such as Kotlikoff's are often based on the Congressional Budget Office’s own Alternative Fiscal Scenario (AFS) projections, which acknowledge these amounts.
The Truth 3 years ago at 12:58 PM

The chart in this article showing GDP without the huge increase in Federal Debt in the USA recently, says a lot about presentation of economic "facts."

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