Rob Douglas: The true cost of generational theft
April 3, 2014
"The United States has spent decades playing 'take as you go,' in which each generation of elderly takes from the young while promising the young their turn when old to expropriate from their own children. I consider this a Ponzi scheme, or chain letter if you'd prefer, that has been organized by Uncle Sam in such a way that each new generation of retirees can claim to be entitled to the off-the-books benefits that they have been promised." — Laurence Kotlikoff
In a recent study published by the Mercatus Center, "Assessing Fiscal Sustainability," Boston University Professor of Economics Laurence Kotlikoff finds that, not only is the United States operating fiscally as a Ponzi scheme, economists have been complicit in deceiving Americans about the true cost of this growing generational theft by deliberately using the wrong accounting standard.
"But like the tailors in 'The Emperor's New Clothes,' they went along to get along, in this case with the measures that the politicians, media and general public thought they understood and wanted to talk about."
Still, Kotlikoff thinks honest fiscal accounting will soon prevail.
"But things have changed. Today, the economics profession is speaking with almost one voice, proclaiming that conventional fiscal accounting needs to be supplemented with, if not totally replaced by, fiscal gap and generational accounting … (because) misleading, fallacious fiscal accounting, which is not worthy of even Enron or Bernie Madoff, must end."
According to Kotlikoff, fiscal gap accounting "discloses the amount of adjustment needed to restore sustainability," and generational accounting "looks at the impact of current and implied policy on specific generations."
Using fiscal gap and generational accounting to determine the long-term financial burden of current federal public policy, Kotlikoff finds:
■ The U.S. official debt ($12 trillion) is just 6 percent of the federal government's true fiscal gap of $205 trillion.
■ The burden of that $205 trillion fiscal gap saddles each new American child with a debt of $420,600 that will rise as the expected wages of each new generation rise.
Further, the true fiscal gap already is impacting national savings, income and net domestic investment. According to Kotlikoff:
■ In 1950, national saving and investment rates were 14 percent; today, they are 2 percent and 4 percent, respectively.
■ These declines have reduced the growth in real wages and dampened the increase in living standards.
Overall, Kotlikoff finds:
"The U.S. fiscal gap now stands at $205 trillion. This is 10.3 percent of the estimated present value of all future U.S. GDP (gross domestic product). The United States needs to raise taxes, cut spending, or engage in a combination of these policies by an amount equal to 10.3 percent of annual GDP to close its fiscal gap. Closing the gap via raising taxes would require an immediate and permanent 57 percent increase in all federal taxes. Closing the gap via spending cuts (apart from servicing official debt) would require an immediate and permanent 37 percent reduction in spending. This grave picture of America's fiscal position effectively constitutes a declaration of bankruptcy."
While I miss them dearly, there are moments when I'm glad my parents didn't live to witness how thoroughly my generation squandered our nation's wealth while simultaneously stealing from future generations of Americans. Given the ongoing fiscal fraud being conducted at all levels of government, it's doubtful those future generations will look back on the baby boomers and echo boomers who are now predominate in the halls of government with the justified esteem we have for the greatest and silent generations.
Admittedly, for many years I was like most Americans. I didn't pay attention to the unsustainable spending that takes place at every level of government. I was too busy doing whatever it is we're all too busy doing to pay attention to the long-term fiscal health of the United States.
But for the past 15 years, I've been a close observer of public policy at the local, state and federal levels. Now, when I watch constituents ask their elected representatives for "more," I wonder where they think "more" comes from.
After all, when a nation is significantly funded at all levels by federal deficit spending, "more" comes from the stolen prosperity of our children and grandchildren.
To reach Rob Douglas, email rdouglas@SteamboatToday.com