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LAURENCE J. KOTLIKOFF

Fiscal compromise ignores depth of nation’s economic woes

Our country is broke. It’s not broke in 30 years or 10 years or 5 years. It’s broke today. A colossal $222 trillion separates the present value of projected future spending and the present value of projected future taxes.

This enormous fiscal gap is the true measure of our nation’s indebtedness. It’s 20 times larger than our nation’s $11 trillion official debt and for a reason. Successive administrations and Congresses have carefully kept almost all of our liabilities off the books using accounting that would make Bernard Madoff blush.

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But those “unofficial” liabilities are both real and ruinous. They include the commitment to pay 78 million baby boomers, when fully retired, over $3 trillion (in today’s dollars) per year in Social Security, Medicare, and Medicaid benefits.

Our country’s aging explains part of these costs, but the main issue is excessive growth in benefit levels. In the last four years, spending on these programs, measured as a share of the US economy, rose by an astounding 20 percent. Other expenditures are also completely unaffordable, including spending more on defense than the next 10 countries combined.

Ever hear of the fiscal gap? Probably not. The fiscal gap simply measures whether the government’s budget is balanced across different periods of time.

Economic science makes clear that the fiscal gap is the only appropriate measure to use to examine our financial condition because it’s impervious to accounting games.

If Congress tries, as it has been doing big time for six decades, to shift costs into the future, the fiscal gap doesn’t change. In contrast, the official debt is wholly sensitive to such games. That’s why on an official debt basis, the situation looks much better in the United States than in Greece. But on a fiscal gap basis it’s actually worse.

By the clearest measure, the US economy is worse off than Greece’s.

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Rather than discuss policy from the perspective of our fiscal gap, we economists have fed into the politicians’ game of focusing on official debt. In so doing, we’ve become the tailors in Hans Christian Andersen’s “The Emperor’s New Clothes.” But the danger here is not a pompous king walking naked through the streets. The danger is leaving our progeny facing bills that far exceed their capacity to pay.

Eliminating the fiscal gap requires spending cuts and tax increases equaling 12 percent of the nation’s economic output on an ongoing basis. That requires $25 trillion in budgetary savings over this decade. The 10-year deal just struck by Congress and the Obama administration saves only $600 billion! Yes, federal spending is still on the chopping block, but don’t hold your breath. The scheduled cuts are small, and their postponement — another part of the deal — is likely to become permanent.

In sum, the “compromise” that the president and Congress struck last week only compromised our children’s futures.

Where do we go from here? I say bring in the economists, and I mean real economists, not political hacks parading as economists.

Real economists, not political economists, agree, to a surprising degree, on what’s needed to fix the country. This consensus is embedded in The Purple Plans (mixing red and blue makes purple) — a set of simple ways to fix health care, taxes, Social Security, banking, the environment, and education. These plans, endorsed in part or in full by Nobel laureates and other leading economists, would more than eliminate the fiscal gap. They would also turn our economy around.

Here are highlights:

 The Purple Health Plan caps annual government health care spending at 10 percent of the nation’s economic output. It gives all Americans, each year, a voucher to pay, in full, for a uniform basic health insurance policy. People can buy supplemental policies, but 5-year-olds get the same basic coverage as 95-year-olds. And Medicare, Medicaid, Obamacare, employer-provided health care? All history.

 The Purple Tax Plan ditches the personal income, corporate income, and estate and gift taxes. It replaces them with progressive consumption, payroll tax, and inheritance taxes with top rates of 15 percent. This plan generates more revenue, is more progressive, and requires no annual tax filings.

 The Purple Social Security Plan freezes Social Security, but pays off what it owes over time. All workers contribute to personal accounts. Uncle Sam matches contributions on a progressive basis. All account balances are invested at zero cost, and with no Wall Street involvement, in a global index of stocks, bonds, and real estate. Uncle Sam guarantees a cumulative zero real return and, thereby, protects us from downside market fluctuations.

Of the 535 members of Congress, not one has an advanced degree in economics. And we have a president with no formal economics training. No wonder economic policymaking is becoming a mortal danger to our children.

Were the country hit by a grave virus, the politicians wouldn’t grab white coats and play doctor. They’d bring in trained scientists and physicians who could actually fix things. We have the world’s top economists, almost all of whom know the difference between economics and politics. It’s time to use them.

Laurence J. Kotlikoff is an economics professor at Boston University and co-author of “The Clash of Generations.”
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