Oh, and By the Way, Our Government Is Totally Broke!

By Laurence Kotlikoff

As our politicians engage in their food fight over extending the debt ceiling, we the public should bear in mind the huge problem this obsessive focus on official debt is concealing. Our country is flat broke -- and not because of its official debts, i.e., what's been put on the books -- but because of its unofficial debts, i.e., what's been kept off the books.

Moreover, our country's not broke in 50 years or 30 years or 15 years. It's broke today.

Unfortunately, you wouldn't realize this from the Congressional Budget Office (CBO)'s recently released long-term fiscal forecast, which entirely whitewashed our fiscal future. The CBO's forecast was based on its Extended Baseline Forecast (EBF). This forecast assumes current law remains in place, including provisions of current law, like cuts in Medicare and Medicaid doctor reimbursements, which no one, including the CBO, views as realistic.

In past years, the CBO simultaneously released what it calls its Alternative Fiscal Scenario. This forecast is what CBO actually projects future taxes and spending to be given not just the laws in place, but also how Congress and the Administration have been bending and changing the laws through time. In short, the Alternative Fiscal Scenario (AFS) is what the CBO thinks we’re facing absent a truly dramatic and sustained shift in fiscal policy.

Those of us who track U.S. fiscal policy eagerly await each year’s release of the AFS. But this year, the CBO’s long-term forecast included only the EBF. The AFS was nowhere to be seen. It wasn’t mentioned in the CBO’s lengthy report. Nor was it included in the downloadable data CBO provided on its website.

The national media, which generally “covers” fiscal affairs by repeating what it’s told, missed this omission entirely. Indeed, it spent an entire news cycle discussing the EBF figures as if they had real meaning.

Fortunately, enough people started asking the CBO what happened to the AFS. Within two days a summary of the AFS projections were added as tab 6 in the EBO spreadsheet, with no accompanying press announcement nor any press attention.

The EBF and AFS projections differ dramatically, yet the AFS is hidden away in one tab of one spreadsheet called Supplementary Data, the small link to which will shortly disappear from the CBO’s homepage, making it even harder for we taxpayers to find.

The CBO long-term budget outlook report is not only based on the wrong projections. It also focuses on the government’s deficit over the next couple decades. But as any good economist within the CBO should know, the government’s reported deficit between today and any future date depends on which debts the government chooses to put on and which it chooses to keep off the books.

The only fiscal measure that’s free of this classification problem, known as economics labeling problem, is what economists call the infinite horizon fiscal gap. This measure puts everything on the books – all future spending obligations, whether they are called official or not as well as all future tax and other receipts. The difference valued in the present (the present value) of future spending less future receipts is the infinite horizon fiscal gap. A related economic analysis, called generational accounting, shows the taxes today’s and tomorrow’s children will need to pay if they are left, on their own, to close the entire fiscal gap.

Hence, to understand just how much the EBF and AFS projections differ, we can’t compare debt-to-GDP ratios even out many years. Instead, we need to form the infinite horizon fiscal gaps using the two data sources.

Based on the EBF, the fiscal gap is $47 trillion. But based on the AFS, the fiscal gap is -- $205 trillion! Hence, in presenting a picture of our nation’s long-term fiscal imbalance based on the EBF, the CBO, in effect, understated the problem by three quarters!

The $205 trillion fiscal gap is enormous. It’s 10 percent of the present value of all future GDP. Equivalently, it corresponds to 10 percent of GDP year in and year out for as far as the eye can see. To raise 10 percent of GDP each year we could (a) raise all federal taxes, immediately and permanently, by 57 percent, (b) cut all federal spending, apart from interest on the debt, by 37 percent, immediately and permanently, or (c) do some combination of (a) and (b).

You been hearing the President or the Speaker of the House discussing our true fiscal gap let alone fiscal adjustments of this kind? Not a word. Thanks to the CBO and their handlers, they probably haven't even learned the true size of our fiscal gap.

So we will, it seems, wait to address our nation's insolvency. And waiting will make things worse. Say we wait 20 years, letting more current older generations, including very rich older Americans, off the hook and, starting in 2033 finally close of fiscal gap. This will require, starting in 2033, (d) permanently raising taxes by 69 percent, (e) permanently cutting all non-interest spending by 43 percent or (f) doing some combination of (d) and (e).

There are other, less blunt and painful ways to get our fiscal house in order, but we’re not going to begin having that national discussion until we get honest and timely disclosure of our true fiscal condition.

Fortunately, Senator Kaine (Democrat from Virginia) and Senator Thune (Republican from South Dakota) have introduced a bill mandating this disclosure. It’s called The Inform Act and it requires the CBO, GAO, and OMB to do long-term fiscal gap and generational accounting on an annual basis and in advance of Congressional voting on all major tax and spending bills.

To date, 14 Nobel Laureates in Economics and close to 1,000 other economists as well as thousands upon thousands of other American citizens have endorsed the bill at www.theinformact.org.

Economists don’t often agree on what drives the economy or how to fix it. But these economists, who span the political spectrum and represent all parts of the academic and business worlds, are speaking with one very strong voice demanding honest government disclosure and accounting of our long-term fiscal obligations as well as the economic threats they pose to our children.

Laurence Kotlikoff is a Professor of Economics at Boston University and co-author of The Clash of Generations.