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 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.
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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.
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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.
