Put 100 economists in a room and you'll get 100 different opinions. That's the joke, and it's usually not far off the mark. So imagine what it would take to get more than 500 economists in whole-hearted agreement.
There's no need to imagine, actually. That’s how many economists – including 12 Nobel Laureates – have endorsed the bipartisan Intergenerational Financial Obligations Reform (INFORM) Act, introduced last month on Capitol Hill.
This unprecedented support from economists across the political spectrum is testimony to the bill's clear logic – and even moreso, to its moral necessity. The goal of the INFORM Act is to put an end to the gimmickry in our federal budgeting that keeps huge and mounting fiscal obligations off the books, and threatens to pass this debt onto our children and grandchildren as crippling IOUs.
The fact is, politicians in Washington have spent decades perpetrating a shell game to disguise the magnitude of the federal government’s fiscal obligations. Their main tool has been verbal sleight of hand. The most egregious example is how policy makers have classified Social Security payments and obligations to keep our alarming debt exposure out of view. Instead of regarding the contributions of Americans into the Social Security system as “borrowed” money that requires a “return of principal plus interest,” our legislators get away with calling this money “taxes” that result in “transfer payments.” Voila – no need to put the obligations to pay promised Social Security on the books.
The result is an official rendering of the federal debt that would have a private sector accountant charged with fraud or incompetence. That $12 trillion of publicly held debt that we keep reading about? To economists focused on present and projected liabilities, based on current law, that debt figure is off just a bit. Try $222 trillion instead. That is the true “fiscal gap” based on the Congressional Budget Office’s long-term Alternative Fiscal Scenario projections, last produced in June 2012.
What, exactly, is the fiscal gap? It’s the difference between future projected spending and revenue, plus initial public debt, over the infinite time horizon. The infinite time horizon may sound odd to non-economists. But in considering changes in revenue and spending needed to address this long-term fiscal gap, generational accounting must work off present values.
THE DOLLAR’S REAL VALUE
That means that a dollar far off in the future has a much smaller present value compared to a dollar today. Economics says we can’t ignore the future when it comes to long-term government budgeting. But it also tells us to discount (as in, make less of) dollars the government will spend and collect far out into the future in calculating the nation’s fiscal gap.
As it happens, this year’s tax hike and spending cuts appear to have reduced the fiscal gap to $200 trillion. This estimate entails a $22 trillion decline in the fiscal gap, which is certainly a large number. Unfortunately, the remaining fiscal gap is still absolutely massive, representing 10 percent of the present value of all future GDP.
Coming up with savings equivalent to 10 percent of GDP year in and year out is a tall fiscal order. Achieving those savings through spending cuts alone would require an immediate and permanent 36 percent cut in all non-interest spending. To do so via tax hikes alone would require an immediate and permanent 55 percent increase in all federal taxes.
You might think the fiscal gap is so huge because of our massive defense spending. The annual U.S. defense budget of $682 billion exceeds the combined defense budgets of China, Russia, the United Kingdom, Japan, France and five other countries in the top tier. Yet eliminating all U.S. defense spending forever starting today would only put the tiniest dent in the fiscal gap.
The 3,000-pound gorilla in the room is the pending retirement of the 78-million strong baby boom cohort. Each of these folks, myself included, is slated to receive an average of $40,000 per year in today’s dollars from Social Security, Medicare and Medicaid benefits. Multiply $40,000 by 78 million people and you get more than $3 trillion of entitlement liabilities, every penny of which has been kept off the books.
The INFORM Act would stop this fiscal lying and force our government to put all its liabilities, as well as all its assets, on the books. Specifically, it would direct the CBO, the General Accountability Office (GAO) and the Office of Management and Budget (OMB) to incorporate fiscal gap analysis in their reports to lawmakers.
Moreover, it would mandate that these agencies include a generational accounting analysis to examine what it would mean to dump the entire burden of the fiscal gap in the laps of our children and grandchildren. With this additional information in their hands, our legislators can’t ignore the long-term consequences of their budgeting.
Five hundred economists – and counting – are on board with the INFORM Act because they understand credible accounting when they see it. But the Act also has the support of Democrats and Republicans alike, as demonstrated by the bill’s Senate sponsors, Tim Kaine (D-VA) and John Thune (R-SD), and House sponsors, Reps. Jim Cooper (D-TN) and Aaron Schock (R-IL). Among the first co-sponsors are Sen. Rob Portman (R-OH), former head of OMB, and Sen. Chris Coons (D-DE). The INFORM Act also has the endorsement of a number of prominent policy experts, including former Secretary of State George Shultz and former Comptroller General David Walker.
At a time when partisan gridlock is the byword in Washington, this bipartisan support of the INFORM Act is both remarkable and deeply welcome.
Perhaps the conscience of our lawmakers is being stirred by the fact that young people are among the legislation’s strongest champions. In fact, a millennial-led group called “The Can Kicks Back” presented the idea of this bill in a white paper last February and then stormed Capitol Hill to drum up support and sponsors. They understand the consequences for their generation, and future generations, of Congress just kicking the can further down the road. With passage of the INFORM Act, there will be no way lawmakers can ignore the implications of further delay or dereliction of duty.
By pushing for this legislation we are reaffirming a commitment as old as our country – to leave a better world, with even greater opportunity, to the next generation. That is the essence of the American Dream, and it is our responsibility to preserve it.
Laurence Kotlikoff is an economist at Boston University and co-author of The Clash of Generations.