With the U.S. debt dragon slain--at least temporarily--legislators in Washington and money managers around the world breathed a sigh of relief Monday, after Congress, in intense weekend negotiations, seemed finally to have agreed on a solution to the $14.3 trillion debt ceiling crisis.
But is their celebration premature? What if the nation's attention had been focused all this time on the wrong number? What if U.S. debt isn't $14.3 trillion, but bigger by a factor of 14? Time, maybe, to put the cork back in the champagne bottle.
Bloomberg BusinessWeek, in its current cover story "Why The Current Debt Crisis is Even Worse Than You Think", argues the true measure of U.S. debt ought to be the so-called fiscal gap. That's the present value of the difference between the nation's total revenues and its total obligations. That comes to $211 trillion.
For Congress, as it tries to thread its way out of the nation's debt crisis, to be focused on the smaller number, is like a driver "using a map of New York to try to drive around L.A." So says Boston University economist Laurence J. Kotlikoff. The BusinessWeek piece showcases the work of Kotlikoff and fellow economist Jerry Green of Harvard.
The two men, in an academic paper titled "On The General Relativity of Fiscal Language," make a simple point: Debt is in the eye of the beholder; you can define it any way you want. Washington's $14.3 trillion figure excludes things politicians find it inconvenient to call debt, such as the future obligations of the Social Security system. But just because those obligations aren't called debt doesn't mean they don't have to be paid. The present value of these and all other U.S. obligations make up Kotlikoff and Green's $211 trillion figure.
Not just the professors but the authoritative and impartial Congressional Budget Office regard the fiscal gap as providing a more meaningful, less subjective way of estimating total U.S. indebtedness. CBO, in its most recent "Long-Term Budget Outlook," says that by any measurement the federal government faces "a daunting long-term budgetary shortfall."
How big is that imbalance? it goes on to ask. "Two measures offer complementary perspectives: "Annual amounts of federal debt show how shortfalls accumulate over time, whereas the fiscal gap summarized the shortfall over a given period in a single value."
Though the two professors' academic paper isn't easy reading, Kotlikoff has made the same argument in layman's language ,in a separate piece he wrote for Bloomberg. The fiscal gap, measured over the infinite horizon, he writes, "is the only label-invariant measure of fiscal solvency, and its message is loud and clear: We aren't broke in 2021 or in 2018. We're not broke when some arbitrary measure of official debt exceeds some arbitrary threshold. We're broke today because the fiscal gap is huge." It was huge during the Clinton presidency, when, by the government's self-congratulatory reckoning, the nation enjoyed a tidy surplus.
Even if Congress and the president could agree to run a balanced budget, making this year's deficit "officially" zero, says Kotlikoff, "the nation's true indebtedness would still rise by $4.15 trillion."
What's the upshot of his view? Only that the steps the U.S. needs to take to solve its debt problem are greatly more painful than congressmen and pundits have lead the public to believe.
"What would it take," he asks, "to get our fiscal house in order?" Measures truly draconian. If we were to start today to extricate ourselves from debt in any long-term meaningful way, we would need, he says, to raise all federal taxes (personal income, corporate income, payroll and estate and gift taxes) immediately and permanently by 64 percent. "Another option is to cut all noninterest spending by 40 percent." You don't hear today's politicians throwing around those numbers.
Under the proposed deal, $1 trillion in spending cuts would take effect immediately, with another $1.5 trillion to come later. The president would be authorized to increase the debt ceiling by at least $2.1 trillion, averting the credit crisis that otherwise would have struck tomorrow, Tuesday.