Reflections on "the Debt" Deal

Our four parties unite to ignore the elephant in the room.

The House of Representatives 435 members voted, on balance, to raise the debt ceiling. There were 71 Republicans and 45 Democrats opposed. This reflects our four-party system — far right, middle right, middle left, and far left. But all four parties have something in common — the ability to ignore our nation’s long-term fiscal insolvency and its terrible implications for young and future Americans.

To my knowledge, none of the 435 House members or, for that matter, the 100 Senators has a PhD in economics. Maybe some have Masters degrees in the subject or majored in economics in college. Whatever their economics training, all are blind or pretending to be blind to the fiscal elephant in the room — the U.S. fiscal gap.

The fiscal gap is the present value of all projected future government outlays less all projected future government receipts. The key word here is all. The fiscal gap leaves nothing off the books. For example, it includes the present value of all future Social Security projected payments less all future Social Security projected receipts. This is also known as Social Security’s infinite horizon unfunded liability.

A month ago, Social Security’s Trustees published their annual report. Table VIF1, buried deep in the Appendix, where no one looks, is the statement of this liability. It’s not the size of the Congressional Budget Office’s $26 trillion measure of official debt. It’s far larger. In fact, it’s 2.5 times larger, namely $66 trillion. This measure of Social Security’s red ink is not just gargantuan on its own. It’s $13 trillion larger than it was just three years ago.

How is it that all four parties in Congress can ignore Social Security debt or, for that matter, Medicare debt, or, for that matter, future defense spending debt, or for that matter, all the other off-the-books net liabilities?

It’s simple. They put them off the books. How? With labels — the choice to call payment commitment X official and payment commitment Y unofficial. Imagine, all our Social Security FICA taxes were labeled differently — as borrowing and all our future Social Security benefit claims were labeled as official government contingent Treasury bonds, where the payoff was contingent on the owner being eligible, including alive, to collect. In this case, official debt wouldn’t be the $26 trillion over which our four parties are posturing. Instead, it would be $92 trillion — almost four years of GDP!

As I’ve written or co-written here, in 1986, here in 1987, here in 1988, here in 1989, here in 1994, here in 2001, here in 2008, here in 2014, and in copious other articles and columns, the deficit is a figment of language, not a well defined economic concept. As Jerry Green and I showed in this theoretical paper, entitled, “On the General Relativity of Fiscal Language,” economics, like physics has measures without meaning.

In physics, time and distance are not well defined. They are a figment of one’s so-called frame of reference, i.e., one’s direction and speed through space — one’s physical language. And since there are an infinite number of frames of reference, there are an infinite number of measures of the current time, as I type, and the length of the table on which I type.

In economics, the deficit, taxes, transfer payments, private wealth, government wealth, disposable income, personal income, and all related variables are measures in search of meaning. Stated differently, one’s choice of labeling, e.g., whether to call your Social Security contributions “taxes” or “official borrowing,” leave us with an infinite number of measures of these “measures.”

My 1986 article making this point was called Deficit Delusion. It was published in The Public Interest, a widely read policy journal edited by Irving Kristol (Billy’s dad). Yes, the journal was right of center. But the article was apolitical. It said that half of the national income accounting we were teaching to freshmen in college was nonsense. So too were some of the most famous articles in macroeconomics — articles that relied on meaningless “data.”

As might be expected, macro economists, most of whom had publications that utilized such “data,” took no interest in the fact that they were spending much of their careers on fools’ errands. Interestingly, a group of non economists, namely physicists, paid attention. This explains my 1988 article article in Science and my 1989 article article in The Sciences. It also explains why I and colleagues (economists Alan Auerbach and Jagadeesh Gokhale) co-developed generational accounting (GA). GA is label free, i.e., it’s economically well defined — It’s the same measure no matter what internally consistent labeling convention is used. GA measures how much of a country’s fiscal gap is being left for next generations to pay and the magnitude of that burden.

I gave my paper with Jerry Green its audacious title to try to shake up the economics profession. Maybe pretending to sound like Einstein would annoy my macro colleagues enough to get them to study the paper’s general proof and understand their addiction to words over substance. I chose Jerry to co-author this paper for a reason. Every economist knows Jerry Green. He’s Harvard’s senior economic theorist. And virtually all PhD economists across the globe read Jerry’s co-authored microeconomic theory textbook in their first year of grad school.

Did this work? Did 30 or so generational accounting studies for countries ranging from the UK to Thailand work? Yes and no. Economists are now generally attuned to economics labelling problem and generally no longer write academic articles trying to explain meaningless times series W with meaningless time series Z.

But when it comes to working in government or talking to the public, they revert to the government-labeled data and become the tailors in economics’ version of The Emperor’s New Clothes. As for the financial press, they have, thanks to these economic public spokespeople, bought the fiscal malarky hook, line, and sinker. Every financial writer in the country has a piece out today about the debt deal as if they knew what “the debt” means.

Here’s what our press and so-called leaders don’t know or aren’t saying. Our nation’s well-defined fiscal gap is massive. The absolute value is sensitive to the choice of discount rate. I use the theoretically appropriate average post-1950 6.5 percent real return on GDP. This puts the fiscal gap at $41 trillion and the present value of all future GDP at $534 trillion. Hence, the fiscal gap is 7.7 percent of GDP. This means we need to increase receipts by 7.7 percent of GDP each year forever starting immediately or cut outlays by 7.7 percent of GDP each year forever starting immediately or do a combination of these nasties each year forever starting immediately.

Raising receipts requires an immediate and permanent 41 percent hike in all federal taxes, as labeled by Uncle Sam. And cutting spending requires a 35 percent in all federal expenditures apart from interest on official debt as labeled by Uncle Sam. Note, I’m referencing current measures of taxes and spending, but relabelling all our data would not change the size of our fiscal gap or the economic pain associated with closing it. For example, a relabelling that made reported taxes larger would mean a smaller percentage tax hike was needed to close the gap. But the absolute requisite increase in annual takings from the public — the underlying economic pain, as in reduced capacity to spend — would be the same.

To quote Dylan,

There must be some way out of here said the joker to the thief. There’s too much confusion, I can’t get no relief. Businessmen, they drink my wine, Plowmen dig my earth. None of them along the line know what any of its worth.

There is a way out of here. It’s simultaneous fundamental reform of all our fiscal institutions. Here’s such a reform package. But thinking big means talking big and talking big means sounding extreme and sounding extreme means losing votes. So, best do what Congress just did, yet again — nothing meaningful to close the fiscal gap.

Make no mistake, our nation’s ever growing fiscal gab will destroy our country’s economic future no less than fiscal profligacy has destroyed the economic futures of Argentina, Venezuela, Zimbabwe, and so many other economic basket cases. Yet, this is our fiscal pastime — kick an ever bigger can down the road. Each kick is straight to the jaws of our children. But boy do we love them.