Laffey is running for the Republican nomination with fundamental policies to fix Social Security, healthcare, taxes, and more -- all designed to restore the American Dream for your children.
Hi John, I realized that the right discount to discount real flow is the historic real return on U.S. national wealth and not the long-term real yield on U.S. inflation-link Treasuries. The latter discount rate is lower and is the one used by SSI. That's why their numbers are larger. The fiscal gap is the shortfall in the government's intertemporal budget. This budget plus household intertemporal budgets, when added together equal the economy's intertemporal budget. Along any path of the economy, the present value of the economy's realized consumption (household plus gov) must equal the realized present value of its human wealth plus its national net wealth. The discounting of realized paths is at the realized path of the real return to national net wealth. Hence, using the average national wealth return for discounting the average path of future real variables is an approximation to the theoretically correct measure. The government real bond yield can go down because, for example, the public becomes more risk averse. So it's not telling us about whether the economy, appears, on the average, to be trying to spend more in present value than it will, on the average, have in resources. This said, using a higher or lower discount rate for all the analysis doesn't change the fiscal adjustments need to close the fiscal gap. best, Larry
Larry thanks very much for these thoughts and I agree with you; you are now using a more appropriate parameter for the discounting of the fiscal gap. As I'm guessing you know, there's still to this day active debate about how to think about this in corporate finance theory. Practically speaking for me at least [as a practitioner], the right way to think of the discount rate is as the expected rate of return, or IRR (without leverage). It can be thought of as the opportunity cost of making the investment. The opportunity cost of course would be the cost/return related to the next best investment. In other words, the discount rate should equal the level of return that similar stabilized investments are currently yielding. If we know that the cash-on-cash return for the next best investment (again, literally, the opportunity cost) is, say, 6.5%, then we should use a discount rate of 6.5%. Real return on national wealth IS therefore the right call here ....I guess the only question then is if the 6.5% historic return level would be realized going forward -- Reinhart/Rogoff et al. might say no, not at this point....but anyway you are analyzing it in the optimal way.
I still might be missing something, so one more question: you say our fiscal gap — the present value difference between the projected path of outlays and the projected path of receipts — is, by your latest estimate, $41 trillion — almost two years of GDP. But you also point out and link to the 2022 SSI/OASDI dashboard that unfunded SSI liabilities are $61 Trillion out to the infinite horizon, and $20 Trillion out to 2096. My question is, are these unfunded SSI liabilities subsumed in your $41 Trillion fiscal gap number? If so are you only going out to 2096 with your number; or, is your figure an infinite horizon number and there are net positive receipts coming from Households [to knock $61 Trillion down to $41 Trillion]....??
Again, your great work on this is much appreciated -- I am glad Laffey will really hammer this theme ....sadly, no "traditional politician" ever will, which is why I was long attracted to the concept of an outsider running for the Oval Office, and hence worked for Cain in 2012 and Carson in 2016 -- though both were not the right outsider, alas! Trump was never going to be.....but Laffey seems destined to be so. Thanks again and all best.
Send me any links to these behaviors. I don't doubt they are occurring, but I want to get my Bettercare Plan co-authors to focus on how we can modify the plan to keep this from happening. This may require having an independent federal claims adjudicator.
good luck to Mr. Laffey, but he sounds far-too-reasonable about Important Stuff to win the Republican nomination. (unless, of course, he pivots to wanting to discuss Hunter Biden's laptop and purple M&M's ... then he might have a shot)
Larry, I hope you are well in 2023! Question: when last we talked [I was working for Ben Carson], your analysis of the fiscal gap had it at @ $211 Trillion or so. Now, you say it is much lower [$41.3 Trillion] due to using a higher discount rate [6.5%] more appropriate to long term wealth creation/accumulation in the USA. What was the old discount rate, and what prompted the change? I also thought the 41.3 Trillion was the TOTAL envelope of federal spending, but you link to the SSI page showing long term insolvency of $20 Trillion to 2096 and $61 Trillion out to the infinite horizon. Wouldn't we want to add $61 to the $43, plus other federal spending streams [i.e., health care] ...?? Thanks for any insights!
Anytime a republican uses the words "social security" & "radical surgery" in the same sentence, BEWARE! There is no mystery here; REMOVE or substantially raise the cap on earnings subject to SS withholding.
Liffey has some interesting ideas but lost me at “The Bettercare Plan”. Investigations of Medicare Advantage Plans have found they routinely deny claims that would have been paid under a fee-for-service plan. I’m no a fan of fee-for-service but maybe he should also consider a well-funded Single-Payor Plan.
Well, congratulations to your friend for stepping up, but the prediction about his name being a household name? Well, that rather sounds like your predictions about Liz Cheney.
I agree with your readers who prefer you to stick to economics and social security. I added your Substack to my reading pile bc your work on SS was impressive. It is MUCH better than your work as a political pundit. There is wisdom to staying in one’s lane.
Hi John, I realized that the right discount to discount real flow is the historic real return on U.S. national wealth and not the long-term real yield on U.S. inflation-link Treasuries. The latter discount rate is lower and is the one used by SSI. That's why their numbers are larger. The fiscal gap is the shortfall in the government's intertemporal budget. This budget plus household intertemporal budgets, when added together equal the economy's intertemporal budget. Along any path of the economy, the present value of the economy's realized consumption (household plus gov) must equal the realized present value of its human wealth plus its national net wealth. The discounting of realized paths is at the realized path of the real return to national net wealth. Hence, using the average national wealth return for discounting the average path of future real variables is an approximation to the theoretically correct measure. The government real bond yield can go down because, for example, the public becomes more risk averse. So it's not telling us about whether the economy, appears, on the average, to be trying to spend more in present value than it will, on the average, have in resources. This said, using a higher or lower discount rate for all the analysis doesn't change the fiscal adjustments need to close the fiscal gap. best, Larry
Larry thanks very much for these thoughts and I agree with you; you are now using a more appropriate parameter for the discounting of the fiscal gap. As I'm guessing you know, there's still to this day active debate about how to think about this in corporate finance theory. Practically speaking for me at least [as a practitioner], the right way to think of the discount rate is as the expected rate of return, or IRR (without leverage). It can be thought of as the opportunity cost of making the investment. The opportunity cost of course would be the cost/return related to the next best investment. In other words, the discount rate should equal the level of return that similar stabilized investments are currently yielding. If we know that the cash-on-cash return for the next best investment (again, literally, the opportunity cost) is, say, 6.5%, then we should use a discount rate of 6.5%. Real return on national wealth IS therefore the right call here ....I guess the only question then is if the 6.5% historic return level would be realized going forward -- Reinhart/Rogoff et al. might say no, not at this point....but anyway you are analyzing it in the optimal way.
I still might be missing something, so one more question: you say our fiscal gap — the present value difference between the projected path of outlays and the projected path of receipts — is, by your latest estimate, $41 trillion — almost two years of GDP. But you also point out and link to the 2022 SSI/OASDI dashboard that unfunded SSI liabilities are $61 Trillion out to the infinite horizon, and $20 Trillion out to 2096. My question is, are these unfunded SSI liabilities subsumed in your $41 Trillion fiscal gap number? If so are you only going out to 2096 with your number; or, is your figure an infinite horizon number and there are net positive receipts coming from Households [to knock $61 Trillion down to $41 Trillion]....??
Again, your great work on this is much appreciated -- I am glad Laffey will really hammer this theme ....sadly, no "traditional politician" ever will, which is why I was long attracted to the concept of an outsider running for the Oval Office, and hence worked for Cain in 2012 and Carson in 2016 -- though both were not the right outsider, alas! Trump was never going to be.....but Laffey seems destined to be so. Thanks again and all best.
Hi Cheryl,
Send me any links to these behaviors. I don't doubt they are occurring, but I want to get my Bettercare Plan co-authors to focus on how we can modify the plan to keep this from happening. This may require having an independent federal claims adjudicator.
best, Larry
good luck to Mr. Laffey, but he sounds far-too-reasonable about Important Stuff to win the Republican nomination. (unless, of course, he pivots to wanting to discuss Hunter Biden's laptop and purple M&M's ... then he might have a shot)
Larry, I hope you are well in 2023! Question: when last we talked [I was working for Ben Carson], your analysis of the fiscal gap had it at @ $211 Trillion or so. Now, you say it is much lower [$41.3 Trillion] due to using a higher discount rate [6.5%] more appropriate to long term wealth creation/accumulation in the USA. What was the old discount rate, and what prompted the change? I also thought the 41.3 Trillion was the TOTAL envelope of federal spending, but you link to the SSI page showing long term insolvency of $20 Trillion to 2096 and $61 Trillion out to the infinite horizon. Wouldn't we want to add $61 to the $43, plus other federal spending streams [i.e., health care] ...?? Thanks for any insights!
JOHN L. CHAPMAN
Anytime a republican uses the words "social security" & "radical surgery" in the same sentence, BEWARE! There is no mystery here; REMOVE or substantially raise the cap on earnings subject to SS withholding.
Liffey has some interesting ideas but lost me at “The Bettercare Plan”. Investigations of Medicare Advantage Plans have found they routinely deny claims that would have been paid under a fee-for-service plan. I’m no a fan of fee-for-service but maybe he should also consider a well-funded Single-Payor Plan.
Well, congratulations to your friend for stepping up, but the prediction about his name being a household name? Well, that rather sounds like your predictions about Liz Cheney.
I agree with your readers who prefer you to stick to economics and social security. I added your Substack to my reading pile bc your work on SS was impressive. It is MUCH better than your work as a political pundit. There is wisdom to staying in one’s lane.
Larry - don't change a thing ... while I don't always agree, your opinions are always informed and based on facts/data, not speculation.
Feel free to drive in any lane you choose.
Hello dove nice job of being obnoxious and smug. You should’ve just taken Larry’s advice and not read further.
Hi Chris,
Back atcha brother.