[A-List] Speeches ignore impending US debt disaster

[Bill Totten <shimogamo@xxxxxxxxxxxxx>]

No mention of fiscal gap estimated as high as $72 trillion

by Carolyn Lochhead, Chronicle Washington Bureau

SFGate.com, San Francisco Chronicle (September 12 2004)

The first of the 77 million-strong Baby Boom generation will begin to retire in
just four years. The economic consequences of this fact - as scary as they are
foreseeable - are all but ignored by President Bush and Democratic challenger
John Kerry, who discuss just about everything but the biggest fiscal challenge
of modern times.

Yet whoever wins the 2004 race will become the first US president to confront
what sober-minded experts across the political spectrum describe as an impending
"fiscal catastrophe" lying right around the corner.

Astronomical federal debt, coming due as the Baby Boom generation collects
Medicare, Medicaid and Social Security, is enormous enough to swamp the promises
both candidates are making to voters, whether for tax cuts, health care, 40,000
more troops or anything else.

"Chilling" is the word US Comptroller General David Walker uses to describe the
budget outlook.

"The long-term budget projections are just horrifying", added Leonard Burman,
co-director of tax policy for the Urban Institute. "I've got four children and
it really disturbs me. I just think it's irresponsible what we're doing to them."

What these numbers portend are crippling tax increases on workers, slashed
benefits for retirees, gutted budgets for homeland security, highways, research
and everything else, and an economic decline or a financial collapse that
devastates the middle class, as happened recently in debt-strapped Argentina.
Eventually, analysts insist, someone - today's children or tomorrow's elderly or
both - will pay this debt.

Traditional budget measures used by politicians and the press give what Walker
and many others call a highly misleading view of the US debt. These focus on
publicly held debt already incurred, now at $4.5 trillion, or 10-year budget
forecasts like the one released last week by the Congressional Budget Office
showing a record $422 billion deficit this year and a $2.3 trillion 10- year
deficit.

'Fiscal gap' in the trillions

But these figures, worrisome enough, are deceptive because they ignore future
liabilities such as Social Security and Medicare payments to the Baby Boomers.
An array of government and private analysts put the actual US "fiscal gap",
which means all future receipts minus all future obligations, at $40 trillion
(Government Accountability Office) to $72 trillion (Social Security Board of
Trustees).

These are not sums, but present-value figures, heavily discounted to show in
today's dollars what it would cost to pay off the debt immediately. The
International Monetary Fund estimates the gap at $47 trillion, the Brookings
Institution at $60 trillion.

"To give you idea how big the problem is", said Laurence Kotlikoff, economics
chairman at Boston University, who has written extensively on the subject, to
close a $51 trillion fiscal gap, "you'd have to have an immediate and permanent
78 percent hike in the federal income tax".

These obligations are not imaginary. And unlike the 1980s and 1990s, economic
growth cannot bail out the government because the Baby Boom retirement is at
hand. Those born in 1946 will reach age 62 in 2008, allowing them to take early
retirement and receive Social Security benefits.

"It's a number that's so large that people find it implausible, and so they
don't think about it", said Alan Auerbach, a UC Berkeley economist who studies
the issue and consults for the Kerry campaign. "But it's based simply on the
projections we have for Social Security and Medicare. People aren't making these
numbers up."

A pathbreaking study by Jagadeesh Gokhale of the Federal Reserve Bank of
Cleveland and Kent Smetters, a former deputy assistant secretary at the Treasury
- commissioned by former Treasury Secretary Paul O'Neill - estimated a $44
trillion fiscal gap. It laid out a few painful options on
how to meet the liabilities:

- More than double the payroll tax, immediately and forever, from 15.3 percent
of wages to nearly 32 percent;

- Raise income taxes by two-thirds, immediately and forever;

- Cut Social Security and Medicare benefits by 45 percent, immediately and
forever;

- Or eliminate forever all discretionary spending, which includes the military,
homeland security, highways, courts, national parks and most of what the federal
government does outside of the transfer of payments to the elderly.

Such corrective actions grow more severe each year. Waiting just until 2008, the
end of the next presidency, would mean raising the payroll tax to 33.5 percent
instead of 32 percent, the study found.

Gokhale said that fresh numbers from the Medicare trustees show the fiscal gap
has since grown to $72 trillion, $10 trillion of that for Social Security and an
astonishing $62 trillion for Medicare, the government health care program for
the elderly.

"The long-term picture is pretty bad", Gokhale said.

Election's absent issue

These numbers are seldom discussed, least of all in the 2004 presidential race.
Ironically, as the Baby Boom retirement has neared - and the remedies grow more
painful - political discussion has faded. Gone is Ross Perot's anti-deficit
crusade. Gone is Newt Gingrich's call for Medicare restraint. Gone is Al Gore's
"lockbox" for the Social Security surplus.

Instead, Kerry and Bush promise only to halve the current deficit in four years
- "both (of them) relying on pretty imaginative accounting to get there" said
Burman - while promising more spending and more tax cuts.

Yet today's deficit is a tiny fraction of the government's actual liabilities,
which are so daunting they promise to make Bush's tax cuts a distant memory and
Kerry's health care plan a fantasy.

While Bush and Kerry propose to address parts of the problem, "the numbers don't
add up on either side", Walker said.

Medicare makes up the bulk of these liabilities, driven mainly by the expanding
elderly population and rapidly rising health costs. Social Security, more often
discussed as a looming problem, actually accounts for far less in future debt.

While Congress squabbles over whether the administration hid the new
prescription drug benefit's ten-year cost - pegged by the White House at $534
billion versus CBO's $395 billion - the actual liability incurred by the new
drug benefit is estimated at $8 trillion to $12 trillion.

Kerry and Democrats call the drug benefit inadequate. They would do little to
restrain Medicare costs other than allowing the importation of price-controlled
drugs from Canada.

Bush and Republicans added the drug benefit along with costly subsidies to
providers. Even optimists do not expect their modest market reforms to cut costs.

Promises, promises

Kerry has promised not to cut Social Security. "I will not cut benefits", he
said recently. "I will not raise the retirement age".

Democrats generally cite "trust fund" numbers that show Social Security - and
Medicare to a lesser extent - remaining solvent for decades, even though
government officials repeatedly call the numbers an accounting fiction. CBO
director Douglas Holzt-Eakin last week said the funds contain nothing but
"electronic chits" that measure government obligations to itself.

Bush proposes adding private accounts to Social Security for younger workers,
which could reduce future government obligations, but would do so by diverting a
portion of the payroll tax, adding $1 trillion to the short-term deficit. That
might have been feasible when Bush took office in 2000 facing a projected $5.6
trillion surplus, but the surplus is gone. Similar plans in Congress that
instead rely more on benefit cuts have gone nowhere.

"The country's absolutely broke, and both Bush and Kerry are being irresponsible
in not addressing this problem", Kotlikoff said. "This administration and
previous administrations have set us up for a major financial crisis on the
order of what Argentina experienced a couple of years ago".

If this sounds far-fetched, former Bush Treasury Undersecretary Peter Fisher and
former Clinton Treasury Secretary Robert Rubin both alluded to such a scenario
at a June budget forum in Washington.

"Having been involved in markets for a long, long time", Rubin said, "I can tell
you these things can change unexpectedly and without warning", referring to
potential financial market reactions to the US fiscal position.

Fisher warned of a "pivot point" when "the collective wisdom of bond traders
thinks that the deficit horizon has turned", adding, "Both Bob and I are nervous".

The world has seen fiscal imbalances of this sort before, in Asia and Russia in
the late 1990s and more recently in South America. Such financial panics can be
triggered by any number of events - a flight from Treasury bonds by the
foreigners who buy much of the US debt, for example - if investors' views of the
market, which are focused on the short term, suddenly change.

"If you look at financial crises, they occur seemingly overnight", said
Kotlikoff. "More and more pieces of straw drop on the camel's back, and all of a
sudden, the camel collapses ... Nobody knew exactly what day Argentina was going
to go south or exactly what day Russia was going to default. The timing is up
for grabs."

But early signs of a problem are now appearing, analysts said, starting with the
mounting deficits under Bush caused not just by the recession and terrorist
attacks, but also by enormous spending increases and tax cuts. The brief window
of surpluses that appeared during the late 1990s economic boom offered a chance
to address long-range liabilities, but those surpluses now are gone.

"Maybe the public doesn't want to hear it", Kotlikoff said. "Maybe politicians
think ... the American public can't understand the truth or hear the truth or
bear the truth. I think this is garbage. I think that people care about their
kids and grandchildren and need to know the
dangers facing them - and us."

E-mail Carolyn Lochhead at clochhead@xxxxxxxxxxxxxxxx Copyright 2004 SF Chronicle

http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2004/09/12/MNG2S8NOI21.DTL



Comment on this article by Michael Hudson:
------------------------------------------

If the point in this article is right, then the US Treasury bonds held by
foreign central banks will be worthless. On the balance sheet, foreign central
banks count Treasury-bond holdings as part of their foreign reserves. But these
are fictitious claims now. If governments had to do what corporations do - "mark
to market" - they would see that they get nothing for their exports.

Why work to export then?  Why not promote the domestic economy through internal
improvements and spending to reduce unemployment?

Michael Hudson (September 14 2004)


Please also see "The Fiscal Recklessness of the Bush Administration"
by Charley Reese, King Features Syndicate (September 20 2004)
http://www.lewrockwell.com/reese/reese118.html


Bill Totten     http://www.ashisuto.co.jp/english/