No 61 Posted by fw, September 08, 2010
In the context of my 6-part transcription of the documentary Overdose: The Next Financial Crisis, which nailed the “The solution is the problem” epithet to the door of the White House, it was no surprise to see Obama politicking in Ohio this week where he steamrollered out more of the same tried and failed proposals to re-ignite a sputtering recovery — another $50 billion for U.S. roads, rails and airports.
Unwilling to let this Obamanomics’ moment pass without critical comment, I Googled around and found an additional authoritative voice sounding the alarm for us – Professor Larry Kotlikoff, professor of economics at Boston University, believes the U.S. needs to start cutting spending immediately or face bankruptcy.
Following is Part 1 of a two-part transcription of a 10-minute interview with Professor Kotlikoff, which was broadcast on September 6 on RT, a Russian-based TV network. The broadcast caption is: US bankruptcy, fiscal child abuse and six-decade Ponzi scheme.
RT’s Marina Portnaya (MP) interviewed Professor Larry Kotlikoff (LK).
MP — RT is sitting down with Larry Kotlikoff, professor of economics at Boston University. Professor Kotlikoff, thank you very much for sitting down to speak with me.
LK – It’s my pleasure.
MP – Let’s begin with your estimation of the economic situation in the United States. You have come out and said that the U.S. is bankrupt, in far worse fiscal shape than Greece. That is a pretty bold statement to make. Why so?
LK – Well, it’s based on data from the Congressional Budget Office. Also the IMF (International Monetary Fund) has produced recently similar kinds of projections. If you really look at all the bills the government has due for the U.S. – well, we have to pay lots of money for Social Security and Medicare, which is health care for the older people and Medicaid. And we also have defence spending obligations into the future. So all these projected bills really represent a form of debt. And they’re the unofficial debt or the implicit debt and they’re huge; they’re really high.
And the official debt is actually relatively small. As a share of our output, for example, it’s only about 70 percent or so – 60, 70 percent. What we do here is compare all this spending from now through time and all the taxes that are going to be collected. And the spending includes paying off the official debt, though time. And that difference [between the spending and the taxes collected] is called the fiscal gap. And that fiscal gap is about $202 trillion based on the Congressional Budget Office’s projections. And that’s just enormous. It would require immediately and permanently doubling all our taxes – individual income taxes, corporate income taxes, payroll taxes – all these taxes would have to be doubled immediately and permanently to pay for this spending. And that’s really impossible. So we have to cut the spending. And when you cut spending that you promised to make, you’re really reneging on an obligation. So that’s really the definition of “bankruptcy.”
MP – And one of those promises includes, according to you, Social Security, Medicare and Medicaid. You say that Social Security has played a central role – and I’m quoting you – “in a massive six-decade Ponzi scheme known as the U.S. fiscal policy.” Now, why has it been a Ponzi scheme?
LK – Well, what we’ve been doing – and other countries have been doing this too – is you keep taking from young people more and more resources and you give them to old people. And you tell the young people: “Don’t worry, when you become old, you’ll have your turn to get back what you gave us plus a lot more because we’ll go after the next generation to pay you.” And so we are, in effect, feeding off our children. It’s fiscal childhood abuse and we’re doing it through all these different programs – Medicare, Medicaid, Social Security — borrowing to pay for defence spending. So, it’s changing the tax structure so the young have a bigger burden and the old are given tax breaks.
But the baby boomers were born between 1946 and 1964, so it’s going to take a while for them all to retire. But when they all do retire they’re going to be paid on average about 110 percent of per capita GDP. So you’re going to get paid more in Social Security, Medicare and Medicaid benefits — just those three benefits on average — than the entire output per person in the economy. And if you multiply the number of baby boomers that will be alive at that point, times that kind of a payment, it becomes about $4 trillion a year in today’s dollars. So, if you think about $4 trillion every year just for those bills, you get a sense of why our fiscal gap is so enormous.
The demographics are not the worst of developed countries. The U.S. is still going to be relatively young compared to countries in Europe, compared to Russia, even compared to China. But our benefit levels are so high, and they continue to grow much more rapidly than our output per person growth, and the combination of the two is lethal. So we have a fiscal policy that’s not sustainable and that is going to destroy the American dream.
Now what could happen in four years is that – or even in two days – is that the international lenders to this country realize that this country really can’t cover these bills. And they could stop buying our Treasury bonds and our Treasury bills and they could send our interest rates sky high and our dollar could come crashing down. We could have an international financial crisis overnight that could lead to the government having to print even more money. The government is now printing lots of dollars and that could lead to inflation and you could end up with a situation like Russia had in the late 90s which is hyperinflation. So that’s the really scary part of this. When countries can’t pay their bills they start trying to pay them by printing money, which is not really a solution. So we have to get control of this problem.
End of part 1 of 2
For more information
Visit Kotlikoff’s website where you will find his articles and rave reviews of his latest book, which proposes a fix to the U.S. “financial plague” — Jimmy Stewart is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking.
Kotlikoff is a hot ticket right now. He’s all over the web, appearing on talk shows and in the pages of the leading online alternative press and the blogosphere. Just Google his name and stand back.