Pethokoukis, Economics, Taxes and Spending

The US fiscal gap: $205 trillion

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Economist Laurence Kotlikoff does an interesting calculation. He looks at the present value of all the promised government expenditures from now through, well, basically the end of time, including servicing the debt. Then he subtracts all the projected future taxes. The present value of the difference is a whopping $205 trillion. Kotlikoff:

This is 10.3 percent of the estimated  present value of all future US GDP. Stated differently, the United States needs to  either raise taxes or cut spending or engage in a combination of these policies by  an amount equal to 10.3 percent of annual GDP to close its fiscal gap.

Doing so via  taxes would require an immediate and permanent 57 percent increase in all federal taxes. Doing so via spending cuts (apart from servicing official debt) would require an immediate and permanent 37 percent reduction in spending. This startling and grave picture of America’s fiscal position could effectively constitute a declaration of bankruptcy. But no one on Pennsylvania Avenue or on Wall Street would openly declare the United States to be broke.

Laurence Kotlikoff

Laurence Kotlikoff

This calculation, which gives the US the same fiscal gap as Greece, is not without its critics. As reporter Derek Thompson has noted, there is a difference between “real past promises” such as our publicly held debt and “projected future promises” to pay entitlement benefits. You alter the first promise, and that’s a legit default. What’s more, those future projections are changing all the time depending on fuzzy future estimates of, say, potential GDP growth and healthcare cost inflation. Indeed, last year Kotlikoff’s estimate was $222 trillion. Kotlikoff offers a vigorous defense of his methodology in a Q&A with RealClearPolitics.

Update: Bloomberg’s Matthew Klein makes a good point on context:

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3 thoughts on “The US fiscal gap: $205 trillion

  1. Scary stuff, but we could run inflation higher, and “pay off” extant debt that way. If we had 7 percent inflation for 10 years, the national debt would be cut in half, and as for Medicare, we just have to adapt death panels, an excellent idea.

    Spending $250k to keep a carcass “alive” for a couple of weeks is not a good idea.

    And balance the federal budget.

  2. The debt is only a small part of the problem – the real villain is the promises for social security, Medicare, Medicaid, Obamacare, etc. Unfunded liabilities. Since government spending is already 40% of GDP, it must cut out 25% of its programs/promises. And forget about all the further socialist schemes, which are usually destructive of the economy or the culture.

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