Lawrence Kotlikoff is out with an angry column at Yahoo. The premise is that Paul Krugman and others are spreading "dangerous fiscal fables" and that the American debt situation is absolutely dire. At one point he claims that our policies amount to "fiscal child abuse plain and simple".
Kotlikoff's main argument is that the way we measure the debt is wrong, and that instead of just looking at what we owe on our government bonds, we should consider the entire "fiscal gap"--all of our future fiscal commitments based on current law--as the relevant measure. According to Kotlikoff, the U.S. fiscal gap is $222 trillion.
This strikes me as a silly way to think about policy. Kotlikoff says there is no difference between the short run and the long run in terms of budget policy, but this is clearly wrong. Budget projections are based on underlying assumptions about what the future will look like. When the CBO creates their fiscal projections they make a bunch of assumptions about things like economic growth, health care costs, etc. They also assume no relevant policy changes. These assumptions are less likely to be accurate the further into the future you project, for obvious reasons. A hypothetical 75 year CBO budget projection from 1800 would have missed the Louisiana Purchase, the War of 1812, The Civil War, the end of slavery, and the industrial revolution in America. The CBO projection from 1900 would have missed the Great Depression,two world wars, and the cold war. The CBO projection from 1960 would have missed the entrance of women into the workplace, the end of the cold war, globalization, and the great recession. As time passes, a bunch of important stuff happens that isn't foreseeable 50 years in advance.
Kotlikoff feels like we should aim to balance the budget on the infinite horizon. But the preceding paragraph should reveal the ridiculousness of this exercise. Things change. Maybe the coming cyber war with China will require us to divert most of resources to computer hacking. Maybe the singularity will arrive. Maybe economic growth will stop entirely. Maybe we will have cures for diseases and less people will be sick. Maybe we will reform our immigration policy to allow more young people to move here. Who knows? The point being that what really matters isn't how much money we say our government is going to transfer from working people to retired people in 2080, but whether the above things--or a bunch of things that we haven't even thought of--will happen.
The crazy thing is that from a certain perspective Krugman and Kotlikoff basically agree. Kotlikoff is essentially arguing that the current budget deficit is pretty trivial and what really matters is paying for health care for seniors in 2030. When you argue that the relevant fiscal number is $222 trillion, you are basically saying that the $845 billion deficit for fiscal year 2013 isn't really that important in the grand scheme of things. This is what Krugman thinks! Which is why he endorses a temporary fiscal stimulus to boost output and get us back to full employment.
The question of future health care costs is important, and is something we will need to address, but thinking of it purely in terms of budgets totally misses the issue. Raising the medicare age just moves the costs from the government to private citizens, and effectively raises them, because as Steve Brill's epic health-care piece in Time magazine demonstrated, health care is a lot cheaper when the government uses monopsony power to bargain it down. The health care challenge is to figure out how to reduce these costs even further. According to the CBO, health care inflation is slowing. What else can we do to reduce costs? Give visas to doctors from other countries who are willing to treat the elderly on the cheap? Increase the scope of practice authority for nurse practitioners? Death Panels?
The point is that health care policy, and budget policy generally, aren't about making CBO lines match up, but about economic growth, reducing costs, and moral questions about how we distribute resources within a society.
Kotlikoff also claims that hyperinflation is on the way. This is something he has been saying for a the last few years despite inflation continuing to come in at below the Fed's 2% target. But if he is really concerned about "fiscal child abuse" than he should favor inflation because it redistributes money from creditors/savers (mostly the elderly) to debtors (mostly young people). He doesn't seem to see it this way, though.
Study my Letter on Diana@Philosophyinaction.com.
ReplyDeleteSTOP LYING TO YOUR READERS, ALREADY!
Stop referring to the Crazy, Lying, Stupid, Crooked, Con Artist, politicians as "US"- THEY AREN'T US- WE AREN'T THEM! I've written to Prof. K. & Krugman already. You're all full of you- know- what!
Stop referring to the politicians' Debts- which are just that- THEIRS- as the "National Debt","Public Debts", the "US Debt", "Countries' Debts", "States' Debts", "Counties' Debts", "Cities' Debts",etc. Your claim that LK admits that the current ANNUAL budget deficit (which you claim is about $845 Billion) is Trivial is RIDICULOUS. LK has stated that what he calls the "National Debt" is going up about $1 TRILLION A MONTH.
The so-called "federal government" is not only Bankrupt, & Head- Over- Heels In Debt, It's Operating Way In The Red, & It Has A Huge, & Increasing, Budget Deficit. There's virtually zero $ for anything whatsoever.
(To find My Letter, try searching for The Crazy In My Inbox, on D's Blog.)
What you've done is create a straw man out of Kotlikoff's work, then resort to to name calling to knock down the straw man as "silly" and "crazy." We all acknowledge there is inexactitude with the $222T figure Kotlikoff arrives at, but your attempt to dismiss him by saying his projections are off does not diminish the value of his work, it is very intriguing. A blogger knocking down a straw man with name calling, not so intriguing.
ReplyDeleteDon't get me wrong. I am not accusing you of deliberately creating a straw man, but it is what you did, perhaps inadvertently.
Your idea that we cannot see into the future may have held weight once, but not now. We simply have to look at the Southern European nations to see proof that deficits financed by borrowing cannot be perpetuated into infinity. You claim we cannot be sure projections will always be accurate. You've stated the obvious, but you have no proof that projections are always too pessimistic. It is possible that projections will be too good or bad, therefore, prudence mandates that we have a fiscal regime that is sustainable, not one that is unsustainable, but then hope for some unforeseen robot revolution to bail us out.
If we follow your argument, that we must live for today because the future in unknowable, then we would be led to the obvious need to balance the budget immediately and every year, no matter how draconian. Looking at the real world sees the flaw in that idea. E.g.- individual's take out mortgages. They take out a mortgage because they foresee future income, but they do not take out a mortgage with the intention of leaving it for their grandchildren to pay back. Kotlikoff's approach is a more logical way to deal with that reality.
Furthermore, be very careful about using popular media, instead of scholarly journals, as references. Using Time magazine as a defense of the monopsony efficiency of govt. health care is easily knocked down. This editorial in the Los Angeles Times is a single example of the greater _inefficiency_ when the govt. enters into healthcare: http://www.latimes.com/news/opinion/commentary/la-oe-kellermann-medicare-drug-costs-20130329,0,6694807.story
Better luck next time. Joseph
Hey Joseph,
ReplyDeleteI appreciate you taking the time to read and comment. Your point is well taken that name calling isn't a substitute for reasoned argument. I adopted a tone that I believe was far less name cally than the Kotlikoff post I linked to, so I don't think it was completely out of line.
I also disagree that I made a straw man of Kotlikoff's work. I see his basic argument as being that the right way to think about public policy is to budget out all of the U.S. government's projected future outlays and subtract all of its projected future revenue over an infinite horizon and try to make that number equal "0". I think this approach leads him to overstate the extent of our fiscal troubles, call for drastic policy changes, and not prescribe remedies that address our actual future policy challenges.
The problems in Southern Europe are completely inapplicable, Italy is hovering around a primary surplus and Spain had a good budget situation before the crash. These countries struggle because they don't control their own currency and the ECB keeps monetary policy far too tight. Fully developed, stable countries, that borrow in their own currency (Japan, UK) don't suffer the same sorts of problems.
I don't think we should only think about today. My point is that the future gets pretty hazy in a hurry. And since the main driver of future deficits is healthcare for the elderly, the policy challenge (as I see it) is to try bring down the price of healthcare or to adjust the ratio of elderly to the young through immigration. Cutting health care entitlements may be part of this solution, but thinking only in terms of budgets, leads to an over-reliance on this solution.
As you point out, the budget situation could be way worse in 70 years. This is true. But its also why current budget projections 75 years out aren't helpful. If anything we should try to address challenges that are relatively foreseeable (health care inflation + a demographic situation that makes the current structure of health care entitlements unsustainable).
Your article seems to suggest that we could use monopsony power to bring down costs but just arent doing it. They should start.