Category Archives: government debt crisis

Mind the Gap?

Posted on by

Larry Kotlikoff writes,

The fiscal gap is a comprehensive measure of our government’s indebtedness. It is defined as the present value of all projected future expenditures, including servicing outstanding official federal debt, less the present value of all projected future tax and other receipts, including income accruing from the government’s current ownership of financial assets.

He wants to see CBO, OMB, and GAO all report on this measure.

I think I would prefer to see accrual accounting. That is, report the increase in government obligations each year. But the fiscal gap idea might be helpful.

John Cochrane on Valuing Government Pensions

Posted on by

He writes,

A good response occurred to me, to those cited by Josh who want to argue that underfunding is a mere $1 trillion. OK, let’s issue the extra $1 trillion of Federal debt. Put it in with the pension assets. Now, convert the pensions entirely to defined-contribution. Give the employees and pensioners their money now, in IRA or 401(k) form. If indeed the pensions are “funded,” then the pensioners are just as well off as if they had the existing pensions. (This might even be a tricky way for states to legally cut the value of their pension promises)

I suspect the other side would not take this deal. Well, tell us how much money you think the pension promises really are worth — how much money we have to give pensioners today, to invest just as the pension plans would, to make them whole. Hmm, I think we’ll end up a lot closer to Josh’s numbers.

That is, one way to value government pensions is to ask workers how much they would be willing to take in the form of an individual retirement account to give up their pensions. Of course, if the government workers believe that their pensions are at risk, they might take a low figure. But if we take that possibility off the table, then workers are likely to demand a lot more money than the current stated value of the pension obligations.

I think others have pointed this out before, but when the subject of Social Security privatization comes up, aggressive assumptions about stock market returns seem reasonable to those on the Right and crazy to those on the Left. But their positions reverse when the subject changes to state and local pension funding. My own preference is to make conservative assumptions about stock market returns for both discussions.

Tyler Cowen on Wealth Taxes

Posted on by

He writes,

The coming battles over wealth taxation may prove especially bitter and polarizing. Most wealth has already been subjected to income and other taxes, perhaps multiple times. It doesn’t seem fair to the holders of that wealth to suddenly pay additional taxes on assets that they thought were in the clear, and such taxes would signal that previous policy has failed.

Read the whole thing. Almost five years ago, I wrote,

That leaves the option of declaring a national emergency and enacting what is known as a wealth tax or a capital levy. The idea is you undertake a one-time confiscation of assets and promise never to do it again. You hope that this has zero adverse incentive effects but brings in a boatload of money.

Taking Care of Elderly Parents

Posted on by

Timothy Taylor writes,

Some other high-income countries have government programs to pay for long-term care. Not surprisingly, they spend a substantially greater share of GDP on long-term than does the U.S. In any event, the long-term U.S. budget picture is grim enough that adding another entitlement for the elderly isn’t likely.

As usual, he has useful links, primarily a CBO study.

I have a vision of the year 2025 in which the difference between the rich and everyone else is that the rich can afford to send their children to private schools, pay full fare for the children’s college education, and pay for their own parents’ long-term care. Everyone else will depend on public schools, community colleges and scholarships, and government-provided nursing homes. Otherwise, the lifestyles of the rich and the non-rich will look pretty similar.

Fertility to Increase?

Posted on by

That is the prediction of Jason Collins.

As those with higher fertility are selected for, the “high-fertility” genotypes are expected to come to dominate the population, causing the fertility rate to return to its pre-shock level. We show that even with relatively low levels of genetically based variation in fertility, there can be a rapid return to a high-fertility state, with recovery to above-replacement levels usually occurring within a few generations. In the longer term, this implies that the proportion of elderly in the population will be lower than projected, reducing the fiscal burden of ageing on developed world governments.

James Hamilton on the Government (off-) Balance Sheet, and me on Scenario Analysis

Posted on by

He writes,

Adding all the offbalance-sheet liabilities together, I calculate total federal off-balance-sheet commitments came to $70.1 T as of 2012, or about 6 times the size of the on-balance-sheet debt. In other words, the budget impact associated with an aging population and other challenges could turn out to have much more significant fiscal consequences than even the mountain of on-balance-sheet debt already accumulated.

When Hamilton presented this paper a several weeks ago at Cato, Bob Hall and I had exactly the same reaction. The off-balance-sheet liabilities are contingent liabilities. They often take the form of out-of-the-money options. Think of the Pension Benefit Guaranty Corporation. In some states of the world, it will lose a lot of money, and in other states it will break even or make a profit. To report just one number seems uninformative. The same holds for the government’s portfolio and guarantees of mortgages and mortgage-backed securities. The problem cries out for scenario analysis, in which you present possible values for the key drivers (such as interest rates) and possible outcomes (for, say, the ten-year budget outlook).

This led to a testy exchange between me and Douglas Holtz-Eakin, who insisted that Congress wants a single number. It so happened that a couple of weeks ago I was scheduled to give an informal talk at the Congressional Budget Office (which Holtz-Eakin once headed) on a topic of my choice. I chose the topic of scenario analysis.

I said that for the purpose of my talk, we would assume that you could talk to Congress like adults. That is, anyone in a position of responsibility at a large financial corporation could understand scenario analysis. If our elected representatives, who oversee trillions of dollars, cannot handle it, then we have some really big problems. (I think, in fact, that this is the case. As an aside, I would love to have someone who thinks government is not too big explain to me why he is not bothered by the fact that you cannot have an adult conversation with the people who are in charge of it.)

So, assuming that you would not be thrown out of the room for engaging in scenario analysis, the question becomes how one should do it. I thought that the more outspoken people at CBO were a bit defensive. They said that in the case of macroeconomic forecasting, for example, they had white papers that considered many scenarios and that they reported a range of possibilities based on those scenarios. My reply was that this was not a particularly helpful way to communicate scenario analysis–it just creates a sort of smeared picture. Instead, for example, I suggested that in textbook macro terms you could look at the effect of fiscal stimulus under a scenario in which the Fed holds interest rates constant, a scenario in which the Fed uses a Taylor rule, and a scenario under which the Fed targets nominal GDP. Showing those three scenarios probably would be educational.

Returning to off-balance sheet liabilities, key drivers include interest rates, demographics, and the impact of medical technology and practice. I am particularly interested in seeing the effects of interest rates, because I suspect that a rise in interest rates would adversely affect the budget outlook for many of these off-balance-sheet items.

Andrew Biggs on Social Security

Posted on by

He writes,

A Social Security reform that addressed the program’s structural and fiscal problems would begin by transforming today’s complex benefit formula into a two-part system consisting of a savings account and a flat universal benefit. Such a system could be implemented gradually — applying only to new workers as they entered the work force, and so very incrementally and slowly replacing today’s system without breaking any promises already made to working Americans.

First, everyone in this new system — rich and poor alike — would be given an opportunity and a strong incentive to save for retirement. Each worker would be enrolled automatically in an employer-sponsored retirement account such as a 401(k) or 403(b). Workers would contribute at least 1.5% of pay, matched dollar for dollar by their employers. Universal retirement savings accounts would allow Social Security to focus its efforts: If everyone saved as they should for retirement, Social Security could concentrate its resources on low earners who needed the program the most.

Read the whole thing. To me, it comes across as centrist. But he would described as a nutter by most of the people who I would describe as nutters.

The Baby Boom and Entitlements

Posted on by

Stephen C. Goss testified about the rise in the disability rolls,

Demographic changes, principally the drop in the birth rate after the baby boom, have dramatically changed the age distribution of the population. This change has increased the cost of the DI program as a percent of taxable payroll (and as a percent of GDP) over the past 20 years in much the same way that it will raise OASI and Medicare costs over the next 20 years. Disability insured rates and incidence rates have increased substantially for women, further contributing to higher DI cost. However, all of these trends have stabilized or are expected to do so in the future.

For progressives, this is good news and bad news. The good news is that this analysis suggests that the rise in disability reflects the aging of Baby Boomers, rather than what Casey Mulligan calls the redistribution recession.

The bad news is that the Baby Boom really does have predictable adverse effects on the entitlements budget. As the Boomers hit the prime age for disability, up went the disability rolls. Coming next? The Baby Boomers reaching the age of eligibility for retirement benefits and for Medicare. As Andrew Biggs points out, this is in fact the main driver of increased Medicare spending going forward.

Hamilton, Hooper, Greenlaw, Mishkin

Posted on by

I thought I linked to their paper before, but I cannot find the post.*

we calculate the level of the primary government surplus that would be necessary to keep debt from continually growing as a percentage of GDP. We argue that if this required surplus is sufficiently far from a country’s historical experience and politically plausible levels, the government will begin to pay a premium to international lenders as compensation for default or inflation risk.

This sounds a lot like my Guessing the Trigger Point paper, in which I say that a key variable is the “pain threshold,” which is my term for “politically plausible levels” of the required fiscal adjustment.

I heard Jim present a different paper, on estimating the off-balance-sheet liabilities of the U.S. government, at a recent Cato event. I questioned the usefulness of an exercise that tries to come up with a single number, when so many of these liabilities are contingent (the government has written a lot of put options). Douglas Holtz-Eakin shot back that policy makers cannot handle multiple possibilities. They need one number.

Fine, then. If policy makers cannot handle something that is essential to financial management in any public corporation in America, tell me why we want them to manage trillions of dollars?

*Ah, here is where I linked before.