Previously at OB&B, I featured the book The Coming Generational Storm – an eye-opening read on the fiscal woes facing the federal government that the authors describe as “fiscal child abuse.” One of the co-authors, Laurence Kotlikoff, is an economics professor at Boston University and recently published a piece at Bloomberg that serves as a good update to the book: Stop the Fiscal War Against Our Children Now
The Congressional Budget Office just released its annual long-term fiscal forecast. It shows, after some simple calculations, that our government’s fiscal gap — the bill presumably being left to our children — has grown enormously over the past year.
The fiscal gap measures, in present value, the difference between all projected federal spending and future taxes. By including all spending on the same footing — whether official debt service, entitlement programs or discretionary government purchases — the fiscal gap makes no distinction between official and unofficial spending obligations, and properly so.
In fact, the government’s classification of obligations such as interest payments as official and others, such as Social Security payments, as unofficial is a labeling game with no basis whatsoever in economic theory. It’s a strategy politicians have used for decades to disguise the true nature of our country’s indebtedness.
How big is the fiscal gap? By my own calculations using the CBO data, it now stands at $211 trillion — a huge sum equaling 14 times the country’s economic output. To arrive at that figure, I assumed that annual noninterest spending, as well as taxes, would grow indefinitely by 2 percent a year beyond 2075, the point at which the CBO’s estimates end.
I strongly recommend reading the whole article, as well as reading The Coming Generational Storm. Understanding the the nature of our fiscal position is necessary for understanding the debate raging in Washington, as well as its effect on state and local governments. What America needs to get back on better footing is a growing economy that can bring in a larger amount of revenue for the government. Unfortunately, Washington hasn’t shown much leadership on that front, particularly the White House. It’s clear that the 2012 election, like the 2010 election before it, will be dominated by the economy and fiscal austerity. Only time will tell if we end this cycle of fiscal child abuse.