The Ongoing Epidemic of Fiscal Child Abuse

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.

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4 Responses to The Ongoing Epidemic of Fiscal Child Abuse

  1. roopost says:

    Debt is on my mind too these days. The article you cite is interesting and you are quite right in suggesting it is worth the read. What is also interesting are the comments that follow. Almost instantly, respondents caught onto the notion that taxes would need to be raised to ’64’% rather than ‘by’ 64% which if my arithmetic is close to accurate would mean someone being taxed at 35% would pay an additional 22.5% tax. This would amount to a total of about 57.4% in total income tax. As time goes on the responses get somewhat more ‘cryptic’.

    However, what seems to be true in the consensus of comments is that ‘something’ needs to be done. Raising taxes is that something. This notion of a zero sum gain in the contributions made by taxpayers to the management of the nation is silly and impractical. Worse, the intractability of the two sides of American politics causes more damage to an already difficult situation.

    Kind regards,

    • Drae says:

      Roo – I agree the two parties are causing more damage. Capitalism is more than low taxes and we can’t fix the fiscal imbalances through spending cuts alone. But to think there is nowhere where government can or ought to cut back is likewise wrong-headed. Before the 2010 election, there was a poll that showed the majority of Americans thought neither party had any solutions or answers to our problems. I still feel that way as these budget talks continue.

      • roopost says:

        If you are right, and neither party has any solutions then we are, all of us, in for some rough times ahead. I shall keep my optimism dusted off however, and anticipate a sensible result in 2012 as evidenced by less extremity and more synergy.

        Kind regards,

  2. Drae says:

    Roo – just because the parties don’t seem to have solutions now doesn’t mean they won’t or that there aren’t individuals with ideas worth considering. I’m still optimistic myself so we’ll see what happens.

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