The present value of future liabilities is $65.9 trillion, according to an article published by the St. Louis Fed a few weeks ago (“Is the USA Bankrupt?”). USA Today, still terrified by USA tomorrow, picked up on the doomsday theme soon afterwards (“What's the real federal deficit?”).
I promised to update my reaction to the USA-is-bankrupt assertion; I’d hoped to get a direct response to my fundamental question from one of the principals. Apparently, though, they are too busy to check their email boxes these days.
That’s okay. Turns out I found what I was looking for anyway: confirmation by the principals that their “present value of future liabilities” calculation leans heavily on the false assumption that future generations will have to find a way to rid themselves of their inherited Treasury securities; i.e., that they’ll need to find a way to reduce their debt-to-GDP ratio to zero percent.
You already know how I view that policy “imperative” if you’ve been here before. But in case you haven’t, here’s a summary: It’s horse apples. And I didn’t form that judgment out of thin air; a lot of experts have explained it to me over a period of years. Some of them are quoted at the bottom of this article—so be sure to read their comments instead of just taking my word for it.
Here’s what I’d been looking for. It’s a quote from page 3 of the definitive paper, Fiscal and Generational Imbalances: An Update:
The FI [Fiscal Imbalance] measure equals the current level of debt held by the public (representing past overspending) plus the present discounted value of future federal non-interest expenditures less the present discounted value of future federal receipts.
Translation: The big, scary number, $65.9 trillion, is today’s debt plus all future fiscal deficits. [Implied conundrum: To reduce it to zero, how high would tax rates have to go, and how much would government services have to be cut?]
But I guess I should have looked at the article’s title more closely: “Is the USA Bankrupt?”. See that question mark at the end? That apparently means the author is not committing to the “we’re-bankrupt-now” assertion, but merely wondering what the correct answer is for the real economy in which we live.
Well, I think I figured it out. The answer to the Are-we-bankrupt question is:
“Nope, definitely not. The wealthiest nation in history is not only not bankrupt, but the future is likely to be brighter than ever—if only we can shift the national debate to faith-in-the-future, away from fear-of-the-future.”
Let’s run a simple calculation. Assume that we and our kids and grandkids reject the policy of reducing the debt-to-GDP ratio to 0%—and instead we agree to a policy of reducing it to 60% from its current level of 65%. How? By implementing growth-enhancing policies that keep GDP-per-person growing just a little bit faster than debt-per-person grows.
[Sidebar: Wouldn’t it be refreshing to hear all those politicians and journalists start tossing out ideas about how to help the economy grow faster, instead of how to increase tax rates and reduce the quantity and quality of government services? Yeah, I know: Dream on, Steve.]
Anyway, here’s that simple calculation:
• Present value of future liabilities: $65.9 trillion(*)
• Policy target, ratio of debt to GDP: 60%
• Policy target, present value of future GDP: $110 trillion (=$65.9÷60%)
(* Varies inversely with the GDP growth rate.)
[Purists: click on the thumbnail below to see the fine print regarding “debt.”]
As I mentioned above: Lest you think I am a lone-ranger advocate of the “growth trumps deficits” argument, here’s a selection of quotes from people who, over the last fifteen years, have helped bring me to my current way of thinking.
Is the USA Bankrupt? Here’s what others have had to say about that idea.
• The notion that the debt incurred by current generations has somehow to be paid off eventually by future generations is a confusing, or confused, effort to use a mathematical principle of solvency where it does not apply.... there is no reason why the federal debt cannot continue to be rolled over and continue to grow, at least with the nation’s growing income.
—Robert Eisner, The Misunderstood Economy, p. 126-7• Kotlikoff fails to include in his intergenerational accounting the full value of all the governmental services received by each generation.
— Robert Eisner, The Misunderstood Economy, p. 126• ...he sees the liabilities of the federal government growing. But he can't see the tens of trillions of dollars of new assets emerging from these new industries that have been generated and are now the spearheads of global economic growth.
—George Gilder (1996, reacting to Pete Peterson’s similar alarm bells about the liabilities side of the balance sheet)• ...government cannot confine its scope to its own set of books, to its own receipts, expenditures, assets, and liabilities... The government must look at the impacts of its actions on the broader society, what economists call “externalities,” which cannot be easily reduced to bookkeeping entries. For example, federal spending to finance programs to reduce teenage smoking might well be more than repaid by reduction in the future costs of health care.
—Francis X. Cavanaugh, The Truth About the National Debt, p. 33• Ultimately, of course, the assets represented by the volume of Treasury securities outstanding... will be passed on to each new generation. Old people die, and they can’t take it with them. Yet the myth persists that by passing on the national debt we are borrowing from the future.
—Francis X. Cavanaugh, The Truth About the National Debt, p. 19• By itself, faster growth could resolve all of the budget difficulties associated with the aging of the Baby Boom generation, and still leave ample resources for dealing with any number of other pressing social problems.
—Paul Romer (2000)• Before the middle of this century, the growth rates of our technology... will be so steep as to appear essentially vertical. From a strictly mathematical perspective, the growth rates will still be finite but so extreme that the changes they bring about will appear to rupture the fabric of human history.
—Ray Kurzweil, The Singularity is Near, p.9
That’s a sampling of the opposing view (i.e., that the USA is prosperous, not bankrupt). Too bad that side of the argument rarely if ever makes it into the mainstream press, isn’t it? Kinda makes one wonder whether there’s some kind of hidden agenda behind those doomsday stories—even when the St.Louis Federal Reserve Bank chooses to print them—doesn’t it?
