Who do you trust, Kotlikoff or the market?

Larry Kotlikoff is an expert on the US budget.  He pioneered the accounting system that takes into account not just legal liabilities such as Treasury debt, but also entitlement liabilities such as Social Security.  Here’s a recent article discussing his views:

The U.S. has a $210 trillion “fiscal gap” and “may well be in worse fiscal shape than any developed country, including Greece,” Boston University economist Laurence Kotlikoff toldmembers of the Senate Budget Committee in written and oral testimony on Feb. 25.

“The first point I want to get across is that our nation is broke,” Kotlikoff testified. “Our nation’s broke, and it’s not broke in 75 years or 50 years or 25 years or 10 years. It’s broke today.

“Indeed, it may well be in worse fiscal shape than any developed country, including Greece,” he said.

I do understand his point, but I’ve never quite bought the broader argument.  The bond market is clearly not concerned about US Treasury debt, whereas investors are rightly concerned about Greek debt—indeed Greece has already defaulted on a portion of its sovereign debt, so it is 100% “broke.”

I think the reason that markets are not too concerned about the US fiscal situation is that the entitlement liabilities can be adjusted at the discretion of the US government. For instance, in 1983 Congress scaled back future Social Security benefits, and various court cases have established that they have the right to do this.  Government spending is determined by the whims of Congress; if we have a shortfall in the future, we’ll spend less or tax more.

In contrast, corporations are assumed to be already maximizing profits.  So if they are unable to service their debt there is no obvious solution.  But if the Federal government spends 22% of GDP and taxes 19% of GDP, there is an obvious solution, indeed two obvious solutions, either raise taxes or reduce spending.

Does the Laffer curve argument factor in here?  After all, I’ve claimed that the US government may not be able to raise much more money than they are currently raising, as higher taxes would reduce GDP.  That’s why Europe raises about as much tax revenue as the US (per capita) despite higher rates.  The higher rates cause less work, which reduces GDP.  But that actually doesn’t matter for this argument, because if you raise tax revenue from 19% of GDP to 22% of GDP, while keeping spending at 22% of GDP, then you’ve balanced the budget, even if you don’t raise an extra dime of revenue from the higher taxes.

That doesn’t mean that the US does not face severe fiscal challenges, just that it’s unlikely that it would lead to the US defaulting, as we are not “broke.”

The market test also explains why I disagree with Tyler Cowen’s intuition on the effect of QE at negative interest rates.  The markets view QE as expansionary.  The market monetarist view is the market view. Whenever the market changes its view and becomes more Keynesian, or MMTist, or Austrian, or more new classical, I’ll change as well.

It’s hard to keep up with all the good stuff that people send me:

Travis V pointed me to a very good Noah Smith critique of Robert Lucas.

Saturos and ChrisA pointed me to a very good cartoon explaining how Janet Yellen could boost velocity.

Marcus Nunes pointed me to a post on the 1933 dollar devaluation, which is pretty good overall but contains two serious errors.  The author (who I believe is Eric Rauchway) repeatedly says FDR raised the value of the dollar in 1933, when he did exactly the opposite.  Perhaps he meant the price of gold increased.  He also suggests that Keynes approved of the destination of FDR’s policy.  That’s not quite right, as Keynes thought FDR overshot by about 20%.  He approved of the direction of change, and was relieved when FDR finally stopped the devaluation.  The policy was Irving Fisher’s, not Keynes’s.

I have a new post at Econlog.  I can already see that people misinterpreted the post.



67 Responses to “Who do you trust, Kotlikoff or the market?”

  1. Gravatar of Kevin Donoghue Kevin Donoghue
    11. March 2015 at 09:00

    Eric Rauchway: “At the end of 1933, Roosevelt talked up the dollar in value, stabilizing it in January 1934….”

    That sounds right, judging by the dollar-sterling figure in Eichengreen’s Golden Fetters. Granted that was after talking it down in a big way.

  2. Gravatar of Njnnja Njnnja
    11. March 2015 at 09:15

    I hate it when people argue over semantics, but I’m going to do it here (sorry). The US is “broke” by a pretty reasonable definition of the word, even if we aren’t Greece. “Broke” shouldn’t only refer to your capacity to make timely interest and principal payments on outstanding debt obligations, regardless of what Moody’s and S&P say. It’s not about whether you can make some future cuts to avoid bankruptcy. It’s about whether or not you are, well, “broke.”

    For example, someone who is forced to sell a late model Mercedes and trade it in for an old Honda, who sells their McMansion and downsizes to a smaller house, and tells their kids that even though they hoped to send them to a nice private school for college but now are going to have to go to State U instead, is someone who is “broke.” Even if they don’t actually miss any payments or file for Chapter 7 bankruptcy.

    If you make promises and take on commitments that will cost $X, and are forced to change those commitments because you won’t have enough money to pay all of $X, then you are broke. If your hand is forced, you are broke. And even worse, the history of what happens to debtors whose hand is forced is really bad. Even if, in theory, an orderly liquidation of assets will satisfy all (or even most) creditors, once the debtor is forced to do something to fix his situation, an orderly liquidation is not always possible. When markets sense desperation, it is very difficult to predict what will happen.

    If the US makes well-planned fiscal adjustments gradually, over time, then we can probably dig ourselves out of this hole without much problem. But if we don’t make any changes until those changes are forced upon us, I don’t think anyone can say with great confidence how the bond market will deal with it. Even if the tax increases and cuts to government spending are sufficient to make bondholders entirely whole, there is a non-zero probability that they get skittish and spike yields anyways.

    The reason markets don’t worry about this is that they honestly don’t think that far ahead.

    Related is Hemmingway’s answer to the question “How did you go bankrupt?”

    Two ways. Gradually, then suddenly.


  3. Gravatar of Doug M Doug M
    11. March 2015 at 09:22

    While I agree with you that the Government is not broke… If you cannot balance the budget when you are 5 years into an expansion and near full employment, then you are never going to do it.

    Now is the time we should be shooting for balanced.

    I have a completely unrelated question on monetary policy… I would love it if you could pick this up in a future post…

    The news and the market seems to be focused on “lift-off” the date of the first raise in interest rates from the Fed. Is this at all relevant? Do rates matter?

    Traditionally, when the Fed wanted to tighten the money supply, they sold bonds, and withdrew reserves from the banking system. Banks needed to make reserve requirements and would borrow money, pushing up the short-term interest rate. Tighter money causes a higher interest rate.

    Today, when the Fed raises rates, there are piles of excess reserves. The Fed will not buy securities and will not reduce the money base. What they will do is raise the rate they pay on excess reserves. Does actually do anything to Money supply? Does a higher interest rate cause tighter money?

  4. Gravatar of bill bill
    11. March 2015 at 09:40

    Using Kotlikoff logic, a 40 year old with $3,000,000 in the bank is broke because the NPV of his living expenses over the remainder of his life exceeds $3,000,000. If the US ran a budget deficit of 3% per year for the next 100 years and NGDP grows at a rate of 3.9% each year, total debt as a % of GDP (real and nominal) steadily falls. I’d prefer a balanced budget, but small deficits are not a major problem.

  5. Gravatar of TallDave TallDave
    11. March 2015 at 09:59

    Reminiscent of the “government shutdown” where Democrats were screaming that the government was going to default, but the reality was that Treasury wouldn’t miss any interest payments unless Obama actually ordered them to default (CRS had already ruled they could prioritize debt payments). The markets shrugged.

    The markets believe the United States will cut spending rather than repudiate its debt or try to print our way out. Now, should we elect an American version of Syriza, obviously that could change, but right now the markets are looking at the American electorate and saying “we’re not worried.”

    There’s another interesting facet to this though, which is that the Fed could right now conceivably retire most of the debt without triggering inflation, and maybe even pile up a cushion against the future SS debt. It’s not clear how much credibility they can sustain, but right now it seems to be a lot.

  6. Gravatar of Aidan Aidan
    11. March 2015 at 10:07

    Njnnjas’ definition of broke is a tautology and pretty much the perfect example of why comparing a household budget with the federal government is useless.

    Kotlikoff has been declaring the US broke and bankrupt for years now. At no point in the last few years has the market indicated that they agree, because it would be insane and irrational for markets to behave as though the federal government is presently incapable of servicing its debts. It’s a normative view of the federal budget that he’s been able to convince him is descriptive view. As Scott said a few years ago in a post about Kotlikoff’s crank views on inflation, “when the markets tell you that your theory is wrong, believe the markets, don’t believe your theory.”

  7. Gravatar of foosion foosion
    11. March 2015 at 10:09

    Calculations of the deficit into the infinite future are ridiculous. 5 or 10 year forecasts are hard enough.

    Kotlikoff’s main predicted drivers are Social Security and health care spending (Medicare, Medicaid, etc.) Social Security is off budget and funding issues would essentially be solved by removing the cap on Social Security taxes (politically very popular, but not popular with those in charge). If healthcare spending was brought down to the average cost in countries with better healthcare systems than the US, we wouldn’t have budget problems.

    Dean Baker has a rather nice takedown of Kotlikoff at http://www.cepr.net/index.php/blogs/beat-the-press/larry-kotlikoff-tells-us-why-we-should-not-use-infinite-horizon-budget-accounting

    The Fed not raising interest rates would help a lot. A stronger economy would mean more tax revenue and lower spending on various safety net programs. Plus of course it would mean the govt paying less to borrow.

  8. Gravatar of Britonomist Britonomist
    11. March 2015 at 11:04

    He has been saying this is the same old nonsense for years, and it was addressed by Dean Baker and Krugman last year:



  9. Gravatar of BC BC
    11. March 2015 at 11:22

    “I think the reason that markets are not too concerned about the US fiscal situation is that the entitlement liabilities can be adjusted at the discretion of the US government.”

    Another way of saying this is that people don’t expect to receive the entitlements that current law promises. But, if that’s the case, then trying to maintain entitlements at that level would actually deliver an unexpected windfall to recipients and cutting entitlement benefits wouldn’t actually break any implicit promises. The cut is already built into market expectations.

    So, which is it: (1) are people planning for and expecting entitlement reforms as the markets imply or (2) are those unfunded liabilities like true liabilities as Kotlikoff claims?

  10. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. March 2015 at 11:28

    I don’t really understand the criticism of Kotlikoff here. I believe that he is simply saying “accrued liabilities exceed current and projected revenues”, and by a wide margin. That’s indisputable and it is well worth documenting. Besides, it is a pretty good definition of “broke”. Why is Kotlikoff on this bandwagon? Because he is saying the same thing as Scott—only Scott is saying either taxes *will* increase or spending “will” decrease and Kotlikoff is saying taxes *should* increase or spending *should* decrease. This is completely consistent with the idea of that entitlements can and must be reduced or taxes must be increased, or both (otherwise, what would be the point of Kotlikoff’s warnings if nothing can be changed?). The markets may also think that *will* happen, but one really needs a canary in the coal mine to ensure that it does. In other words, he’s showing a certain amount of necessary leadership and is making a vary valuable contribution to this necessary adjustment. The markets should be very pleased with Kotlikoff because, especially in this case, sooner is better and Kotlikoff more than most economists, is ensuring that “should” becomes “will”. If one just sits around and waits for markets to react, that’s just passive. It is not leadership. And, I thank Kotlikoff for his leadership That is the difference between “will”and “should”.

  11. Gravatar of Ray Lopez Ray Lopez
    11. March 2015 at 11:46

    I agree with most of the above on Kotlikoff, who wrote a book a while ago that ‘demographics is destiny’ (not true BTW) and who is alarmist, but correct, in that the USA is ‘broke’ because it will not be able to keep its Social Security promises.

    But today’s post by Sumner had this howler in it: “Whenever the market changes its view and becomes more Keynesian, or MMTist, or Austrian, or more new classical, I’ll change as well.” – yeah, I bet you do Sumner. So you are like a weather vane, telling everybody which way the wind is blowing right now, but having no predictive power. Typical economist.

  12. Gravatar of E. Harding E. Harding
    11. March 2015 at 11:56

    Hey, everyone, remember when nominal bond yields on Greek debt were lower than on U.S. debt? It was less than a decade ago! “The market” only began to be worry about Greek debt after Scott began blogging. “The market” will only begin to worry about U.S. debt in the 2030s or 2040s.

  13. Gravatar of foosion foosion
    11. March 2015 at 11:59

    “I don’t really understand the criticism of Kotlikoff here. I believe that he is simply saying “accrued liabilities exceed current and projected revenues”, and by a wide margin. That’s indisputable”

    It’s far from indisputable. Read my post and the link and Britonomist’s following post and link.

    Anyone remember the market reaction when it looked like the House Republicans would cause a default? Bond buyers fled to the traditional safe asset – US treasury bonds.

  14. Gravatar of dw dw
    11. March 2015 at 12:04

    if we are broke because we owe $210 trillion dollars, then how are all corporations, every business, individual also not broke? since the way this seems to work, is to try to say that we owe future payments today. and so far, predicting the future seems to be,shall we say, if not impossible, if not close to it. especially since the best forecasting we seem to be able to do is the weather for the next day, beyond that, it gets really murky. and the weather doesnt need to try to predict human behavior. consider how well every economic forecaster in the last 500 years has done.

  15. Gravatar of E. Harding E. Harding
    11. March 2015 at 12:06

    “I’ll change as well.” – yeah, I bet you do Sumner. So you are like a weather vane, telling everybody which way the wind is blowing right now, but having no predictive power. Typical economist.”
    -For once, I agree with Lopez. You would never have guessed Greece would default in less than six years by reading Sumner in 2009. You will never guess America will default in less than half a century by reading Sumner today. As the dictum says, “past performance is no guarantee of future results”.

  16. Gravatar of E. Harding E. Harding
    11. March 2015 at 12:15

    “Anyone remember the market reaction when it looked like the House Republicans would cause a default? Bond buyers fled to the traditional safe asset – US treasury bonds.”
    -The bond yields fell over a period of several days, from July 27 to August 19. They really only started falling outside the range of normal when it was clear the House would cave.

  17. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. March 2015 at 12:22


    Which of the following two scenarios do you think is more accurate:

    1. The markets think that there is no problem between our accrued liabilities and our current and projected revenue, so nothing has to be done;


    2. Yes, there is a big problem, but due to guys like Kotlikoff, we assume that people will see the light and something will be done so we don’t run into actual cash flow problems like Greece?

    Again, this is the difference between the passive “will”and the active *should*. Would Greece be in a better or worse position today if they had had a few Kotlikoff’s in the past?

  18. Gravatar of foosion foosion
    11. March 2015 at 12:25

    In other words, when there was an unusual risk of a US default, yields fell. When the immediate risk abated, yields fell some more.


    One issue is whether we are better at forecasting the future than the market is. Another is understanding the “thinking” behind market moves.

  19. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. March 2015 at 12:33

    And, why should the issue be framed “who should you trust more, Kotlikoff *or* the market”?

    Kotlikoff is saying that things must change. Markets are betting things will change because they must. Are these two things inconsistent? Or, is Kotlikoff one reason the markets are betting the way they are?

  20. Gravatar of foosion foosion
    11. March 2015 at 12:36


    There are at least two issues here.

    1) The insanity of forecasting on an essentially infinite horizon.

    2) The “thinking” underlying market moves.

    I’m a lot more confident that Kotlikoff’s predictions are ridiculous, for the reasons I’ve stated, than I am that I understand what the market expects the US govt to do over the next few decades.

  21. Gravatar of E. Harding E. Harding
    11. March 2015 at 12:40

    foosion, I have ideas. Perhaps yields fell
    1. Because of speculation about the upcoming August 9 Fed announcement.
    2. The market was the first to recognize the debt ceiling debate was, as libertarians recognized as well, pure political theater.
    3. Because of changing expectations of government spending growth (I find this most plausible).

  22. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. March 2015 at 12:47


    As to your 1) “the insanity of forecasting on an essentially infinite horizon” , I suspect that part of that criticism, like Scott’s, is that things will change the further out we get (in regard to taxing and spending). If so, you are not rebutting my point.

    As to 2) the “thinking underlying market moves”, I have no idea what that means or what you are trying to get at.

  23. Gravatar of foosion foosion
    11. March 2015 at 12:47

    E., I find the safe haven theory no less plausible than the ones you list. Safe haven doesn’t require a high degree of safety, just more safety than the alternatives. What security is safer *and* at least as liquid as US treasuries?

    People have a tendency to interpret market moves to fit their favorite theory. I’m not claiming to be immune.

    I’ve yet to hear a good defense of Kotlikoff’s (or anyone’s) ability to forecast the US govt budget on an essentially infinite horizon.

  24. Gravatar of benjamin cole benjamin cole
    11. March 2015 at 12:47

    Tyler Cowen engages in a common if unintentional obfusxatory description of quantitative easing. Cowen refers to quantitative easing as a “swap of reserves for bonds.”
    He is evidently unaware of the role of the 22 primary dealers who act on behalf of the Fed in open market operations. The Fed only buys bonds from the 22 dealers, such firms as in Nomura Securities or Cantor Fitzgerald. The primary dealers buy bonds and deliver the bonds to the Fed.
    The Fed then creates money in the form of reserves which it credits to the primary dealer’s commercial bank accounts. Before QE this was thought to be stimulative, as banks would lend out as much as they could based upon their reserves.
    However, QE is different in scope and scale. Remember the primary dealers have $4 trillion in reserves credited at commercial banks—but people who sold bonds to the primary dealers also have $4 trillion in cash digitized or otherwise.
    The “Fed just swapped reserves for bonds” storyline is limited and myopic.
    If you want to be a macroeconomist today, you must understand the role of the 22 primary dealers, and how the Fed creates reserves and credits those reserves to the commercial bank accounts of the primary dealers. Then you must ponder what do the people do with the $4 trillion they have from selling their bonds to the primary dealers.
    interesting side note: Since QE started, an additional $500 billion in cash has entered circulation, bringing the total to $1.34 trillion.

  25. Gravatar of foosion foosion
    11. March 2015 at 12:52


    1) Knowing the budget deficit in the far future requires knowing such things as GDP growth and healthcare costs. This is exceedingly difficult on a 10 year horizon, let alone much longer. The exercise is silly – there are too many unknowables. Your suspicion is unfounded.

    2) We don’t know why the market sets rates at the level it does. We can only speculate. We can observe, for example, 10 year treasury yields. We can not observe the thinking that results in those yields.

  26. Gravatar of Britonomist Britonomist
    11. March 2015 at 12:56

    They’re not true liabilities anyway, as Sumner already explained. It’s in fact in all practical terms a PAYG system, the market realizes this, anyone who doesn’t is just naive. It’s separate from direct government insolvency because they are not hard liabilities, it’s simply a case of the government making very big promises in the future that some are skeptical of.

  27. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. March 2015 at 13:01


    Of course, we cannot know anything (or at least most things) for certain (wasn’t there recently a blog post here on that very subject)? So, we are consigned to making judgements based on the best available evidence. When it comes to budgetary issues, should we just assume that we don’t have a problem because the future GDP is uncertain? Should I assume that my house will not be destroyed by fire because I’m not sure that it will catch fire? Or, is this a matter of risk management based on best available evidence? Why should the default position be “no problem”?

  28. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. March 2015 at 13:07

    “They’re not true liabilities anyway…”

    If this is a criticism of Kotlikoff, it is not valid. As noted above, Kotlikoff is, in essence, saying that maybe we need to break some of those expected benefits. If Kotlikoff were of the view that we legally can’t, there wouldn’t be much point in his protestations.

  29. Gravatar of ssumner ssumner
    11. March 2015 at 13:15

    Kevin, No, he got it backwards, Roosevelt talked down the value of the dollar. I’m certain of that, indeed I wrote a 40 page paper on FDR’s policy.

    Njnnja, The US is the richest country the world has ever seen (except a few tiny ones.) To call us “broke” is beyond absurd. Countries are always nudging retirement ages higher as people live longer. It doesn’t mean you are breaking any promise. We aren’t promising 30 year olds that they’ll be able to retire at 67 with full benefits, only a fool would believe that. They’ve already raised the retirement age.

    Doug, The Fed will raise the IOR, that’s how they’ll do it. The interest rate itself doesn’t matter, but the rate relative to the Wicksellian equilibrium rate does. So you need to look at both the Fed’s actions and the condition of the economy to determine what’s going on. Higher rates might be tightening, or might not.

    Vivian, When he compares us to Greece he must know that he’s giving people the idea that we will default like Greece defaulted. Otherwise it’s really misleading. “Broke” should not mean “need to eventually raise tax revenues from 19% of GDP to 23% of GDP,” after many decades. That’s just misleading.

    E. Harding, Yup, I won’t predict things the market doesn’t predict. Which is why I’ll be correct more often than those who do.

  30. Gravatar of dw dw
    11. March 2015 at 13:22

    having not seen the paper, but since he forecast ed how liability we would have, did he also happen to forecast how much revenue there would be in that time span? if not, why not? did he also include all of the US assets?

  31. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. March 2015 at 13:22


    I don’t think it is misleading. As I have indicated above, Kotlikoff is saying that we need to change. He is not saying the situation is irreversible—if it were, why would he waste the effort?. He is saying *if nothing is done* we will default like Greece. Do you disagree with that?

  32. Gravatar of foosion foosion
    11. March 2015 at 13:33


    From the linked articles: “Saying that this means that the United States is bankrupt is hyperbole; more important, it’s not helpful. What, exactly, should we be doing right now?

    The answer all the deficit-panic types offer is basically that we must cut future benefits. But why, exactly, is that something that must be done immediately? If you state the supposed logic, it seems to be that to avoid future benefit cuts, we must cut future benefits. I’ve asked for further clarification many times, and never gotten it.”

  33. Gravatar of ssumner ssumner
    11. March 2015 at 13:33

    Vivian, I suppose I think of the term “broke” in terms of the use for companies or individuals. Generally when a company is broke there is nothing it can do to avoid default. Greece may have faced the same situation. So when he says we are worse off than Greece, I don’t get it. There are clearly things we can do to avoid default. I understand that this is partly semantics, but I just don’t get the worse off than Greece claim. Maybe our debts are bigger, but we are a much bigger country.

    He’s also claimed that Italy is the European country in the best fiscal shape, despite a huge national debt, a low birthrate, early retirement age, and the bond market pricing in more risk of default in Italy than the northern countries. He must be making some assumption about the future path of spending and revenues in Italy, but given their dysfunctional political system, is reform there more plausible than for countries that have shown a previous ability to reform, like Germany?

  34. Gravatar of ssumner ssumner
    11. March 2015 at 13:34

    Just to be clear, I disagree with people like Krugman. I do think we need to trim entitlements like Social Security, albeit not drastically.

  35. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. March 2015 at 13:53

    I suppose one could nitpick and accuse Kotlikoff of using a colloquial term such as “broke” but that strikes me as pedantic, not constructively substantive. The US bankruptcy code (Title 11) defines “insolvent’ (perhaps as good a synonym of “broke” as one could imagine) as:

    The term “insolvent” means””

    (A) with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation, exclusive of””
    (i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity’s creditors; and
    (ii) property that may be exempted from property of the estate under section 522 of this title.

    Bankruptcy is not my speciality, but I do believe accrual accounting is appropriate here. Let’s give Kotlikoff a little slack. He’s doing us all a favor. If the markets are anticipating something will be done, that won’t happen unless folks like Kotlikoff step up. Thanks, Laurence. I think you are one of the good guys.

  36. Gravatar of Vaidas Urba Vaidas Urba
    11. March 2015 at 14:49


    Here is my comment about negative yield OMOs:
    Note that negative effects are largely offset by securities lending programs and by fiscal authorities optimizing the maturity structure of debt.

  37. Gravatar of TravisV TravisV
    11. March 2015 at 15:25

    Tyler Cowen on the Trans-Pacific Partnership:


    Cowen might be correct. However, it seems to me that Obama could exclude the pharma and entertainment industries from the negotiations if he wanted to….

  38. Gravatar of Larry Siegel Larry Siegel
    11. March 2015 at 15:50

    Isn’t anyone curious about this statement of Sumner’s?

    >if you raise tax revenue from 19% of GDP to 22% of GDP, while keeping spending at 22% of GDP, then you’ve balanced the budget, even if you don’t raise an extra dime of revenue from the higher taxes

    Where does the extra tax revenue come from, if not from higher taxes?

  39. Gravatar of TravisV TravisV
    11. March 2015 at 16:20

    Off-topic, Kevin Erdmann, Joe Leider and I are having a good discussion in the comments sections of these posts:



  40. Gravatar of Derivs Derivs
    11. March 2015 at 20:01

    I actually chaired a committee for an extremely large “solvent” bankruptcy in Federal court. Bankrupt just means you can not pay all your creditors. Liabilities exceed Assets, but you can still have large amounts of cash, so you choose to go into a strategic default. Many reasons a company might choose to default and allow itself to be forced into bankruptcy by not paying a few of it’s creditors.
    Only a sensationalist asshat that wants to see his name in the paper would refer to the U.S. – “as a nation” as “broke”.

    “FDR raised the value of the dollar in 1933, when he did exactly the opposite. ”

    Yes, he did the opposite by devaluing the dollar. He was in a pissing match with the Brits who devalued by coming of gold in ’31. Then Roosevelt let the dollar go into freefall in ’33 trying to jumpstart the U.S. economy, causing Germany to no longer be able to maintain positive trade balances to pay off their debts to England and France, France defaulted to the U.S. and with that, the Germany to France-England and France-England to U.S. war related debt payments all fell apart, and once that was done, all niceties were over and Germany stopped making payments on long-term debt and simultaneously decided to begin re-arming in ’33. Extremely interesting how a devaluation all helped lead into WW2. (probably best to say accelerate things into WW2, sure ‘ol Adolf would have taken the world there regardless).

  41. Gravatar of Ray Lopez Ray Lopez
    11. March 2015 at 20:16

    @benjamin cole – I could be misreading you, as you may be referring to how existing bonds are turned into high-powered money, but from your unclear description I don’t think it’s clear how ‘new money’ is created in the US economy. Two ways: from the interest rate of new government debt (the interest rate determines how much new money is created, think about it, and I myself was a bit unclear on this point, as I thought the Fed and Treasury bought and sold from each other, rather than through primary dealers), and, second, from the Fed buying commercial paper that it historically has not bought. This last way is significant since 2008: the Fed has something like 40% of its reserves in ‘toxic’ mortgages, that it bought for dollars, hence expanding the money supply. At some point this will become inflationary. And if Sumner’s NGDPLT is adopted, how must the Fed create ‘new money’? By buying even more such commercial paper, even “loans to build kid’s lemonade stands” as one of his followers said? How can this not be inflationary? Giving good dollars for junk assets?

    @Sumner: “E. Harding, Yup, I won’t predict things the market doesn’t predict. Which is why I’ll be correct more often than those who do” -shame on you then. Your job is not to be ‘correct more often than others’ but to be proscriptive. You should not, like some economists said in 2006, say that housing is fairly valued since that’s what the market says, but rather you should be in the bully pulpit preaching how housing is overvalued, like Schiller did to a degree, and others even more so, and this will lead to problems down the road. Society does not need a Pollyanna making ‘mouth bets’ with no skin in the game, so later they can say on their blog ‘they were more right than others’. That’s just playing games, not being useful to society, By not having skin in the game, you’re not even providing liquidity when you do that. Then again, you’re a typical economist.

  42. Gravatar of Ray Lopez Ray Lopez
    11. March 2015 at 20:33

    @Derivs – I agree with your analysis. From reading Adam Tooze on this issue, Germany at the time of the 1930s did not want to have free floating exchange rates, since the Nazis would lose control of the economy, so with fixed exchange rates indeed they suffered a current account imbalance and negative trade balance, forcing them into autarky and even more Nazi control of the economy. Offtopic: as for WWII, if the US stayed out, arguably the Iron curtain would have been replaced by a German equivalent, trading Stalin for Hitler. I doubt Germany would have invaded the UK, and remember most of France was on Germany’s side (not that they would admit that after the war). Except for the Jews, who in fact were slaughtered regardless and who the US could have protected (by telling Adolf: ‘leave the Jews alone and we’ll stay out of the war’–I’m sure Adolf would have gone along with that), there would be no great loss in Germany ‘winning’ in WWII. As for the Pacific theater, the US did its job by beating Japan, and that’s fine, as it was attacked first.

  43. Gravatar of Vivian Darkbloom Vivian Darkbloom
    12. March 2015 at 01:25

    I guess I owe Laurence Kotlikoff an apology. I had assumed, incorrectly, based on this blog post, that Kotlikoff had used the colloquial expression “broke” in his testimony to the Senate. He did not. The written submission of that testimony indicates that he used the term “insolvent” once and then later goes on to describe, in detail, what he (and others) mean by “fiscal gap”:

    “Economic theory is unequivocal in telling us what not to measure when it comes to fiscal sustainability and generational policy. It’s also crystal clear in telling us what to measure, namely the infinite-horizon fiscal gap. The infinite-horizon fiscal gap tells us whether the government has, over time, enough receipts to cover its projected spending. It equals the present value of all projected future expenditures less the present value of all projected future receipts.”


    He then goes on to explain that if we want to meet our existing and projected legal obligations and entitlement promises, taxes will need to be raised very substantially. Alternatively, we would need to cut spending. Obviously, any solution could (and in my view should) include both, but Kotlikoff clearly understands some promises are not legally binding and should be broken.

    He also clearly lays out why acting sooner is better than later. The US markets may be thinking that the US will eventually act on its fiscal gap problem, but in doing so they are expressing confidence that folks like Kotlikoff will help make that happen.

    As for as “trusting” Kotlikoff or the markets, consider the following:


    Who should the leaders of Greece have “trusted” back in 2005? The “markets” or the Cassandra’s out there like Kotlikoff? I think that graph sums up nicely the very points Kotlikoff is making: 1) The fiscal gap needs to be narrowed; and 2) the sooner, the better. This example also demonstrates some of the wisdom of commenters in earlier threads about the value of accounting. Theory is fine, but you’d better check that at least occasionally against empirical evidence and “reality”. It’s pretty dangerous to rely on verbal models.

    As far as the infinite horizon and uncertainty of future GDP, I’m sure Kotlikoff would be the first to agree that good structural changes might alter some of those projections for the better. It’s not a valid critique in my view against using that infinite horizon. It simply points out that structural change can and should be part of the solution. But, like fiscal remedies, structural change does not happen by itself.

    If you consider once again that chart about the markets and Greece, it should become even more apparent that if Greece had placed a bit more trust in a Kotlikoff rather than the “markets” back in 2005 and earlier, they would have made the necessary taxing, spending and structural changes needed to prevent the mess they now find themselves in. By the time the markets caught up, it was to late to save them from disaster.

  44. Gravatar of Major.Freedom Major.Freedom
    12. March 2015 at 02:21

    Who do you trust, Kotlikoff or the market?

    “The market, obviously.” – Sumner.

    Who do you trust, central banks or the market?

    “…….” – Sumner.


    “The market monetarist view is the market view. Whenever the market changes its view and becomes more Keynesian, or MMTist, or Austrian, or more new classical, I’ll change as well.”

    The market monetarist view is not the market view. The market view does not exist as a singular view. The market view is in fact millions if not billions of separate individual market views. That of course includes the view I just mentioned. It is the only view that does not self-contradict and is consistent with its own pronouncements.

    There are Austrian views, neoclassical views, Keynesian views, MMT views, and market monetarist views. All those views, to the extent those views actually guide all the individual behaviors, that view is “the market view.”

    No one individual can claim to be privy or know or possess “the market view”. Sumner is deluding himself by arrogating his view above the reality of what it is he is referring to. All witchdoctors do this.

    Where Sumner is confused on this is that he tries to enact a bird’s eye, metaphysical viewpoint of the market, which of course is impossible to do. Sumner is a participant in the market. His views, or rather his actions that follow from them, are in “the market”. He does not have an external, abstracted view of “the market” as if his actions are something other than a part of it.

    It should be noted that Austrian economics makes no predictions. I do believe Sumner is suggesting that the Austrian view is wrong because bond prices should be something different from what they are, which means “Austrian predictions have been falsified”.

    For the millionth time, Austrian economics makes no predictions. Period.

    If bond prices are what they are given the “fiscal situation”, Austrian theory does not purport to claim any causal relationship that differs from the present relation. Sumner still does not understand Austrian theory.

    Austrian theory is a body of knowledge concerning the logical structure and dynamics of individual action. It does not say anything about what prices “should” be given certain conditions. There are no constants in the field of human action.

    The Austrian view is not a bird’s eye view of “the market”. The Austrian view is a logical view of all the individual actors whose choices Austrians strongly believe cannot be scientifically predicted.


    Many Treasury bond investors know the Treasury is insolvent, but they nevertheless invest in bonds anyway because of the Fed, and the greater fool.

  45. Gravatar of Nick Nick
    12. March 2015 at 04:04

    The fiscal gap is unsolvable, Kotlikoff has his head up his ass. If we solved this ‘problem’ next year it would reappear again very soon. It doesn’t matter how we solve it, it is a political problem and it will recur. We have two parties: one believes in a long term strategy of lowering tax receipts to set up retrenchment of expenditures. The other believes in extending underfunded benefits to support future revenue increases.
    There is no way out of that. No matter what we do, the next time one of the parties has a lot of power we will take the balanced budget and unbalance it … Recreating the gap.

    The gap is forever. The gap is politics. When politics fails totally, we will default. We’ll never be ‘broke’.

  46. Gravatar of Vivian Darkbloom Vivian Darkbloom
    12. March 2015 at 05:09


    All public problems are political. What do you suggest conscientious people do? Just throw up their hands? Disengage completely? (And, while I normally wouldn’t use that type of language to express disagreement, since you brought it up, wouldn’t a more apt phrase for the “do nothing” crowd be that *they* have their heads up their asses?) Problems of this nature do have a way of re-occuring in cycles. However, when it comes to major issues like this one, that is not a daily or even yearly re-occurance. Change happens periodically. The last major social security reform was in 1983. That reform wasn’t perfect and it did not solve the major issues with that program’s finances permanently; however, it did greatly alleviate the problem. I’m cynical, too; but I try not to let that turn into a sense of permanent futility and hopelessness. Kotlikoff isn’t perfect. But he’s doing his best to make a constructive contribution to what nearly every thinking person agrees is a major problem with the fiscal gap. I don’t think that means he has his “head up his ass”.

  47. Gravatar of Nick Nick
    12. March 2015 at 05:32

    The last ‘social security’ reform may have been 1983, but our last entitlement reform is the ACA. Before that it was Medicare part D. Gore ran on reforming social security in 2000 an lost to a plan to drive down revenues. Then the man with that plan tried to reform social security himself and failed.
    And of course the entitlement side is only a part of the story. We have cut and raised taxes many times in that period.
    So these things do happen every year. Something with serious consequces for the long term budget always comes up.
    What should people so besides throw up their hands? Nothing! This is a stop worrying and learn to love the bomb situation.
    Or you can say ‘starve the beast’ is just too irresponsible and no one can morally vote republican till they disavow it. If you are really, really afraid of budget problems it is clear to my mind which side is playing the more dangerous game. But most reformers actually agree with republicans that we should reduce spending (we should), and so they don’t want to say this. I sort of don’t want to say it either.
    Stop worrying. Retrenchment is ugly.

  48. Gravatar of AshtonW AshtonW
    12. March 2015 at 05:49

    Thinking of your prior post on Larry White’s claim that undershooting inflation could be beneficial if the real economy is picking up, Mark Carney recently claimed it would foolish to cut rates/expand QE unless low inflation hurts wage growth, consumer spending and investment.

    Is this Carney’s roundabout way of essentially saying he’s targeting aggregate nominal income over inflation?

  49. Gravatar of Saturos Saturos
    12. March 2015 at 05:50

    Completely off-topic for any sensible discussion of anything, but… NGDP level targeting has finally been implemented. By Eliezer Yudkowsky’s fan-fictional version of Harry Potter.


    (It’s an amusing story, if you don’t mind Harry Potter constantly lecturing you about rationality in the unmistakable voice of Yudkowsky as he defeats his various foes.)

  50. Gravatar of ssumner ssumner
    12. March 2015 at 06:59

    Vivian, I still don’t think the language of business insolvency is at all useful for the sort of challenges facing the US.

    1. The US will need to adjust policy over time, something that can be said about all countries, at all moments in history.

    2. Greece is broke.

    There is a big difference between #1 and #2, in my view.

    Vaidas, Thanks. I still think the bottom line is the policy is expansionary, but your comment adds needed perspective.

    TravisV, That’s exactly the point I would make.

    Larry, There is no extra revenue in my example, you raise tax revenue from 19% of GDP to 22%, by lowering GDP. That’s how Europe did it.

    Derivs, It wasn’t devaluation that led to the Nazis, it was the deflation of 1929-33 that put them in power. The war debt issue was a side show–it was mass unemployment that led to Hitler and WWII.

    Vivian, Greece is not the best example to use, as they were hiding the size of their deficit through creative accounting. Kotlikoff relies on government data, so he would have had the same problem as the markets.

    Ashton and Saturos, Thanks for the links.

  51. Gravatar of Derivs Derivs
    12. March 2015 at 08:49

    “Derivs, It wasn’t devaluation that led to the Nazis,”

    I never said that. I suggested it was “what led to them re-militarizing”.

  52. Gravatar of Ray Lopez Ray Lopez
    12. March 2015 at 09:13

    @ssumner – your points #1, #2 are barely distinguishable, contrary to your misunderstanding. Greece is broke in 2013 but not in 2007–same with most other troubled countries–a point made in “The Shifts and the Shocks: What We’ve Learned-and Have Still to Learn-from the Financial Crisis (pp. 75-76).” by M. Wolf. Sample stats of Public Debt-to-GDP for various countries, {2007, 2013}, from Wolf: Greece: {107%, 176%}, Italy: {103, 132}, Portugal: {68, 124} (!), Ireland: {25, 123} (!), Cyprus: {59, 114} (and they had to do a partial default), Spain: {36, 94}. Clearly six years is a long time, and the market completely overlooked these ratios. The only ‘consolation’ for the USA is that they can print their own currency, and hyper-inflate their way out of any problems. The hyperinflation option is not an option for small countries that don’t print their own currency, so default, as in Cyprus and soon in Greece, is their only option. The fact that the market, which looks at most about 4 years down the road, cannot see the obvious looming problem with US finances is something you should be blogging about, instead of taking the Pollyanna view that ‘markets are always right’.

  53. Gravatar of Floccina Floccina
    12. March 2015 at 09:17

    I think the reason that markets are not too concerned about the US fiscal situation is that the entitlement liabilities can be adjusted at the discretion of the US government.

    I try to tell that to people that, and that it is easy to balance the budget by making some sensible changes without hurting the poor:
    Why Eliminating the Deficit is Technically Easy but Still Politically Impossible until the bond market demands it.

  54. Gravatar of Floccina Floccina
    12. March 2015 at 10:09

    That’s why Europe raises about as much tax revenue as the US (per capita) despite higher rates. The higher rates cause less work, which reduces GDP.
    For non-econo people shouldn’t it say
    That’s why Europe raises about as much tax revenue as the US (per capita) despite higher rates. The higher rates cause less work in the taxed and measured economy, which reduces GDP.

    Also the USA Federal Gov. has lots of land and mineral rights that it could sell.

  55. Gravatar of TravisV TravisV
    12. March 2015 at 10:28

    Brad DeLong keeps writing stuff like this:

    “it made no sense for my rich grandfather after World War II to be a hard-money guy. He had a much bigger portfolio of assets to invest in: equities backed by more-or-less honest accounts, land that the coming of automobiles and superhighways and the move to the sunbelt meant could be developed as suburbs, as well as leveraged resource speculations. He profited immensely from investments in all of these. Yet, in his heart of hearts, he remained a hard-money guy.

    And it really makes no sense for my contemporaries to be hard-money believers. Yet an astonishing share of the rich among them are.

    A great and enduring puzzle…”


    It sure seems to me that the correct answer to the puzzle is Nick Rowe’s “inflation fallacy”…..

  56. Gravatar of Jim Glass Jim Glass
    12. March 2015 at 11:59

    How is there any conflict between Kotlikoff and the market?

    I do understand his point, but I’ve never quite bought the broader argument. The bond market is clearly not concerned about US Treasury debt, whereas investors are rightly concerned about Greek debt

    Well, risk to debt default occurs only when the cash flow needed to service it runs short.

    Greece ran out that cash flow a few years ago — that’s why their bonds are in the hopper now.

    Nobody projects that the USA will run seriously short on that cash flow even on current policy for about another 20+ years. So why would the value of US bonds be impaired today — even if we could say with absolute certainly that after the existing US bonds mature future ones would be impaired?

    Remember how Greece’s bonds were rated fine just a few years before they collapsed, even though there were plenty of warnings that Greece was piling up an unsustainable debt load for the long run. The same with Argentina, General Motors … It’s very much the typical pattern.

  57. Gravatar of Jim Glass Jim Glass
    12. March 2015 at 12:07


    Vivian, Greece is not the best example to use, as they were hiding the size of their deficit through creative accounting.

    And the USA isn’t? The US Treasury reports each year that its legally incurred liabilities for unfunded federal pensions, entitlements, and other items has increased by *trillions* (with a “t”) of dollars, net in excess of related future tax receipts to pay for them.


    E.g. in 2013 the one-year increase in accrued net liability at present value for current participants in SS and Medicare was $2.3 trillion closed group ($1.1 trillion open group). That’s just one item, I haven’t looked up federal pensions and the rest.

    Yet because the US govt uses cash accounting — which it makes illegal for any business with either any inventories at all or receipts of $5 million (IIRC) — instead of accrual accounting as the rest of the nation is legally required to use, this is not counted in the USA govt’s deficit or debt, as it would be for a private business or state government.

    There’s a Federal Accounting Standards Advisory Board that sets rules for US govt accounting (as the FASB does for business sector accounting). Back in 2006 its members voted to include a portion of these legally accrued entitlement obligations and in US deficit and debt calculations, following the same accounting principles that apply to the private sector and to state and local governments. The vote was unanimous among the academic and professional members of the board, opposed by all the government members, total 6-4 overall.

    The government (Both Congressional and executive representatives) threatened to gut the board then and there if it took any further action in that direction. It caved and recanted, and that was that.

    As to Greece, yes, its political management of its finances might have been pressured towards more responsible realism sooner if it politicians hadn’t hid the size of it deficit through creative accounting.

    Do you think this is any less true in the USA?

  58. Gravatar of Jim Glass Jim Glass
    12. March 2015 at 12:38

    Yea! The old Social Security/ Medicare/ National Debt arguments are returning! We can declare the Great Recession officially over.

    And I see the old arguments haven’t changed much.

    They’re not true liabilities anyway … it’s simply a case of the government making very big promises

    That’s a favorite! I could see it coming from libertarians planning to slash entitlement programs when the day finally comes that they ascend to power. But it always comes, as here, from those who defend them from any cutback. “We are morally and legally committed to paying all these benefits — but don’t put their cost visibly on the books because we can slash them any time! But we never will! But we can.” As if planning to break your “very big promises” is a virtue.

    You gotta make up your mind. To the extent you intend to pay them, they are a liability. If you think they aren’t one, that you are free to break your very big promises — go tell that to an AARP convention!


    Calculations of the deficit into the infinite future are ridiculous. 5 or 10 year forecasts are hard enough … The insanity of forecasting on an essentially infinite horizon..

    You miss their point. such projections do *not* make liabilities bigger by counting them “out forever”, that’s bogus rhetoric. Discounting to present value makes distant future liabilities minimal. Social Security’s “infinite horizon” liability is smaller than its liability for current participants.

    The point of open ended accounting for government accruals is the same as it is for those in the private sector, to match income and liabilities accurately and avoid misleading the public — as all fixed-time-limit horizons do because they count current income but *not* the following liabilities attached to them.

    E.g., take a claim like: “If we just restrict our focus to the 75-year planning horizon the shortfall is 1.0 percent of GDP”.

    The *wrong* takeaway most get from this is that over the entire 75 years there’s only a 1% shortfall, so what’s the big deal? Our great-grandkids can worry about that. Baker makes that claim pretty much overtly: “sorry folks, we don’t get to make policy for people living 100 years from now”. But that’s plain wrong.

    The 1% is *not* a calculation for 75 years — its a calculation for ONE year using a 75-year formula. But at the far end deficits are worse and worse, while at our end things are positive. As the good years drop off and the bad years add and move forward, the 75-year result gets worse every year.

    So next year the 75-year projection is 1.1% of GDP, and in year 3 it is 1.2% of GDP, then 1.3% of GDP … and in year 30 it is so huge the whole system collapses. “But Dean Baker told me it was only 1% over 75 years!”

    Open-ended accounting tells you now what 75-year accounting will tell you as an unhapy surprise then, which is a good thing, and why it is mandatory for all organizations other than the federal government.

    And there is no problem running it forward 30 years, the mere length of a home mortgage, which is where the great bulk of the dollar numbers come from. Social Security is locked in as long as the formula doesn’t change. Unfunded federal pensions are locked in. The great bulk of the increase in Medicare costs over this time frame comes from the aging of the boomers, not from health care costs, contrary to what some like to claim (as if they had a way to reduce health care costs.)

    All are baking in the cake right now, via demographics and existing formulas. To paraphrase Butch and Sundance, don’t worry about being able to swim 75 years from now, it is the fall through the next 30 years that is going to clobber these programs and the fisc.

  59. Gravatar of Jim Glass Jim Glass
    12. March 2015 at 13:01

    Dean Baker has a rather nice takedown of Kotlikoff…

    Well, Baker appears to be either ignorant or disingenuous in that.

    He mocks the scoring of SS’s $$25 trillion unfunded liability as being so scary big only because it runs to “infinity”, without realizing that the “infinite” number is *smaller* than the very finite number for just current participants. (I hope Dean is ignorant of this fact, because if he knows it then his argument is just plain dishonest..

    Social Security is structured so that future-generation cohorts will receive less from it than they put in, later generations contribute $1 trillion net to SS’s finances at present value. The $25 trillion unfunded liability is $26 trillion faced by people living and working today, in the program today, which has to be covered for them in their — our — lives by tax increases/benefit cuts.

    Baker also misleadingly minimizes the fiscal cost of the SS shortfall by citing numbers that count the trust fund as financing for SS without saying how the fiscal cost of redeeming the bonds in the trust fund will be financed.

    However the real fiscal cost number is plain and given in the Trustees Report. Social Security is a cash flow program, with its cash flow cost to the Treasury increasing from near zero, break-even, today, to 1.4% of GDP (not 1% of income, as Dean claims) circa 2033, and stabilizing from there into the future indefinitely.

    How much is that? Not much? Well, for perspective…

    [] The 1983 tax increase that “saved” Social Security the first time it went broke — and which traumatized the Washington political establishment into paralytic showdown mode until a 50% tax increase/50% benefit cut deal was brokered at the very last minute, as those of us who are old enough may remember — amounted to 0.24% of GDP, only about 1/6th as much.

    [] The 1993 Clinton tax increase, the largest of the last 50 years — which was able to pass the Democratic-controlled Senate only on vice-president Al Gore’s tie breaking vote, after passing a Democratic-controlled House by only 218-216, a single voter’s difference) — amounted to 0.83% of GDP, 40% less than this shortfall.

    So actually passing a tax increase/benefit cut on even this “small” scale is not so easy.

    And, of course, at the same time fiscal shortfalls for Medicare, Medicaid, unfunded federal pensions, etc., are going to be multiples larger than that.

    Now Dean also says our children in the next generation will be richer than us and so be able to afford it easily. True, perhaps, — but of course it is equally true that in 1993 and 1983 the voters were a lot richer than a generation earlier, and it didn’t make passing those much smaller needed benefit cuts tax increases easy.

    And it is equally true that we today are a lot richer than our predecessors, but I don’t see Dean saying we should be increasing taxes cutting benefits to put these programs on a stable fiscal status now, because we’re so rich it’s easy for us, and the needed adjustment will only get worse if we wait.

    To the contrary, he and Krugman say that even though it will makes the ultimate adjustment more costly, we should *not* adjust today and instead drop the bigger cost on our children, because they will be so rich it will be easy for them, finally, at last!

  60. Gravatar of Cory Hoffman Cory Hoffman
    12. March 2015 at 13:04

    It just seems that Kotlikoff’s concerns fail to take into account the possibility that programs like social security could (will?) become obsolete.


    If my children will be cyborgs who live for 500 years and never become too frail to engage in productive activity and will have nanomachines in their bloodstream that keep them healthy and functional, Medicare and Social Security will no longer be necessary.

  61. Gravatar of Jim Glass Jim Glass
    12. March 2015 at 13:23

    He has been saying this is the same old nonsense for years, and it was addressed by Dean Baker and Krugman last year:

    Dean we’ve seen. Here’s Krugman…


    … I’m terrified …. what’s really scary “” what makes a fixed-rate mortgage seem like such a good idea “” is the looming threat to the federal government’s solvency…

    “Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen.” So says the Treasury under secretary Peter Fisher; his point is that because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest.

    …. the conclusion is inescapable. Without the Bush tax cuts [now 90% permanent] it would have been difficult to cope with the fiscal implications of an aging population. With those tax cuts, the task is simply impossible. The accident “” the fiscal train wreck “” is already under way.

    How will the train wreck play itself out? Maybe a future administration will use butterfly ballots to disenfranchise retirees, making it possible to slash Social Security and Medicare. Or maybe a repentant Rush Limbaugh will lead the drive to raise taxes on the rich. But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt…

    … investors still can’t believe that the leaders of the United States are acting like the rulers of a banana republic. But I’ve done the math, and reached my own conclusions “” and I’ve locked in my rate.

    You refer to Krugman saying today…

    “It’s true that if current policies are continued with no change, we’re highly likely to face an unsustainable fiscal gap “” a gap that can’t go on forever “” if we look far enough away. Stein’s Law therefore applies: if something can’t go on forever, it will stop”

    Yup, that’s exactly what Krugman above said too. It’ll stop!

    But when Krugman writes this …

    “The answer all the deficit-panic types offer is basically that we must cut future benefits. But why, exactly, is that something that must be done immediately? If you state the supposed logic, it seems to be that to avoid future benefit cuts, we must cut future benefits. I’ve asked for further clarification many times, and never gotten it.”

    … he’s really being too disingenuous by half.

    Every SS Trustees report and Financial Statement of the US, as I linked to above, states explicitly that if a benefit cut/tax increase fix isn’t adopted now then a *bigger* one will be required later, the longer the wait yet bigger the fix, giving actual numbers on how the cost grows.

    So what Krugman is saying here is nothing but: “I’ve never gotten why should we take any kind of unpopular hit on ourselves now when we can avoid it by dropping by force a much bigger benefit-cut tax-hike hit on our kids.”

  62. Gravatar of Jim Glass Jim Glass
    12. March 2015 at 18:43

    Hey, here’s a tidbit from the latest _Financial Report of the U.S. Government_ (I’ve got to look at this thing more often)…

    We all know about the $13 trillion of US debt held by the public, and the Social Security Trust fund debt of $2.5 trillion. But how many people out there know …

    “the Government’s liabilities for federal employee postemployment and veteran benefits payable (i.e., the Government’s pension and other benefit plans for its military and civilian employees), increased $264.3 billion during FY 2013, from $6,274.0 billion to $6,538.3 billion”

    … yes, that’s $6.5 trillion in unfunded federal pensions and retirement benefits owed, equal by itself to fully half the entire national debt held by the public, and more than 2.5 times the amount of the SS Trust Fund.

    If you knew about that, raise your hand! If you didn’t don’t be embarrassed, because the $264 billion annual increase wasn’t counted in the deficit and the $6.5 trillion total isn’t included in the national debt numbers, because … I dunno … pensions payable to federal employees and the military “aren’t real liabilities”?

    As to Dean Baker, here’s the official scoop on how wrong he is about an “absurd infinite horizon” being used for the purpose of making Social Security’s numbers look bad. From the _Report_ …

    OASDI Present Value of Cost Less Tax through the Infinite Horizon

    Present value of future costs less future taxes for current participants: $26.4 trillion.

    Plus net costs for all future participants: $ -0.6 trillion.

    Present value net cost, infinite horizon: $25.8 trillion.

    The “infinite horizon” makes Social Security’s funding look *better*! But hey, that’s absurd! 🙂

    So much for Dean understanding the motives of those who invoke the infinite horizon regarding SS. (Or perhaps it so much about him being honest about them — because it’s hard to believe a maven of Social Security like Dean doesn’t know this A-B-C level data.)

    And if Krugman is still looking for some reason, any reason, to justify why these issues should be tackled now instead of dropping ’em all off later on someone else, tell him here’s yet one more statement of why…

    The timing of changes to close the ‘fiscal gap’ has important implications for the well-being of future generations. For example, relative to a policy that begins immediately, it is estimated that the magnitude of reforms necessary to close the 75-year fiscal gap increases by more than 20 percent if action is delayed by 10 years and by more than 50 percent if action is delayed 20 years.

    Hmm, 20% in 10 years is 2% per year and accelerating. The next generation might not thank him and Dean for being so “progressive” in saving themselves from a cost by dropping double, or maybe 5x, the cost on them.

    Paul also might want to look up the more extensive writeup of the economic costs of delaying the run-up of debt and deficits (slower growth, etc.) in CBO’s Long-Term Budget Outlook.

    I know Krugman’s said that he doesn’t bother reading conservative sources of information because they present nothing worth knowing — but has he moved so far left that he now considers CBO and the Treasury to be useless right-wingers?

  63. Gravatar of ssumner ssumner
    13. March 2015 at 04:41

    derivs, I doubt that too. They didn’t need any excuses.

    Floccina, Good point.

    TravisV, Good point.

    Jim, Do you really believe that if the Treasury was issuing not just 30 but 50 year bonds they would reflect a substantial default/inflation risk?

    And no, the US is not faking the books in the way that Greece did, not even close.

    You said:

    “You gotta make up your mind.”

    Is that directed at me? I don’t see any inconsistency in my argument.

    In general, nothing you say convinces me that the US is more broke than Greece. I just don’t see it.

  64. Gravatar of Vivian Darkbloom Vivian Darkbloom
    13. March 2015 at 05:49


    The Lee/Rubio proposal contains two individual rates, as I explained above. One is for “business income” and one is for “non-business income”. A major issue with that proposal would be how to distinguish the two. However, the examples referred to related to business income which is 25 percent for both entities and individuals (including pass-throughs). A general partner in a limited partner is considered to engage in a trade or business. In fact, it is because the general partner is considered to engage in a trade or business that the limited partners are as well by attribution in all but the most passive types of activities. While Matt referred to “employees”, the example he gave would likely 1) be prohibited under FPHC rules or, if not, would likely be considered self-employment income (business). True, there remains limited arbitrage under the Lee/Rubio proposal for translating non-business income to business income (10 percent rate differential)–see my last comment. Your proposal to raise the individual rate would make matters worse. Unlike Lee/Rubio, you did not specify that the 50 percent would only apply to non-business income earned by non-entities. Even if you meant it to apply only to non-business income, the rate differential between 10 percent and 25 percent is certainly not an improvement with respect to those seeking to arbitrage between the business and non-business rate, because the greater differential creates greater incentive.

  65. Gravatar of Vivian Darkbloom Vivian Darkbloom
    13. March 2015 at 05:50

    The above comment was meant to be posted in the earlier thread.

  66. Gravatar of ssumner ssumner
    14. March 2015 at 05:41

    Vivian, Good point. An alternative approach is to tax all income at the individual level, none at the business level.

  67. Gravatar of Jeff Jeff
    16. March 2015 at 10:02

    Scott and Vivian,

    Even better, eliminate the corporate income tax and make all income, including capital gains, taxable at the same rate. Tens of thousands of intelligent people now working as corporate tax attorneys and accountants would be freed up to do work that is actually useful, and we’d also get rid of the perceived unfairness of a system that taxes high income people at a lower rate because much of their income is capital gains. (I understand that this isn’t really correct, that’s why I said “perceived” unfairness.)

    The current system also favors debt financing over equity financing, since interest payments are a subtraction from taxable income but dividend payments and stock buybacks are not. The financial system and the economy as a whole would be more stable if there was a shift to equity financing. If your financing is all debt, and you experience an unexpected decline in sales, you are in big trouble since you have to make your interest payments, while cutting a dividend is always possible.

Leave a Reply