Checkpoint: Generational Accounting
“To get back one’s youth,” said Oscar Wilde, “one has merely to repeat one’s follies.” This may well be true, but Wilde neglected to inform us of the fine print. Indeed, by repeating one’s mistakes, youth may be regained. It is however a zero-sum game, and thus, to regain youth, the young have to be stripped of theirs. In the 21st century, the thief of youth is not time, but our elders – those who have condemned the young, and the yet-to-be born with a burdensome future.
To state it plainly, for that is precisely what is lacking – the national debt of the U.S., currently estimated at just under $20 Trillion, is merely a microcosm of the real figure, which, according to Laurence Kotlikoff, Boston University Professor of Economics, is in excess of $200 Trillion. The difference between these two figures is called by economists: the fiscal gap. The gap exists because the national debt is reported as being only what is owed in government bonds, and not what the government is obliged to pay out in the future – namely, welfare programs. This immense bill being racked up is ignored as tomorrow’s problem, and as such, is known as ‘generational accounting.’ Few developed economies are exempt.
Why do governments do this? For the same reason I ate two desserts last night – it was tomorrow’s problem. Fortunately for the elderly, they won’t be here tomorrow, but we’ll have their bill. Governments could borrow in the traditional way, which would involve selling treasury bonds, or other such public assets, and spending the money earned. This method however, has the effect of being immediately volatile – if it is done too often, or too swiftly, the government’s creditors may become suspicious of its ability to make payments.
Therefore, instead of borrowing traditionally, governments now borrow in a much more devious and understated fashion. They borrow money from the public for specific programs, such as Welfare programs. These ‘taxes’ such as the payroll tax, are to be repaid in the form of pensions, health care, etc. Thus the government receives money to spend immediately, knowing full well it won’t be them who have to pay it back. Indeed, because these values are not recorded as official debt, they don’t even have to acknowledge it.
This issue, at least in the economics community, is not as esoteric as it is to the rest of us. Indeed there was a bill introduced to Congress in 2013 called the Inform Act. 1,200 economists, including 17 Nobel laureates, supported the bi-partisan bill. The bill proposed to adjust the calculation of the national debt to include the future expenditures owed. But the bill died in Congress, and thus little informing has been done.
Today is being paid for at tomorrow’s expense. Welfare schemes such as Medicare, Medicaid and Social Security are unfunded liabilities. If such programs are managed properly, they should be funded by the taxes of the public throughout their working lives, who then access these funds later. However, due to the inefficiency and poor administration of the programs, and the fact that much of the taxes brought in were used in misguided government spending elsewhere, the benefits of such programs are not being paid solely from the recipients’ life of taxes, but also the lives of taxpayers yet to be born – who, if the ledger isn’t balanced, won’t be able to enjoy the same security, despite having to pay much more tax. Even by conservative estimates, being born in America today, as opposed to during the 1940s or 1950s, means that you will be burdened with tax rates likely to be double as high.
According to Kotlikoff, to eliminate the U.S.’s current inter-generational credit card bill – it would require an “immediate, permanent 59 percent increase in federal tax revenue” or “an immediate, permanent 38 percent cut in federal spending.” If we continue to wait, say perhaps for another 20 years, the federal tax increase required would rise to 70 percent, or a spending cut of 43 percent.
You may wonder how such a gross credit card bill has been allowed to spiral as it has. But such bills are spiraling in all aspects of the U.S. economy. Unlike previous empires, the U.S. is not a creditor, but a debtor. There’s a saying that goes: if you owe the bank $100, you’re subject to its power. But if you owe the bank $100,000,000, then it’s subject to your power. This relationship is invoked commonly during systematic economic failures like the GFC, when the taxpayer is required to bail out banks that are ‘too-big to fail’ for this very reason. The U.S. Government operates on the same policy.
These generational accounts are only going to get worse: In the mid-2000s, approximately seventy-seven million baby-boomers started to collect Social Security benefits; and in the mid-2010s, Medicare as well. According to the most recent census, between 2012 and 2050, the older population is expected to double. The combination of this rise, with a declining birth-rate, means there will be fewer taxpayers to fund the growing programs - Japan is already feeling the pinch of this problem acutely. The bitter irony of claims that immigrants are a detriment to workers and U.S. society in general is that possibly the only saving grace for the social security of the American workforce will be the influx of taxpaying immigrant workers. The only thing Trump’s wall will keep out of the U.S. is the likelihood of a secure retirement for the citizenry after a lifetime in the American workforce.
How are we to combat this? After all, no politician in their right mind (although that is no longer a prerequisite) is going to campaign on a slogan of hiking taxes by two-thirds. Nor would any politician touch, with any force, what has become known as the ‘third-rail’ in American politics: Social Security and Medicare.
One action that could be taken is that employed in Britain under Thatcher. Namely, to not allow welfare benefits to increase ahead of general inflation. Thatcher’s tactful reforms of the basic state pension provided short and long run savings that have, despite their unpopularity at the time, provided the U.K. with generational accounts in a much better state than most other developed economies. Employing this policy in the U.S. would provide a gargantuan saving, although relative to the problem, it would appease little.
This problem cannot be ignored like it has been by those who created it. Indeed, crises like the GFC are independent of the latent crises like generational accounting that may shudder and collapse in a financial disaster, making said GFC look like a slow stock day. The historian Niall Ferguson uses a simple analogy to describe the self-sustaining criticality of ‘generational accounting’ debts. Ferguson asks us to imagine a pile of sand. Then imagine dropping grains of sand on top of the pile one grain at a time. The pile grows higher for a time, without sabotaging the structure of the pile itself. There is a point of critical mass however, and, as with Zeno’s paradox it cannot be accurately calculated, when the pile will collapse on itself.
Keynes, the great economist, once said that when the facts change, you are obliged to change your opinion. Indeed, when faced with the facts of the fiscal life of Sisyphus evident for mine, and future generations, it would be idiotically stubborn to maintain a bend towards flexible spending forms of democratic socialism when strict austerity measures are clearly required. However, other problems have been instigated or ignored by our elders that also require attention. It seems, rather pessimistically, that the future simply cannot win.
Clear paths to solutions are difficult to discern through the dense pressurized fog of our dilemmas. Perhaps clean renewable energy could provide some of the savings required to pay for our future, although the very existence of our future, which depends on such energy, is far from assured.
Many of you would have heard the ancient Greek proverb: “A society grows great when old men plant trees whose shade they know they shall never sit in.” It must be said that future generations, despite the request of Oasis, will surely look back in anger when they realize it is not the shade of a tree they’re sitting under, but a mountain of debt. If only to crudely prove how far the modern apple has fallen from the classical tree. It is not the scheming and deceitful, who, like Sisyphus in Greek mythology, are condemned to push an immense boulder up a mountain, only to suffer the eternal repetitive punishment of having it roll back down whence he nears the summit. It is rather the young and innocent who will be made to suffer this torture, while the crafty and corrupt bathe in the spotless sun of a world without tomorrows, and thus without consequences.