boston.com
Debt level places US at risk
By Charles Stein, Globe Columnist, 4/4/2004
In 2002,Treasury Secretary Paul O'Neill asked a pair of economists to calculate the federal government's fiscal gap. In simplest terms, O'Neill wanted to know how big a tab the current generation was leaving for future generations to pay. The calculation included everything from the cost of defense and roads to the bills for Social Security and Medicare.
Their work never made it into print. After O'Neill was fired, his successor, John Snow, decided not to publish the findings. He may have figured that the estimate, like last week's gory atrocity photos from Iraq, was just too disturbing for the American public to handle.
Laurence Kotlikoff is in the Paul O'Neill mold. The chairman of Boston University's economics department feels strongly that the nation needs to face up to the fact that it has created obligations that it cannot possibly afford. ''This is the moral crisis of our age," he writes in his new book, ''The Coming Generational Storm. ''We are collectively endangering our children's future without giving them the slightest say in the matter."
Kotlikoff's book arrives at a good time. Washington's spiraling budget deficit has become a campaign issue. Last month, the trustees of Social Security and Medicare released annual reports that showed the programs for seniors have multitrillion dollar liabilities. Red ink is on the nation's radar screen.
To Kotlikoff, the discussion is welcome but misguided. He is a harsh critic of government accounting, arguing that it gives a distorted picture of the country's finances. ''We hide our bills the way Enron did," he said in a recent interview.
Kotlikoff is one of the pioneers of generational accounting, a system that measures the burden today's commitments will create down the road. ''It's the future, stupid," he writes in his book.
O'Neill's economists used a similar approach. They concluded that America's fiscal gap was $44 trillion, more than four times the gross domestic product. To put that number in perspective, think about this. If the politicians in Washington wanted to fix the problem today, they would have to choose from among the following unpleasant options: Raising income taxes by 69 percent, boosting payroll taxes 95 percent or cutting Social Security and Medicare 45 percent The longer we wait, the more Draconian the tax hikes or cuts will have to be.
Kotlikoff isn't holding his breath waiting for Washington to move. ''Politicians are lower life forms," he said. But a failure to act will have consequences, he warns. In a worst-case scenario, he envisions a future that makes the ''Terminator" seem hopeful. He forsees a stagnant American economy crushed by debt. Taxes are dramatically higher. So is the inflation rate because the government has decided to print money to escape the fiscal vice. Money and talent are fleeing the country. ''I'm not particularly optimistic," said Kotlikoff.
Not everyone is so gloomy. While conceding that an aging population and rising medical costs pose major challenges, some economists say the problems are manageable. ''We will have to make adjustments but it won't be the apocalypse," said Marilyn Moon of the American Institutes for Research, a Washington think tank.
I hope she is right. But is it too much to ask the two candidates for president this year just how they plan to make the adjustments? The early indicators aren't promising. President Bush's three tax cuts contributed $9 trillion to the fiscal gap, according to Kotlikoff. Bush's Medicare drug benefit will add trillions more to the $44 trillion total. Like most Democrats, John Kerry has stressed the importance of preserving Social Security and Medicare benefits, without saying how he expects to pay for them. His proposed tax hikes on the wealthy will help close the gap, but compared to the size of the problem, he is spitting in the ocean.
Zoology was never my strong suit, but I recall that most ''lower life forms" -- Kotklikoff's description of politicians -- wriggle around because they have no backbone. Do Bush and Kerry?
Charles Stein is a Globe columnist. He can be reached at stein@globe.com.
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