SECOND YORKSHIREMAN:
House! You were lucky to live in a house! We used to live in one room, all twenty-six of us, no furniture, 'alf the floor was missing, and we were all 'uddled together in one corner for fear of falling.
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U.S. 'fiscal gap' paving the road to meltdown
Headshot of Derek DeCloet
DEREK DeCLOET
theglobeandmail.com
August 23, 2008
Every so often, Laurence Kotlikoff has to stop and correct himself. When he's getting wound up and passionate and damn frustrated about the state of U.S. finances, occasionally, the words just don't come out right.
"We're kind of heading down the path of Argentina," the Boston University economist says.
Yikes. Argentina? The basket case of South America? The country that's so deeply in debt it's paying nearly 15 per cent when it borrows more?
Prof. Kotlikoff rethinks for a moment. "Argentina's probably in better shape than we are today, to tell the truth," he says.
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The Globe and Mail
Now there's an opinion you won't hear next week when the Democrats gather in Denver to nominate Barack Obama, or the week after, when the Republicans meet in Minneapolis. The U.S. fiscal crisis is the issue that dares not raise its head in this election, pushed off the front page by the foreclosure crisis, rising unemployment, gasoline prices and a meaningless debate about whether Mr. Obama's a snob.
People are sufficiently preoccupied with the state of the U.S. economy and the U.S. financial system (see: Fannie Mae and Freddie Mac) that it's easier to ignore, for the moment, the busted balance sheet of the U.S. government. Plus, there are few votes to be had for a politician who runs on a platform of financial pain. But raising taxes - a lot - and cutting benefits may be just what the next U.S. president, whether it's Mr. Obama or John McCain, will have to do, whether he wants to or not. Investors, take note.
Prof. Kotlikoff, a Harvard PhD, has given advice to the governments or central banks in Norway, Sweden, New Zealand, China, Italy and Japan, among other places, and is surprised that the day of reckoning has not already come. Of the many blunders of Bush the Second, among the most appalling is the fiscal irresponsibility of a so-called conservative President. Prof. Kotlikoff calculates the American "fiscal gap" has grown to $70-trillion (U.S.), and estimates that the current President is responsible for one-quarter of that amount. Nice legacy.
But what does the number even mean? Seventy trillion dollars is an impossible sum to fathom, which may be another reason the issue gets little political air time. Big, chronic problems aren't sexy. And this one is big. To earn $70-trillion in profit, you'd need 1,723 companies the size of ExxonMobil; $70-trillion would be equal to the annual sales at 1.35 million Wal-Mart stores. That's not the size of the U.S. government's debt, though. It's the shortfall between its projected future revenues and what it plans to spend (in today's dollars).
If you suspect this has a lot to do with boomer demographics, you'd be right. But the U.S., by far, is not the oldest developed nation. Canada's older. Japan and Germany have a lot more grey hair. What gives? The U.S. may be a bad place to be unemployed and poor, but it's a terrific place to be old. The average U.S. senior gets more than $30,000 in Social Security and government-paid health care benefits, a number that will balloon - even after adjusting for inflation - with the Bush prescription drug plan.
Other Western countries have expensive programs to look after their elderly, too. But most have either a better lid on health costs (even though they've got universal coverage), or they've gone through some sort of pension reform (like the Canada Pension Plan changes of a decade ago). Unless the U.S. makes radical changes too, says Prof. Kotlikoff - he proposes a national sales tax and a complete overhaul of American health care - it's on a path to hyperinflation, the usual fate of countries whose governments get in too deep.
"When the government prints enough money, that will be what will happen," the economist says. "Eventually, interest rates are going to skyrocket. People are going to understand the U.S. can't pay back its bonds."
You could dismiss him as a crank, or a Chicken Little, except that he's got a lot of credible company. The best-known member of the alarmist school of fiscal thought is a guy named David Walker, who, until recently, was also the U.S. comptroller-general - Washington's top accountant. If anyone would know the numbers, he would. Mr. Walker got so frustrated with the deafness of politicians on the subject that he decided to tour the U.S. to take his message to voters. (The tour is the subject of a documentary called I.O.U.S.A., which has just been released in theatres.)
It's tempting for Canadians to get smug about all this, having faced down a monster deficit and bankrupt pension plan in the 1990s. But there's little to cheer about the prospect of a financial meltdown of a country that still buys three-quarters of Canadian exports. (Think of the devastation to the manufacturing sector, for instance, if the U.S. dollar collapses.) In U.S. elections, most Canadians naturally root for the Democrats. This time, they've also got reason to hope for a president with the guts to take on an issue that neither candidate wants to talk about. |
