The vector indicates a clear but not yet present, none the less critical issue
On 19 Jun, 2012, at 10:56 AM, K wrote:TEL) Reith Lecture: 'We’re Mortgaging the Future of the Younger
Generation'
web link :
telegraph.co.uk
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Reith Lecture: 'We’re Mortgaging the Future of the Younger Generation'
2012-06-18 19:57:30.415 GMT
Niall Ferguson
June 18 (Telegraph) -- Uncontrolled public debt threatens to
rupture society as the older generation thrives at the expense of
the young.
Critics of Western democracy are right to discern that
something is amiss with our political institutions. The most
obvious symptom of the malaise is the huge debts we have managed
to accumulate in recent decades, which (unlike in the past)
cannot largely be blamed on wars.
According to the International Monetary Fund, the gross
government debt of Greece this year will reach 153 per cent of
GDP. For Italy the figure is 123, for Ireland 113, for Portugal
112 and for the United States 107.
Britain’s debt is approaching 88 per cent. Japan – a special
case as the first non-Western country to adopt Western
institutions – is the world leader, with a mountain of government
debt approaching 236 per cent of GDP, more than triple what it
was 20 years ago.
Often these debts get discussed as if they themselves were
the problem, and the result is a rather sterile argument between
proponents of “austerity” and “stimulus”. I want to suggest that
they are a consequence of a more profound malaise.
The heart of the matter is the way public debt allows the
current generation of voters to live at the expense of those as
yet too young to vote or as yet unborn. In this regard, the
statistics commonly cited as government debt are themselves
deeply misleading, for they encompass only the sums owed by
governments in the form of bonds.
The rapidly rising quantity of these bonds certainly implies
a growing charge on those in employment, now and in the future,
since – even if the current low rates of interest enjoyed by the
biggest sovereign borrowers persist – the amount of money needed
to service the debt must inexorably rise.
But the official debts in the form of bonds do not include
the often far larger unfunded liabilities of welfare schemes like
– to give the biggest American programmes – Medicare, Medicaid
and Social Security.
The most recent estimate for the difference between the net
present value of federal government liabilities and the net
present value of future federal revenues is $200 trillion, nearly
13 times the debt as stated by the US Treasury. Notice that these
figures, too, are incomplete, since they omit the unfunded
liabilities of state and local governments, which are estimated
to be around $38 trillion.
These mind-boggling numbers represent nothing less than a
vast claim by the generation currently retired or about to retire
on their children and grandchildren, who are obligated by current
law to find the money in the future, by submitting either to
substantial increases in taxation or to drastic cuts in other
forms of public expenditure.
To illustrate the magnitude of the problem, the economist
Laurence Kotlikoff calculates that to eliminate the federal
government’s fiscal gap would require either an immediate 64 per
cent increase in all federal taxes or an immediate 40 per cent
cut in all federal expenditures.
When Kotlikoff compiled his “generational accounts” for the
United Kingdom more than 12 years ago, he estimated (on what
proved to be the correct assumption that the then government
would increase welfare and health care spending) that there would
need to be a 31 per cent increase in income tax revenues and a 46
per cent increase in National Insurance revenues to close the
fiscal gap.
In his Reflections on the Revolution in France (1790),
Edmund Burke wrote that the real social contract is not
Jean-Jacques Rousseau’s contract between the sovereign and the
people or “general will”, but the “partnership” between the
generations. He writes: “SOCIETY is indeed a contract… The state
… is … a partnership not only between those who are living, but
between those who are living, those who are dead, and those who
are to be born.” In the enormous intergenerational transfers
implied by current fiscal policies we see a shocking and perhaps
unparalleled breach of precisely that partnership, so brilliantly
described by Burke.
I want to suggest that the biggest challenge facing mature
democracies is how to restore the social contract between the
generations. But I recognise that the obstacles to doing so are
daunting. Not the least of these is that the young find it quite
hard to compute their own long-term economic interests.
It is surprisingly easy to win the support of young voters
for policies that would ultimately make matters even worse for
them, like maintaining defined benefit pensions for public
employees. If young Americans knew what was good for them, they
would all be in the Tea Party.
A second problem is that today’s Western democracies now
play such a large part in redistributing income that politicians
who argue for cutting expenditures nearly always run into the
well-organised opposition of one or both of two groups:
recipients of public sector pay and recipients of government
benefits.
Is there a constitutional solution to this problem? The
simplistic answer – which has already been adopted in a number of
American states as well as in Germany – is some kind of
balanced-budget amendment, which would reduce the discretion of
lawmakers to engage in deficit spending, much as the practice of
giving central banks independence reduced lawmakers’ discretion
over monetary policy.
The trouble is that the experience of the financial crisis
has substantially strengthened the case for using government
deficit as a tool to stimulate the economy in times of recession.
Last year, following a German lead, continental European
leaders sought to solve that problem by resolving to limit only
their structural deficits, leaving themselves room for manoeuvre
for cyclical deficits as and when required. But the problem with
this “fiscal compact” is that only two eurozone governments are
currently below the mandated 0.5 per cent of GDP ceiling; most
have structural deficits at least four times too large, and
experience suggests that any government that tries seriously to
reduce its structural deficit ends up being driven from power.
It is perhaps not surprising that a majority of current
voters should support policies of intergenerational inequity,
especially when older voters are so much more likely to vote than
younger voters.
But what if the net result of passing the bill for baby
boomers’ profligacy is not just unfair to the young but
economically deleterious for everyone? What if uncertainty about
the future is already starting to weigh on the present? As Carmen
Reinhart and Ken Rogoff have suggested, it is hard to believe
that developed country growth rates will be unaffected by
mountains of debt in excess of 90 per cent of GDP.
It seems as if there are only two possible ways out of this
mess. In the good but less likely scenario, the proponents of
reform succeed, through a heroic effort of leadership, in
persuading not only the young but also a significant proportion
of their parents and grandparents to vote for a more responsible
fiscal policy. As I have already explained, this is very hard to
do. But I believe there is a way of making such leadership more
likely to succeed, and that is to alter the way in which
governments account for their finances.
The present system is, to put it bluntly, fraudulent. There
are no regularly published and accurate official balance sheets.
Huge liabilities are simply hidden from view. Not even the
current income and expenditure statements can be relied upon. No
legitimate business could possible carry on in this fashion.
Public sector balance sheets can and should be drawn up so
that the liabilities of governments can be compared with their
assets. That would help clarify the difference between deficits
to finance investment and deficits to finance current
consumption.
Governments should also follow the lead of business and
adopt the Generally Accepted Accounting Principles. And, above
all, generational accounts should be prepared on a regular basis
to make absolutely clear the intergenerational implications of
current policy.
If we do not do these things then I am afraid we are going
to end up with the bad, but more likely, second scenario. Western
democracies are going to carry on in their current feckless
fashion until, one after another, they follow Greece and other
Mediterranean economies into the fiscal death spiral that begins
with a loss of credibility, continues with a rise in borrowing
costs, and ends as governments are forced to impose spending cuts
and higher taxes at the worst possible moment.
There is, it is true, a third possibility, and that is what
we now see in Japan and the United States, maybe also the United
Kingdom. The debt continues to mount up. But deflationary fears,
central bank bond purchases and flight to safety from the rest of
the world keeps government borrowing costs down to unprecedented
lows. The trouble with this scenario is that it also implies low
to zero growth over decades.
As our economic difficulties have worsened, we voters have
struggled to find the appropriate scapegoat. We blame the
politicians whose hard lot it is to bring public finances under
control. But we also like to blame bankers and financial markets,
as if their reckless lending was to blame for our reckless
borrowing. We bay for tougher regulation, though not of
ourselves.
This is an edited extract from the first of Prof Niall
Ferguson’s four Reith Lectures, to be broadcast today on Radio 4
at 9am
-0- Jun/18/2012 19:57 GMT
On Tue, Jun 19, 2012 at 9:44 AM, D wrote:
Bill Gross: ‘Germany to Me Is a Credit Risk’
blogs.wsj.com
On 6/18/2012 1:45 AM, M wrote:
Greece to get a Government - hooray!
Spain 10-Years soar to over 7% -- oops...pay no attention to the man behind the curtain....
GSPG10YR:IND - 7.135%
M
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