The limits of government debt statistics

By Felix Salmon
August 12, 2010
The Economist finds some interesting common ground between Larry Kotlikoff, who thinks that America's fiscal situation is worse than Greece's, and Jamie Galbraith, who thinks that it's really nothing to worry about:

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The Economist finds some interesting common ground between Larry Kotlikoff, who thinks that America’s fiscal situation is worse than Greece’s, and Jamie Galbraith, who thinks that it’s really nothing to worry about:

In some ways, these unconventional thinkers resemble each other more than the less striking birds in-between. Neither thinks that official debt figures mean all that much. Neither thinks the government’s balance-sheet can be understood on its own, without reference to what the other spouse is up to.

Messrs Galbraith and Kotlikoff both worry above all about the distributional effects of taxing and spending. Mr Kotlikoff fears that fiscal entitlements allow the elderly to make outsize claims on the young. He denounces “gerontocracy” and “fiscal child abuse”. Mr Galbraith fears that in the name of fiscal restraint, taxpayers will shirk their responsibility to the country’s most vulnerable citizens, who rely on public pensions and health care. For both, then, the chief fiscal danger is inequity not insolvency, as normally understood. The question is not whether the government can pay its bills, but who pays what, when.

I’m inclined to agree with them both, if that’s possible — with the caveat that looking at a lot of historical debt figures, as Reinhart and Rogoff have done, can be helpful (if not very helpful) in terms of working out when countries are likely to run out of fiscal rope.

There’s clearly no urgency to pare back US government finances today, given that the government can borrow for 10 years at just 2.75%, and for 2 years at just 0.55%, and given that the government is still performing an important role as borrower of last resort. On the other hand, if the problems identified by Kotlikoff aren’t considered urgent, they’ll never be addressed.

For the time being, I’m with Galbraith on this one. We’re trying to steer one of the world’s most important economies onto a path of sustainable growth: let’s not get distracted by contentious long-term fiscal arithmetic for the time being.

At some point, when the nation’s interest payments really start to hurt, we’re going to have to start looking at those deficits-as-far-as-the-eye-can-see, and wondering whether addressing them in a structural and strategic manner might be less painful, in the long run, than being forced into drastic measures at an unforeseeable time in the future. But as Kotlikoff and Galbraith would probably agree, the key thing to look at is cashflows between various segments of the population and over time, rather than the simple headline debt or debt-to-GDP figure.


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I have to disagree that now is not the right time to attempt to deal with long term debt issues. If not now, when? When things improve, we will be dissuaded from believing there is a problem at all. As Paul Romer said, “A crisis is a terrible thing to waste.”

Posted by Curmudgeon | Report as abusive

USA is under no pressure to correct it’s deficit spending immediately – fair enough. But if they don’t make changes or corrections to SS immediately then Boomers are going to start retiring and there will be NO chance to change it til the Boomers are all gone. By then the SS pool will be nearly exhausted if not underwater itself!

Posted by CDN_finance | Report as abusive

Simple rule to follow for financial solvency. When times are good, save more; when times are bad, spend less.

Government practice is a little different — when times are good, spend more; when times are bad, tax less.

Both systems will have periods of time when you are just squeaking by, but the prudent rules will swing between that and massive surpluses, while the actual practice vacillates between breaking even and running massive deficits.

Hard to see that changing without a crisis.

Posted by TFF | Report as abusive

I can’t believe intelligent people talk about SS being insolvent. It’s impossible.

I swear that 90% of our population thinks we are on a gold standard.

Posted by petertemplar | Report as abusive

petertemplar, you are correct but for the wrong reason. Social Security can’t be insolvent because it has no legal obligations. If/when Congress changes the rules to reduce benefits, the recipients will have no recourse.

It is also true, in theory, that the federal government could monetize the debt. What is the current budget deficit? Fine — sell a trillion dollars a year of bonds to the Fed, you’ve got it covered. (Actually might need to be twice that, since you’ll have a really hard time rolling over existing debt once you fire up the printing presses.)

But where does that get you? Hyperinflation would destroy the economy, MOREOVER the Social Security benefits are indexed for inflation, so the more you print, the more expensive the benefits would become. Very rapidly you enter “wheelbarrow of paper” territory.

Easier (and infinitely more effective) to reduce the promised benefits. Better to have the retirees (a third of the population) upset than to have EVERYBODY upset.

Posted by TFF | Report as abusive

TFF, is there some independent, all-powerful social security benefits level commission that I’m not aware of? If there isn’t, the reason that social security benefits won’t be reduced, even in nominal terms, is because of the very fact you point out: the retirees are a third of the population and a LARGER share of the voting population. They’d hammmer any elected official who even proposed reducing social security benefits, and this will even become more pronounced once the baby boomers are retired.

Posted by Strych09 | Report as abusive

Strych09, you make a good point. Retirees are a key voting block, and many if not most of them would react very negatively to a reduction in Social Security.

I can think of various ways of spinning a cut in benefits, however, which would minimize the opposition.

(1) Phrase it as delaying the “full retirement age” rather than as a reduction of benefits. The two are pretty much equivalent, of course, but many people don’t realize it. Besides, it would be written to only affect people who are 10 years or more from retirement. So that powerful voting block wouldn’t care.

(2) Index benefits differently. For most of our history, “price indexing” would yield a slower growth in benefits than “wage indexing”. Ironically, the time for that is past — with global competition keeping a lid on wages, while driving up the cost of commodities, it seems quite likely to me that the CPI will outpace wage inflation in the coming decades. Especially as the government loads up on profit (and wage) reducing taxes.

(3) Reduce or claw-back benefits for people with income above a certain threshold. You’ll still face opposition from the retirees who are affected, but most will be grateful that the revenue imbalance has been reduced and thus their OWN benefits secured.

(4) Institute a VAT. That would reduce the value of the benefits without reducing their nominal rate. (Though opposition to this one might be pretty broad.)

(5) Engineer a fiscal crisis which mobilizes the 2/3 of the population that is NOT retired. Retirees will remain a minority, possible to vote down if enough other people are concerned.

Ultimately I believe that benefits WILL come down because they can’t be indefinitely supported at their present level. Go ahead and try boosting taxes enough to not only close the existing budget gap but ALSO raise another $100B a year for Social Security. You’ll see open revolt…

Posted by TFF | Report as abusive

@TFF is right. We are in open tax revolt already and the primary winning side in the present congressional and gubernatorial elections is hatred of taxes.

When the Congressional and gubernatorial classes of 2010 take their seats we will see the biggest fiscal collision in American history. Utterly unsustainable spending will meet with an utter unwillingness to raise taxes.

There is only one outlet, which is the Fed, i.e. inflation. There is none now, but the nation’s elderly are in for a Chuck Norris roundhouse, because they hold the savings that faces the inflation risk.

That treasury isn’t using this special opportunity to refinance all its debt out to 30 years speaks to total incompetence. Even I would know to do that.

Posted by DanHess | Report as abusive

Last I heard, they were targeting an average maturity of 6-7 years, longer than the historical norm of 5 years. Not sure where to find this data, however.

Wonder how much of a market they could drum up for 30-year fixed-rate debt without sending interest rates sky high? There is huge demand for short-term stuff right now, which is perhaps why they have issued so much of that to cover the recent deficits.

Posted by TFF | Report as abusive