The limits of government debt statistics
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.