On Tuesday, the Republicans Chris Cox and Bill Archer argued in the Wall Street Journal that a more accurate accounting of the government's liabilities would show that the national debt was closer to $87 trillion than to the stated $16 trillion.
Some commentators, including the Atlantic's Derek Thompson, took issue with Cox and Archer's analysis, arguing that the only way to assess debt is the way it's currently done -- by summing up the number of government bonds outstanding.
I asked Boston University economist Laurence Kotlikoff, an expert on the national debt, to weigh in on the conversation. The following is a lightly edited transcript of our conversation.
RealClearPolicy: Cox and Archer argue that the U.S.’s underlying debt is much higher than the officially stated debt of $16 trillion. They argue that if you add up the unfunded obligations the government has -- to Social Security, Medicare, federal workers’ pensions, and so on -- the real debt is about $87 trillion. Can that be right?
Kotlikoff: That’s wrong. It’s $222 trillion.
That’s what we economists call the fiscal gap. I don’t know what those guys are looking at, but we economists do it a certain way. We’re not politicians. We’re just doing it the way our theory says to do it. What you have to do is look at the present value of all the expenditures now through the end of time. All projected expenditures, including servicing the official debt. And you subtract all the projected taxes. The present value of the difference is $222 trillion.
So the true size of our fiscal problem is $222 trillion, not $87 trillion. That’s comprehensive and incorporates the official debt. The official debt in the hands of the public is $11 trillion, so the true problem is 20 times bigger than the official debt.
Why is it more useful to think about the fiscal gap than the official debt?
The official debt is something that has to be repaid, and the government is committed to principal and interest payments. But the government has other commitments, like Social Security payments, health care and Medicare payments, Medicaid payments, and defense expenditures. And it also has negative commitments, namely taxes. So you want to put everything on even footing. Most of the liabilities the government has incurred in the postwar period have been kept off the books because of the way we’ve labeled our receipts and payments. The government has gone out of its way to run up a Ponzi scheme and keep evidence of that off the books by using language to make it appear that we have a small debt.
So take my mom. She’s 93. The government is paying her Social Security benefits. That’s a liability, an inflation-indexed liability. That means that if inflation goes up, her check goes up. What happens if inflation goes up to your interest and principal payments on government debt? They don’t change at all. So inflation can water down the real repayment of principal and interest, but it won’t water down Social Security benefits. In some ways, Social Security benefits are a more secure liability for the government, compared to the official debt. Because we can always get out from under official debt by just running up inflation, which is what we seem to be wanting to do, because we’re printing a lot of money.
What about the argument some have made, that unfunded liabilities are less "real" than the official debt number, because the government's unfunded liabilities can be adjusted easier? For example, the government’s projected unfunded entitlement obligations could be reduced or eliminated by cutting benefits or raising payroll taxes, and then the fiscal gap would close.
Well, the fiscal gap went up by $11 trillion last year, in one year. I’d like to see economists start working on this problem. What we’ve heard from the politicians is that the elderly and the baby boomers above 55 will not be affected by any Medicare reform, will not be affected by any Social Security reform. That’s not a way of reducing those liabilities meaningfully, because if you exempt something like 50 million people, you can’t get enough action. There’s not enough money to be had. The burden you leave for younger people to deal with is too big. That’s the rub here. You can’t exempt the current elderly and everybody over the 55. That’s what politicians are talking about, so I don’t think that’s a serious set of comments that you’re raising.
You’re saying, “we can always take care of this.” But when are they going to take care of it? They’ve been saying that for decades. Social Security itself is in worse shape than it’s ever been, because the country’s always doing too little too late to deal with the problems.
Are there other countries that are more transparent about the amount of debt they have?
Norway, Holland, New Zealand, Australia, Sweden, and Canada are all doing a much better job looking systematically at the entire future set of liabilities and taxes. Their fiscal gaps are much smaller, if not zero. Italy's fiscal gap is about 40 percent of ours when scaled by the size of its economy. Same for Germany. Greece and Japan have very large fiscal gaps, proportionately speaking, but smaller than ours. The U.S. is in worse fiscal shape than any developed country when you actually look at the entire picture.
If, as you're claiming, our fiscal situation is far more dire than commonly realized, why are borrowing costs so low right now?
I’m the only one who’s actually calculated the fiscal gap for the country. It doesn’t take much more than 10 minutes. I don’t know why I’m the only one in the country who’s calculated it and assessed it. If I’m the only one, and you’re talking to me now for a story about this, and you’ve got a $16 trillion number in your head and it’s really $222 trillion, what do you think the traders on Wall Street have in their brains? Who knows?
They’ve got some form of nonsense in their brains. They’re not really trading on the basis of what the fiscal realities are; they’re trading on the basis of how everyone else trades. Because they can’t lose their jobs if they lose money collectively, with everyone else. They can lose their jobs if they lose money alone.
You can't just say, “gee, Wall Street isn’t pricing this in the [government ] securities.” Well, when has Wall Street gotten it right? They missed the dot-com bubble, they missed the subprime problem. You don’t want me taking Wall Street as your guide to economic forecasts or perceptions of economic realities, because usually they’re wrong.
Bill Gross, who runs the largest bond fund in the world, pulled out of the bond market a year ago, and no one came along with him. So he was out there hanging out by himself, and then he lost money. Then he decided to cave and give up talking about what he was talking about.
So when it comes to making money, making money on other peoples’ mistakes is different from understanding the true problems that are facing the country. That’s what economics is about. We’re trying to understand what’s really going on. What these guys on Wall Street are doing is anyone’s guess.