Treasury Secretary Yellen just announced that the government will hit the debt limit this Thursday! and will run out of accounting tricks to rob Peter to pay Paul as of June 19th. That’s if Congress doesn’t raise the debt ceiling. Meanwhile, House Republicans are, in so many words, threatening a default on federal debt if the Democrats won’t agree to major cuts in Social Security, Medicare, and other entitlement benefits.
The cuts in Social Security would likely include a phased increase in the system’s full retirement age from age 67 (to which the system is quickly heading) to 70. The cuts in Medicare would likely include a rise in its age of eligibility from the current 65 to 67 or higher. Raising these ages would, via the phase-ins, continue the postwar tradition of passing the generational buck, i.e., making our kids and grandkids pay, in this case in the form of reduced benefits, for all the tax cuts and benefit increases that both parties have enacted over the years.
Expropriating our progeny to the benefit of ourselves is immoral. Who does this to their children? It’s also slowly transforming the American Dream into the American Nightmare. But our national Ponzi scheme is now seven decades old. Every administration, including supposedly conservative ones like Eisenhower’s, has expanded our red ink. Most of the expansion has been off the books.
Hence, the new House Republicans, with all their delusions about election theft and more, are, to their credit, absolutely right to be concerned about our nation’s fiscal condition. Indeed, they, and we, should be terrified. Our country is, quite simply, broke. Our fiscal gap — the present value difference between the projected (by the CBO — Congressional Budget Office) path of outlays and the projected path of receipts — is, by my latest estimate, $41 trillion — almost two years of GDP!
This is a smaller figure than I’ve calculated in the past because it discounts the government’s projected cash flows at the theoretically more appropriate real return to U.S. national wealth — 6.5 percent since 1950. Using this more appropriate higher discount rate also lowers the present value of the projected future path of GDP. The ratio of the two figures is 7.7 percent. This means we need to collect 7.7 percent more in taxes, every year starting now, to cover all the future spending the CBO projects. Alternatively, we need to immediately and permanently lower the path of federal spending by 7.7 percent of each future year’s GDP. Or we can do neither of these things and dig an even deeper hole for our kids.
How do you come up with 7.7 percent of GDP annually in extra taxes? One way is to immediately and permanently raise all federal taxes by 41.3 percent! Another is to immediately and permanently cut all federal spending, apart from interest payments on official debt, by 35.3 percent! These adjustments are miles beyond what anyone in Congress realizes is needed. The reason is they are looking at the wrong number — the official debt, not the fiscal gap.
If I’m Speaker McCarthy, I start by passing THE INFORM ACT — the bipartisan Intergenerational Financial Obligations Reform Act introduced by Senators Thune and Kaine in 2013. (FYI, I helped write the bill.) This bill compels the CBO, OMB, and GAO to do fiscal gap accounting on a routine basis. Again, this accounting puts all our off-the-books debts on the book.
What about closing the fiscal gap?
When I ran for President in 2016 as a write-in candidate, I gave this careful thought. Here’s my platform. It has lots of novel and relatively tolerable ways to close the fiscal gap without shooting our economy in the head by defaulting on the debt.