Lawrence Kotlikoff - The Fed And Treasury's Actions Are Equivalent To Child Abuse

Tyler Durden's picture

A few months ago we linked up to a Bloomberg interview with Boston professor Lawrence Kotlikoff who provided his justification for why the US is currently bankrupt (something about a few hundred trillion in off-balance sheet liabilities). Back then Koltikoff, aiming squarely at a specific NYT Op-Ed columnist, said "some
doctrinaire Keynesian economists would say any stimulus over the next
few years won’t affect our ability to deal with deficits in the long
run. This is wrong as a simple matter of arithmetic. The fiscal gap is
the government’s credit-card bill and each year’s 14 percent of GDP is
the interest on that bill. If it doesn’t pay this year’s interest, it
will be added to the balance. Demand-siders say forgoing this year’s 14
percent fiscal tightening, and spending even more, will pay for itself,
in present value, by expanding the economy and tax revenue. My reaction?
Get real, or go hang out with equally deluded supply-siders. Our
country is broke and can no longer afford no- pain, all-gain 'solutions'." And just because nothing has changed, the professor is back to the crime scene this time making an even stronger case of bashing America's oligarchy for not daring to set off on the much needed path of austerity, something even the stereotypically more "fear-prone" French are willing to do (and strike every day along the way). Kotlikoff says: "This massive Ponzi scheme is turning the American Dream
into the American Nightmare
" adding that what the Fed is doing now is equivalent to "child abuse" and adding "If things continue as we adults have planned, our nation’s
debt, measured as a share of gross domestic product, will reach
Greek levels just when the grandkids start heading to work. At
that point, simply stabilizing the debt-to-GDP ratio will
require raising taxes by 50 percent, thereby lowering the
grandkids’ living standard from 74 to 61." And it gets much worse. Read on for Kotlikoff's view on why the Fed should be banned by the Geneva Convention.

We don’t want to think about it, let alone read about it, but higher taxes are on the way. (source: Bloomberg)

Two tax hikes were passed this year and another is likely. These new taxes are supposedly being levied just on the rich. But over time, they will hit most of our kids. And they are just the beginning of our children’s and grandchildren’s tax trauma, given Congress’s inability to curb spending.

The two increases are for Medicare. They were buried inside the 2,000-page health-care bill and take effect in 2013. Earn more than $250,000 ($200,000 if single) and you’ll face an extra 0.9 percentage-point FICA tax for Social Security. And once your income passes this level, you’ll pay a 3.4 percent tax on your asset income.

These thresholds aren’t indexed for inflation, let alone growth in real incomes. So these taxes on “the rich” will eventually hit everyone as nominal incomes rise with inflation and productivity. Within 20 years most earners will be paying these new Medicare taxes.

The Alternative Minimum Tax also has thresholds that aren’t indexed for inflation. Congress has raised these levels to keep the share of taxpayers affected constant. But there is no guarantee it will continue to do so.

There are two other income-tax thresholds that haven’t changed since 1984. These are the income levels at which the first 50 percent and then 85 percent of our Social Security benefits are subject to taxation. In 2000, only 22 percent of recipients were above one of these thresholds. Now it’s 39 percent. When today’s children retire, virtually all will pay taxes on 85 percent of their benefits.

Bye-Bye Tax Cuts

Take a current 10-year-old who reaches the 25 percent tax bracket. She’ll hand back 21 percent (0.25 times 0.85) of her Social Security benefit in income taxes. To add injury to injury, President Barack Obama’s National Commission on Fiscal Responsibility and Reform likely will recommend a 20 percent benefit cut through a three-year increase in Social Security’s full retirement age.

Congress will, surely, also repeal George W. Bush’s income- tax cuts for the rich by raising rates in the top two brackets to 36 percent from 33 percent and to 39.6 percent from 35 percent. Over time, many of our kids who are middle income and even low income will face these higher rates because of real bracket creep.

Based on these assumptions, many young, low earners, now in the 15 percent bracket, will land in the 25 percent bracket by 2020. And many young workers with moderate earnings, now in the 28 percent bracket, will move into the 36 percent bracket.

What’s the total impact on young and future Americans of these tax time-bombs?

Kids and Grandkids

Consider two couples -- the kids, who are 30, and the grandkids, who will be 30 in 2040. The kids earn $70,000 a year per spouse, own a $400,000 house with a $1,718 monthly mortgage payment, will spend $30,000 on each of their two children’s four years of college, and earn 6 percent (3 percent after inflation) on their assets.

The grandkids are just like the kids except all their numbers are 3.68 times larger because of inflation and productivity growth.

Let’s reference by 100 each couple’s sustainable living standard absent any federal taxes. To compare the kids and the grandkids, we’ve adjusted the grandkids’ living standard down for their increased productivity.

Under the current tax system, the kids’ living standard is 83, meaning they face a 17 percent lifetime tax rate. Add in the new Medicare taxes, and the increase in top tax rates over the next decade, and their living standard drops to 80 -- a 20 percent tax rate.

Approaching Greece

The grandkids face a bigger hit. Their living standard is 74 -- a 26 percent tax. So, compared with the current tax system, the grandkids have to pay 9 cents more per dollar earned to Uncle Sam.

If things continue as we adults have planned, our nation’s debt, measured as a share of gross domestic product, will reach Greek levels just when the grandkids start heading to work. At that point, simply stabilizing the debt-to-GDP ratio will require raising taxes by 50 percent, thereby lowering the grandkids’ living standard from 74 to 61.

This is a 39 percent bite, more than twice the lifetime tax rate that baby boomers have experienced. Bear in mind, this is an average, not a marginal tax rate; it’s like taxing every dollar the grandkids earn at 39 percent.

Deficits Keep Soaring

A 50 percent tax hike will work for a while. But, given projected federal spending, it won’t keep deficits from soaring down the road. So the great-grandkids can expect even higher lifetime tax rates than their parents.

We’ve spent six decades passing the generational buck -- taking ever-larger sums from the young and giving them to the old, while promising the young their turn, when old, to expropriate their own offspring.

This massive Ponzi scheme is turning the American Dream into the American Nightmare. Stopping it means dramatically limiting the growth of federal spending. Here’s how:

-- Scrap our health-care system and provide all citizens with a voucher based on pre-existing conditions to buy a basic health plan, and limit coverages so that the total cost of the vouchers is fixed each year at 10 percent of GDP -- what Germany now spends on care.

-- Freeze Social Security in place, pay off its accrued benefits and replace the system with mandatory saving in personal accounts whose assets are jointly invested, by computer, not Wall Street, at minimal cost, in a fully diversified global index fund. The government would match contributions of the poor to make the system progressive and annuitize account balances at retirement. This Personal Security System would take much of Social Security’s unfunded liability off our kids’ backs.

-- Finally, stop spending more than the next 15 countries combined on defense. Declare victory in our unwinnable wars and bring the troops home.

And what about revenue? Scrap the current tax system and tax the elderly as well as the young through a levy on consumption. Also, provide a fixed monthly payment to each household to make the consumption tax progressive.

This all may sound radical. It’s not. Our progeny only have 100 cents out of every dollar they earn to surrender to Uncle Sam. And if their tax rates get too high, they will have a simple response: “Hasta la vista, baby.”

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99er's picture

(Reuters) - In 2007, when the world was on the brink of financial crisis, U.S. income inequality hit its highest mark since 1928, just before the Great Depression.

HarryWanger's picture

Pretty much everything in this article I have read in one form or another since the late 70's. So exactly when is this "nightmare scenario" finally going to hit? I guess in 20 more years, we'll be reading the same thing with different authors telling us how ugly it's going to be for that generations kids and grandkids.

unum mountaineer's picture

"since the late 70's."

eeeeeennnnkkk <jeopardy buzzer>...question: what are things that make you go hhhhhmmmmmm...

Alex Tribec: yes..correct, you get ot pick again..

unum: "I'll choose, collapsing economic foundations for $1000 Alex"

Alex Tribec: " answer...daily double"


isn't that the point harry! what would have worked 30 or so years ago would be fine....if we were 30 years ago. you're aging yourself..

bigdumbnugly's picture

but harry, today i forgot to look both ways before i crossed the street and nothing happened - so therefore no need to trouble myself with that anymore?

HarryWanger's picture

It's human nature to be on the look out for danger. We've evolved that way. It turns into insanity however when it occupies your outlook on a second by second basis where even a paper cut turns into "Oh man! I nearly cut my hand off!"

bigdumbnugly's picture

this is true.  but the example i gave was just allegorical to having an awareness of a potential hazard.  the troubles of the '70's were in some ways (particlarly fininacial) different than those of today.  the fact that the planet wasn't blown to pieces through war then is no safeguard that we won't destroy ourselves in another way now.

i agree things here can get very chicken-little like at the drop of a hat sometimes, but understanding and accepting a clear and present danger and acting accordingly is never out of fashion.

Mako's picture

Actually it's human nature to believe what you have been taught.

Just like you, you believed the lie and still do.  Which was why your "the DOW will never go below 10,000 again in my lifetime was WRONG".  The system will last a generation or so, then collapse and liquidate.  

I mean if we all believed you, we would be sitting at DOW 36,000 or Nikkei 100,000.   You are at the very beginning of the collapse, the collapse and liquidation this time will make the last one look like child's play.  Expect 40-80 years, Japan will be going through the process even longer than that.

BTW it won't be little paper cut this time. 

Internet Tough Guy's picture

Pretty much everything you say about things getting better I have heard since the 70s. I guess in 20 years we'll be reading the same thing from different Wangers, as taxes and unemployment hit 50%.

assumptionblindness's picture

Harry, you make a good point...we have all seen that there was no wolf no matter what that little boy cried!   Is it wise to stop paying attention though? 

It certainly is obvious that nobody knows when the "nightmare scenario" will hit, however, there is only one thing that can continue to keep it at bay...STRONG economic growth.  The absence of such heightens the odds that the cry "WOLF!" will be accurate sooner rather than later. 

Cognitive Dissonance's picture

It certainly is obvious that nobody knows when the "nightmare scenario" will hit,....

Isn't it possible "it" is hitting us now, but over a longer period of time than one would normally use to describe collapse or disaster or "nightmare scenario"? Contrary to what many history books tell us about ancient cultures collapsing "overnight", meaning in one or two years, in fact what happened was that the culture was rapidly declining for 10, 20 or more years. Then, a drought or an invasion pushed it over the top and it rapidly "collapsed".

In realty, the collapse started long before, but wasn't evident until the finally straw broke the camels back. Sounds likes something that has been going down for the past 20 or 30 years, doesn't it? At what point does an exponential acceleration tear the ship apart? Doesn't it hold together until "suddenly" it holds no longer?

Popo's picture

Exactly right CD.   We've been conditioned by sensationalist news-reporting to think in terms of "events", and not of trends.

When people talk about when the nightmare will hit, they are making the mistake of thinking that it is something that will "hit" (as in, a single/fast event like a market crash).

For those who haven't figured it out yet -- the nightmare is going to be much worse than that:  It's going to be 30 years of negative 'growth', with vast portions of our middle-class sliding into poverty.  

We've just had a decade of non-growth in equity markets.  For anyone investing over the long term (ie: most pensioners), the nightmare is already here.

There may not be a great "kaboom".  The powers that be seem intent on trading what would have been a short cataclysmic implosion, for a slow cancerous decline.


Cognitive Dissonance's picture

There may not be a great "kaboom".  The powers that be seem intent on trading what would have been a short cataclysmic implosion, for a slow cancerous decline.

Well said.

Not a kaboom, but a long slow hisssssssssssssssssssssssssss as the air leaks out and the vehicles grinds to a halt. Then "suddenly" it stops/collapses and all that's noted is the end came quickly. Isn't this exactly what we mean when we talk about the can getting kicked down the road? And don't we always talk about the cumulative imbalances that will eventually capsize the ship?

This is why the Fed is acting as it is. As Todd Harrison has repeatedly said, they sold the car crash and bought the cancer. Cancer might take 10 or 15 years before it slowly eats your insides away. Yet we are conditioned to think of cancer in terms of "You have 6 months left to live" when most people can survive really bad cancer for 5 or more years and other cancers much much longer.

bigdumbnugly's picture

that long slow hissssssssssssssssssssss  sounds like something eminating from one of them there anal rings, cd.

sorry, couldn't resist.  last one i promise!

bigdumbnugly's picture

lol to both links.  i remember listening to stern on the radio the day they did the anal ring toss bit.  it was a week or two after the baloney slice toss at the "bullseye."  the caveat was that the baloney had to stick.

DaveyJones's picture

should have read down all the comments before posting down below since you made a similar point.

LMAO's picture

"a long slow hisssssssssssssssssssssssssss as the air leaks out and the vehicles grinds to a halt."

It's not a puncture, it's the Gassssssssssssssssss.

Vive La France!


assumptionblindness's picture

"Doesn't it hold together until "suddenly" it holds no longer?"

In a dive, I believe that the stress 'failure' point on a Boeing 737 is somewhere near the speed of sound.

Your point is well taken.  The engines may have gone out long ago yet those of us in the passenger cabin failed to notice that we were losing altitude.  Imagine the surprise among the passengers when the captain announces "brace for impact!"  There may have been several points over the last 20-30 years where we could have restarted the engines and pulled out of the dive...not now. 

Actually, maybe I should amend the above to reflect that the captain will not announce "brace for impact" until AFTER a wing breaks off.   


frankTHE COIN's picture

To draw an analogy : Dehydration that causes death. While in the sun you

                              feel fine. The instant your lips / tongue feel dry and

                              you feel that you now want a drink of water marks

                              the point that you are already 60 % thru dehydration.

                              Soon to follow is a burst of sweat thru your pours. You

                              then have a short time to get water, or you will die.


ViewfromUndertheBridge's picture

At some stage after the "burst of sweat" you start to lose vision in that all the colour fades to grey...or at least I did after enduring close to 50degC for too long in Dubai...and then I went down into the air-conditioned saloon of the motoryacht I was solo-delivering and drank ice cold water until I upchucked, but not on the carpet...

Chandos's picture

Good point CD...I wrote these little verses a few weeks ago; I think it encapsulates what you're saying:

Much in the same way

As we can see

Our own galaxy from afar

While being wholly

Immersed in it,

So can we see


Coming in the distance

While in it already.



frankTHE COIN's picture

Brett Favre loves Wanger Jeans.

TooBearish's picture

No this time its different - Harry. This financial crisis is a huge wealth transfer from the middle class to the elites and politcally connected, ie govt and union employees.  The debt issued is non productive for most of society and is the seed of rot in the lost American dream.  So fuk you and your polly anna what me worry attitude.

Popo's picture

Really Harry?  We've had an entire DECADE of non-growth in equity markets for the first time ever.

When exactly is the nightmare scenario going to show up?  I guess, maybe when you look around?

midtowng's picture

So true. The federal tax hikes never seem to happen despite warnings of it year after year. Instead, the borrowing gets bigger every year. The borrowing is usually done in order to "pay" for tax cuts for the wealthy.

I don't see anything changing, especially with the Repubs winning next month.

Sean7k's picture

It hits when the wealth accumulated over the previous 130 years is finally transferred in full. 

The author is suffering from a huge delusion- that ordinary citizens can enact change that results if a "fair" and "equitable" system. 

The problem is the existence of government in any form. Sorry, I have to keep repeating this: All governments are designed to benefit a small minority at the expense of the majority. This is accomplished through theft and fraud via the "rule of law" and the police powers reserved for all governments.

The elimination of government, the central bank, taxes coupled with the creation of sound money banking  functioning in a truly free market are the only way we will free ourselves from the slavery of banker debt.

Otherwise, we continue to live the same life- over and over, generation to generation, century to century. There is a reason almost every country in the world has a central bank, it is not fiscal stability, the tempering of boom bust cycles or maintaining employment- it is the outright rape and confiscation of every cent of wealth held by people outside the circle of elites.

the rookie cynic's picture

Kaching. You hit the nail on the head Sean7k.

The Constitution has been over-written by the Unified Commercial Code – inexorably supplanting any hopes of private citizens getting justice in the courts, least of all in New York City. It’s all tilted in favor of the big time lawyers, banks, and multinational corporations.  He that controls the rules wins the game, after all. Fait Accompli.

zaknick's picture

Finally somebody with some shrewd common sense observations. What the fuck is wrong with you people, can't you tell this huge parasite called DC is slowly bleeding you like the ugly tick that it is? And the banksters/fake fed/cia/pentagon/mic/msm media mafia.



Comrade de Chaos's picture

to HW:

Even if the system survives, there is another point you are missing. The real life style of an average American in that next twenty years will be much lower (worse) than the potential life style, given we implement fix right now. And the differences in between what we could be and what we will be might be huge.

DaveyJones's picture

your use of short term history to prove your point is ironic since long term history and long term trends make the US story very similar to other empires that have crumbled under debt, corruption and resource exhaustion.

Buck Johnson's picture

What they have been doing for 30 years since 1980 is to inflate bubbles.  Whats happening now is that we have no more bubbles that are easy to inflate anymore.  Our economic system is out of gas and everything is deflating.

Zero Debt's picture

40 million in US on food stamps does not count for nightmare? What about income inequalities?

unum mountaineer's picture

child abuse? you mean : "I haven't been fucked so hard since grade school" child abuse?

knukles's picture

My reaction was more kinda like self-abuse.

unum mountaineer's picture

i daren't do that..i love myself waaaay to much cuz I swear being in america just won't be as much fun.

RobotTrader's picture

The only thing getting "abused" today are Chipotle short sellers.

Who woulda thunk that a restaurant stock would be the star performer 2 years after the greatest financial bust ever seen?

Up 14% today after more than a 4 bagger off the March 2009 lows.

HarryWanger's picture

Bummed I missed it. Had a buy order last week and never executed it. Was worried about earnings. Boy, why worry? This not only shows how strong this company is but says a lot about the strength of the consumer that seems to be "gobbling" up everything in sight regardless of this "terrible/awful/disastrous economy.

Cognitive Dissonance's picture


If you think today's CMG stock price move "shows how strong this company is but says a lot about the strength of the consumer that seems to be "gobbling" up everything in sight regardless of this "terrible/awful/disastrous economy" than you really are drinking the Kool-Aid.

This move doesn't reflect anything other than gang program trading and rotation of the HFT algo's from one stock who is reporting to the next. This is churn HFT style, using any excuse as cover.

Bill Lumbergh's picture

Absolutely...have you considered submitting an application to be a fill-in for Cramer...all you need to do is master hitting all those buttons like "Buy Buy Buy", "House of Pain", etc.

ViewfromUndertheBridge's picture

Sorry to hear you feel bummed, Harry.

Hey, cheer yourself up thinking about how great it is that FASB 157 got canned, and how HFT rules, and how HUD is going after dead-beat borrowers now in response to (Robo-Signing, Fraudclosure, MERS fraud, REMIC fraud, Reps & Warranties Fraud) a few paperwork issues. Harry, control fraud rocks! Chicago sold its parking meters for half-price to SWFs, cool! GOOG's effective tax rate is 2.4%. And Harry, it gets better...8% of M1 for bankers this bonus season is better than good, how can you be down? The concentration of wealth hasn't been so pronounced since 1928, 42m Americans are on food stamps, 22.3% (shadowstats) are unemployed and the toxic waste that stopped the world in 2008 is being put-back to US banks....

But Harry, you did score with AAPL didn't you? So, you are OK, aren't you?

That's all that matters, Harry.

Cognitive Dissonance's picture

Any one else notice the breakdown in correlation between the major US indexes over the past few days?

Friday at 3:20 PM

DOW down 0.3 %

SPX up less than 0.1%

NASDAQ up 0.7%

That's a one percent difference between the high and low index with the red/green line in between. Classic signs of topping.

hettygreen's picture

I don't remember if this was going on at the turn in '07-'08 but I definitely remember seeing it before the tech led episode of market "weakness" in '00-'02.

assumptionblindness's picture

The correlation breakdown was due to binary recognition (see GOOG, AMZN) that only DOW and S&P companies are subject to the tax code. :-)

notadouche's picture

I have a week's worth of Dallas Morning News during the week of the assassination of Kennedy.  Reading the rest of the paper you see the same thing.  Education is broken.  Social Security will be bankrupt.  Universal Medical coverage is absolutely needed.  Immigration reform.  Crime rates.  yada yada yada.  Go back to any old paper from 50 years ago and it's like Groundhog Day.  It's scary to think the politicians and lobbyist have gotten away pounding on the same tired themes yet have never really addressed them.  Only used as a way to extract more from the people.  Scare tactics to retain or regain power for power's sake yet the "average" person falls into the trap and old people shit their pants with fear and vote in a way that make them feel as they will be more safe.  This is 2010 and it's been the exact same themes since before I was born.  New Deals, Bad Deals and Worse Deals.  It's about time the deal making stop as the grave only gets deeper.  The one thing worse than "foreign entanglements"  appears to be "domestic entanglements".  RIP society.  Welcome to the Thunderdome. 

primefool's picture

Read some Lao Tsu from around 1000BC. He was also extremely upset abou the decay of society, the collapse of values, the disrespectful youth and so on.
All middle -aged men feel this way . its hormonal.