Lawrence Kotlikoff - "With The Fiscal Crisis In Spitting Distance Here Is My Proposed Solution"

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With everyone offering some version of a US budget, one more ridiculous than the other, one thing is certain: nobody has any clue how to fix America's fiscal catastrophe. And while the biggest soap opera rages in D.C. Larry Kotlikoff, who recently served as the only rational contributor to the just released IMF what paper "An Analysis of U.S. Fiscal and Generational Imbalances: Who Will Pay and How?" summarizes the "progress" so far: "The two parties are having a heated debate over the Republican plan to slice $61 billion off Uncle Sam’s projected $3.6 trillion budget. If the Republicans get their way, the deficit will fall from 9.5 percent of gross domestic product to 9.1 percent. If they don’t, they’ll probably shut the government for a couple of days. Then they’ll compromise on, say, a $40 billion budget cut, having proved they gave it their best shot." And sick of the corrupt petulance in DC, Kotlikoff has decided to propose his own budget. " I launched www.thepurplehealthplan.org last week
to solicit endorsements for what I call the Purple Health Plan -
- a proposal that offers common ground to both Republicans and
Democrats. To date, five Nobel laureates in economics, George Akerlof, Edmund Phelps, Thomas Schelling, Vernon Smith and
William Sharpe, have signed on. So have other prominent
economists." We have not read it but fail to see how it can be possibly worse, especially since one Paul Krugman has not endorsed said plan.

U.S. Fiscal Crisis in Spitting Distance: Laurence Kotlikoff, first posted in Bloomberg

The two parties are having a heated
debate over the Republican plan to slice $61 billion off Uncle
Sam’s projected $3.6 trillion budget. If the Republicans get
their way, the deficit will fall from 9.5 percent of gross
domestic product to 9.1 percent. If they don’t, they’ll probably
shut the government for a couple of days. Then they’ll
compromise on, say, a $40 billion budget cut, having proved they
gave it their best shot.

Arguing over lowering our deficit by just 0.4 percent of
GDP when we need to run massive surpluses to deal with the baby
boomers’ impending retirement is, pick your metaphor --
rearranging the Titanic’s furniture, Nero’s fiddling, Custer’s
Last Stand.

Is this malign fiscal neglect, or has Congress somehow
missed what its own Congressional Budget Office is indicating?
CBO’s baseline budget updates suggest the date for reaching what
Carmen Reinhart, Kenneth Rogoff and other prominent economists
believe is a critical insolvency threshold -- a 90 percent ratio
of federal debt held by the public to gross domestic product --
has moved four years closer, in just nine months!

The CBO releases its realistic long-term forecast -- the
alternative fiscal scenario -- every June. In between, it
provides us with periodic updates of its unrealistic 10-year
baseline scenario, based on “current law.” Congress, for
political reasons, forces the agency to interpret current law in
ways that generally make spending much lower and taxes much
higher than is likely.

Take It Seriously

Consequently, no one should take the projected levels of
spending and taxes in CBO’s baseline scenario seriously. But
everyone should take very seriously updates to the baseline.
Why? Because these changes give us a pretty good idea of how the
next alternative fiscal scenario will differ from the previous
one.

Last June’s analysis had us going critical (crossing the 90
percent debt-to-GDP threshold) in 2021. But back then the CBO
assumed the Bush tax cuts wouldn’t be extended for the rich
starting in 2011. In December, President Barack Obama dropped
his demand to immediately raise taxes on the rich in exchange
for a one-year cut in the payroll tax, which helps fund Social
Security. So much for raising revenue at a time when we are
borrowing 37 cents to cover each dollar of spending.

In January, the CBO modified its 10-year baseline forecast,
taking into account the December deal. By my calculations, this
meant the 90 percent threshold would be crossed in 2019.

What a Difference

A lot can change in a few weeks. In February, the president
released his budget and, lo and behold, it proposes maintaining
the Bush tax cuts for all except the rich not through 2013, as
in the December deal, but indefinitely. In so doing, the
president conveniently took the issue of tax increases off the
next election’s table.

On March 18, when the CBO released a new forecast that
incorporated the president’s budget, the 90 percent mark had
moved up to 2017.

Actually, 2017 is optimistic. Uncle Sam’s creditors will
soon start charging exorbitant interest rates -- like those
Greece, Ireland and Portugal now face. The market’s concern with
those countries’ bonds is outright default, which is unlikely in
the U.S. What is likely is rising inflation as the Federal
Reserve
continues to print vast quantities of money to help pay
the Treasury’s bills.

I generally don’t give investment advice, but Bill Gross,
co-founder of PIMCO and manager of the world’s largest bond
mutual fund, has it right. It’s time to your dump all but your
very short-term U.S. Treasuries and other dollar-denominated
bonds. A safer alternative is Treasury inflation protected
securities, or TIPS.

Real Problem

To be clear, the real problem isn’t paying for our current
spending. The real problem is paying for the 78 million baby
boomers
as they retire and claim their promised Medicare,
Medicaid and Social Security benefits, and as spending on the
new health-care exchanges expands far beyond what’s been
projected.

There is one bright spot. Paul Ryan, chairman of the House
Budget Committee, has included a version of the Rivlin-Ryan
Medicare plan in the Republican budget proposal. This bipartisan
proposal, co-authored with Alice Rivlin, former CBO director and
head of the Office of Management and Budget under Bill Clinton,
would transform Medicare from its current fee-for-service,
defined-benefit structure into a defined contribution system in
which the government’s liability is strictly capped.

Rivlin-Ryan would be a huge step in the right direction,
but what’s really needed is a complete redo that would keep
total government health-care spending where it is now, at about
10 percent of GDP.

Common Ground

To that end, I launched www.thepurplehealthplan.org last week
to solicit endorsements for what I call the Purple Health Plan -
- a proposal that offers common ground to both Republicans and
Democrats. To date, five Nobel laureates in economics, George Akerlof, Edmund Phelps, Thomas Schelling, Vernon Smith and
William Sharpe, have signed on. So have other prominent
economists.

If you’re a Democrat, don’t worry. This system is more or
less what’s in place in Germany, Holland, Switzerland and Israel
-- hardly right-wing bastions. If you’re a Republican, don’t
worry. This is a voucher system that’s fair to all and keeps
government spending from exploding.

If you like the plan, please endorse it and share it with
others. This includes the president and House Speaker John Boehner, who should take the Purple Health Plan and adopt it as
their joint proposal.