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SSep 15, 2012

Will the Real Federal Deficit Please Stand Up?

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“When you find yourself in a hole, stop digging.” ***

The latest estimate of the federal deficit is $1.1 trillion. In spite of that, neither candidate for President has talked much about the deficit or offered a detailed plan to close it.                     The best short deficit discussion I’ve seen is a YouTube video made by Hal Mason, a retired accountant. When I last checked, nearly 2 million people had viewed “United States Budget Dilemma.wmv”.

 Mr. Mason suggested it would be necessary to shut down most of our government to close the deficit. Of course, we might miss a few things. Say goodbye Justice. Hasta la vista Education. Bye-bye Agriculture, Commerce, Homeland Security, Housing and Urban Development, Energy, Interior, Labor, State, etc. And, by the way, this also includes the entire Defense department. All together those programs cost $1.2 trillion for 2012.

Make those simple cuts and we’d have enough tax revenue left to pay interest on the federal debt (about $225 billion) and continue printing the checks to support Social Security, Medicare, Medicaid and other “non-discretionary” programs that total about $2.25 trillion.

Alternatively, the budget could be balanced if we all volunteered to pay 46 percent more in taxes than we already pay. So far neither the 1 percent nor the 99 percent has stepped forward.

Sadly, that dismal picture doesn’t come close to showing just how over-promised and broke our country is. Do some studying and you will learn that the budget politicians talk about, the one known as the Unified Budget with the $1.1 trillion deficit, is a fiction. It is convenient for politicians but it is not a true representation of our financial condition. If it were subject to the same accounting standards as our corporations, it would get a qualified opinion from its auditors.

We can get a bit closer to reality by checking the most recent “Financial Report of the United States Government” (2011) from the Government Accounting Office. In it, Comptroller General Gene L. Dodaro observes “The comprehensive long-term fiscal projections presented…show that…the federal government continues to face an unsustainable fiscal path.”

He was being kind.

The reason can be found in the details of those financial statements. The statements include long-term estimates of the amount by which promised benefit payments for Social Security and Medicare exceed estimates of future revenues. The gap depends on the actuarial method used, but filling it would require a deposit, today, of $33.8 trillion to $46.3 trillion. Whichever actuarial method you use, the increase from 2010 to 2011 was over $3 trillion. In other words, government liabilities that are never discussed as part of federal debt are rising three times faster than the official $1 trillion deficit.

But wait, there’s more!

Even these figures are a government-manipulated fiction. The total unfunded liabilities for Medicare dropped by trillions from 2009 to 2010. How? By the passage of Obamacare. It contained major reductions in payments to doctors and medical service providers. There’s only one problem: The chief actuary for Medicare, Richard Foster, doesn’t believe those savings will be achieved. He has already declared, in the 2010 Trustees Report, that the reduction isn’t likely to happen. Basically, we’re still in a political fairyland.

So, is there a measure that we can trust?

I believe there is. Economists call it the fiscal gap, the comprehensive long-term difference between government revenues and government spending based on the most realistic estimates available. The foundation for this measurement is the Alternative Fiscal Scenario, the Congressional Budget Offices most realistic budget projection. The fiscal gap is economics’ standard measure of fiscal sustainability. Using it, economists have tracked the growth of the fiscal gap. It was $60 trillion in 2003, $175 trillion in 2007, $211 trillion in 2011 and $222 trillion in 2012.

Note that $222 trillion is a multiple of our gross domestic product that far exceeds any of the figures that are causing the economic crisis in Europe.

The person I speak with about this— enough to have co-authored “The Clash of Generations” (MIT Press, 2012) with him about this subject— is Boston University economist Laurence J. Kotlikoff. He points out that while the official deficit is $1.1 trillion for 2012, the increase in the fiscal gap for the same year was $11 trillion. That’s 10 times as much as the official deficit.

Can we argue about these numbers?

Not according to Kotlikoff. “No decent economist would use any measure but the fiscal gap to understand our long-term problem,” he said in a recent phone conversation. That means the true financial condition of our country is far, far worse than it is represented in public discussion.

Can you spell b-a-k-l-a-v-a?

Filed Under: Government, Taxes & Other Disasters