RPF0466-Kotlikoff_Senate_Testimony
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00:01:00.000 | It's summertime here at Radical Personal Finance,
00:01:03.000 | and that means it's time for an upbeat, uplifting, encouraging show.
00:01:08.000 | I'm picturing you listening to this show, got the top down on the convertible,
00:01:12.000 | the wind ruffling through your hair.
00:01:15.000 | So that means, of course, today, let's talk about the current insolvency
00:01:19.000 | and guaranteed bankruptcy of the U.S. federal government.
00:01:23.000 | [Music]
00:01:38.000 | Welcome to Radical Personal Finance, the show guaranteed to cheer you up
00:01:43.000 | when you're feeling blue and give you many things to be optimistic about
00:01:47.000 | whenever you're feeling concerned about the future.
00:01:50.000 | We also try to share with you the knowledge, skills, insight, and encouragement
00:01:54.000 | you need to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less.
00:01:57.000 | My name is Joshua, and today I am your host,
00:02:00.000 | and I'm here to provoke you into thinking about what the coming decades may look like.
00:02:05.000 | [Music]
00:02:10.000 | A topic I have long wanted to broach on, Radical Personal Finance.
00:02:14.000 | If you're a long-time listener, you've heard me say here and there in passing
00:02:17.000 | that the U.S. federal government is bankrupt, and I am convinced that a long-term default
00:02:23.000 | on U.S. federal debt is inevitable, et cetera.
00:02:26.000 | I've made passing comments like that, but I've never really substantiated those claims
00:02:30.000 | and never really talked about why I believe that to be the case.
00:02:33.000 | And there are many reasons for that.
00:02:35.000 | Number one, of course, I'm fully aware of how large those statements are,
00:02:39.000 | and I don't like to say things flippantly.
00:02:41.000 | They kind of slip out from time to time.
00:02:43.000 | But I feel the need to be responsible with my language and to speak clearly and responsibly
00:02:50.000 | and just to provide a sense of clarity.
00:02:53.000 | And I don't want to cause people to go off into the world of freak-out mode
00:02:57.000 | and all of a sudden start ordering stacks and stacks and pallets of gold coins on the Internet.
00:03:04.000 | But I do want to make sure that we talk about the subject.
00:03:07.000 | I've also often been overwhelmed with knowing even where to start.
00:03:12.000 | After all, how do you tackle a subject as huge as a giant empire
00:03:18.000 | and the underlying finances of said empire?
00:03:22.000 | I hardly know where to start sometimes.
00:03:24.000 | I hardly know how to do it.
00:03:26.000 | And so I've held off, held off, et cetera.
00:03:28.000 | But I really do want to at least bring the questions to your attention.
00:03:33.000 | I think it would be irresponsible of me not to at least raise some of the questions.
00:03:38.000 | So today I'm going to do that by reading to you a paper that was delivered by Professor Lawrence Kotlikoff,
00:03:47.000 | professor of economics at Boston University.
00:03:49.000 | It was delivered as testimony to the Senate Budget Committee on February 25, 2015.
00:03:55.000 | The paper is entitled "America's Fiscal Insolvency and its Generational Consequences."
00:04:01.000 | This paper is probably the best, most useful, succinct, but academically accurate introduction to the subject that I could do.
00:04:12.000 | And it kind of describes the fundamental problem.
00:04:15.000 | But I need to preface the paper with a few comments in order to hope to help you to hear the paper in the tone and the way that I intend to share it with you.
00:04:27.000 | When you talk about something like the future, it's very difficult to know what will happen.
00:04:35.000 | As the saying goes, predictions are difficult, especially if they're about the future.
00:04:40.000 | So predicting the future is tough.
00:04:44.000 | And when you're talking about things that are deeply politically charged like governments and empire and taxes and spending and all of these things, it is very, very challenging to know even where to begin.
00:04:59.000 | And perhaps more than that, it's easy to feel overwhelmed by how little you know.
00:05:08.000 | I've been researching and thinking about this particular area for about 10 years.
00:05:13.000 | And I feel like a babe in the woods.
00:05:16.000 | I really do.
00:05:17.000 | And it's only based upon the fact that I've learned that just about everybody feels that way.
00:05:24.000 | It gives me the confidence to even broach a subject like this and even seek to spark your thinking.
00:05:30.000 | Another thing to consider is we immediately look and want to jump to our response to say what to do.
00:05:37.000 | We're wired to look for a solution of what we can do.
00:05:41.000 | When somebody presents a problem, we immediately say, "Well, what can we do?"
00:05:45.000 | That's useful.
00:05:47.000 | The challenge is that that's a hard question to answer.
00:05:50.000 | So I'm not sharing and broaching this subject and seeking to give you something thought-provoking out of a desire to tell you what to do.
00:05:58.000 | I don't know what to do.
00:06:00.000 | I'm doing this today out of a desire to put something on your radar screen and to cause you to think and to understand a fundamental problem that we face and will face in coming decades.
00:06:11.000 | Those of us who are around for the coming decades are going to face these problems.
00:06:15.000 | We're going to live in interesting times.
00:06:19.000 | I pay careful attention to companies, but more importantly, municipalities, territories, and states that go through significant financial distress.
00:06:33.000 | And I do that to try to figure out what I think the future may look like for me or for you.
00:06:40.000 | And my desire is to spur you to think about that and to think and to raise this on your radar screen.
00:06:47.000 | So that's enough of a preamble.
00:06:49.000 | At the end of the show, I'll share with you a couple of things of kind of what I do and don't think.
00:06:56.000 | But I'm going to lay out the problem by reading this paper to you.
00:06:59.000 | The paper will be a little bit technical, especially in the beginning where we lay down some terms.
00:07:03.000 | And I think it's important to press through the technical bits just so you understand that there is some academic integrity to this approach.
00:07:11.000 | I'm not hawking gold coins.
00:07:13.000 | I don't have – I'm trying to talk about the collapse next year.
00:07:17.000 | This is a serious economic problem that needs to be tackled.
00:07:22.000 | It needs to be part of our broader discussion.
00:07:25.000 | We can lead the way here at Radical Personal Finance by talking about it ourselves, trying to figure out together in coming years what things may look like for us and how to weather it.
00:07:34.000 | This subject needs to be tackled by politicians.
00:07:38.000 | Unfortunately, I have zero hope of that happening until the things are forced upon them.
00:07:44.000 | So let's start with us.
00:07:46.000 | And on that note, listen – sit back, listen, and enjoy this – the reading of this paper, which again is entitled America's Fiscal Insolvency and its Generational Consequences, a testimony that was delivered to the Senate Budget Committee on February 25, 2015 by a professor of economics from Boston University, Lawrence J. Kotlikoff.
00:08:07.000 | Chairman Enzi and other distinguished members of the Senate Budget Committee, I am honored to discuss with you our country's fiscal condition.
00:08:15.000 | Let me get right to the point.
00:08:17.000 | Our country is broke.
00:08:20.000 | It's not broke in 75 years or 50 years or 25 years or 10 years.
00:08:26.000 | It's broke today.
00:08:28.000 | Indeed, it may well be in worse fiscal shape than any developed country, including Greece.
00:08:36.000 | This declaration of national insolvency will, no doubt, shock those of you who use the officially reported federal debt as the measuring stick for what our country owes.
00:08:46.000 | After all, federal debt in the hands of the public is only 74% of the GDP.
00:08:52.000 | Yes, this is double the debt-to-GDP ratio recorded a decade ago, but it's still a far cry from Italy's 135 debt-to-GDP ratio or Greece's 175% ratio.
00:09:04.000 | Unfortunately, the federal debt is not an economic measure of anything, including our nation's fiscal position.
00:09:14.000 | Instead, the federal debt and its annual change, the deficit, are purely linguistic constructs that reflect how you members of Congress choose to label government receipts and payments.
00:09:27.000 | To see this point, consider the almost $750 billion the government is collecting this year from workers under the heading "Social Security Payroll Taxes" and the future Social Security Transfer Payments these FICA contributions secure.
00:09:42.000 | The $750 billion could just as well be called government borrowing, and the future transfer payments could just as well be called principal plus interest on this borrowing plus a future tax, positive or negative, if the future payments don't correspond precisely to principal plus interest.
00:10:04.000 | This simple change in language would more than double this year's reported federal deficit.
00:10:11.000 | Indeed, were we to go back in time and relabel all past Social Security taxes as borrowing, official federal debt held by the public would not be $13 trillion, but $38 trillion, which is 211% of U.S. GDP.
00:10:31.000 | Driving in New York with a map of L.A.
00:10:34.000 | Economic theory doesn't tell us what language to use to discuss its equations.
00:10:39.000 | Whether we use English, French, or Chinese, the real economic outcomes predicted by the math are the same.
00:10:45.000 | Fiscal labeling conventions are simply a choice of language, and federal debt is a word game, not a well-defined measure of fiscal policy.
00:10:56.000 | Its use in understanding fiscal sustainability and generational policy is no different from driving in Los Angeles with a map of New York.
00:11:05.000 | Economics is not the only field where language can mask reality.
00:11:09.000 | In physics, time and distance were once viewed as fundamental concepts.
00:11:14.000 | Today, they are understood for what they are, reflections of our physical frame of reference, which is itself a language.
00:11:22.000 | And just as there are an infinite number of alternative measures of time and distance, there are an infinite number of alternative measures of the federal debt.
00:11:32.000 | Choose the right words, and you can make the federal debt any number, positive or negative, you want.
00:11:38.000 | Moreover, the fact that Congress has chosen particular fiscal labels over time does not make those labels economically more valid than any other set of internally consistent labels.
00:11:50.000 | Each of us is free to come up with his own labeling convention and produce his own utterly useless measure of government debt.
00:11:59.000 | My mother's treasury checks.
00:12:01.000 | One way to clearly see the vacuity of standard fiscal accounting is to consider the two sets of checks my 95-year-old mother receives from the U.S. Treasury.
00:12:12.000 | The checks look physically identical.
00:12:16.000 | They are both the same size, color, and have the same words in the same font.
00:12:21.000 | The only way they differ is in their amount.
00:12:24.000 | This is how I know that one set of checks is for Social Security benefit payments and the other is for coupon payments on Treasury bonds.
00:12:32.000 | Despite the identical nature of their appearance, only the present value of the Treasury bond payments is included as part of the government debt.
00:12:41.000 | The present value of the Social Security payments my mom receives each month is not.
00:12:46.000 | Why is that?
00:12:48.000 | Yes, the Treasury bonds bear the full faith and credit of the U.S. government.
00:12:53.000 | But those fancy legal words don't make those bonds safe in any real economic sense.
00:13:00.000 | Our government has periodically defaulted on the real value of official debt by running inflation.
00:13:06.000 | In 1946, for example, it wiped out a quarter of the real value of war bonds by lifting price controls.
00:13:12.000 | In the 1970s, our government used inflation to wipe out hundreds of billions of dollars in the real value of federal debt.
00:13:20.000 | So my mom's payments that Congress is currently calling "debt payments" are hardly safe.
00:13:26.000 | In contrast, her Social Security benefits, which are inflation-indexed and backed by the lobbying power of 50 million members of the AARP, are secure against both inflation and changes in legislation.
00:13:41.000 | Yet Congress includes not a penny of these liabilities in its tally of what the federal government owes.
00:13:47.000 | What economics tells us is that we can't choose what to put on the books.
00:13:52.000 | All government obligations and all government receipts, no matter what they are called, need to be properly valued in the present,
00:14:00.000 | taking into account their likelihood of payment by and to the government.
00:14:06.000 | Cooking the Books
00:14:08.000 | Congress's economically arbitrary decisions as to what to put on and what to keep off the books have not been innocent.
00:14:17.000 | Successive Congresses, whether dominated by Republicans or Democrats, have spent the postwar accumulating massive net fiscal obligations, virtually all of which have been kept off the books.
00:14:29.000 | "Net fiscal obligations" refers not just to formal and informal commitments to high future transfer payments, but also formal and informal commitments to low future levels of taxation.
00:14:42.000 | Spending six decades raising or extending transfer payments and cutting or limiting taxes helped members of Congress get re-elected.
00:14:51.000 | But it has placed our children and grandchildren under a fiscal sword of Damocles that gravely endangers their economic futures.
00:15:00.000 | The Fiscal Gap
00:15:02.000 | Economic theory is unequivocal in telling us what not to measure when it comes to fiscal sustainability and generational policy.
00:15:10.000 | It's also crystal clear in telling us what to measure, namely, the infinite horizon fiscal gap.
00:15:18.000 | The infinite horizon fiscal gap tells us whether the government has, over time, enough receipts to cover its projected spending.
00:15:28.000 | It equals the present value of all projected future expenditures, less the present value of all projected future receipts.
00:15:40.000 | The infinite horizon fiscal gap has five important properties.
00:15:44.000 | First, it puts everything on the books.
00:15:47.000 | All expenditures, regardless of whether they are called debt service, transfer payments, or discretionary spending, are included in forming the present value of future outlays.
00:15:56.000 | It also puts all receipts on the book, including income the government receives on its real and financial assets.
00:16:04.000 | Second, the infinite horizon fiscal gap takes on the same value regardless of what internally consistent labeling convention is used to characterize fiscal outlays and receipts.
00:16:16.000 | In contrast, any finite horizon fiscal gap, such as the 75-year fiscal gaps calculated for Social Security and Medicare programs, are, like the federal debt, creatures of nomenclature.
00:16:28.000 | i.e., they can be set to any value one wants simply by choosing the right fiscal labels.
00:16:35.000 | Third, a positive fiscal gap means the government is attempting to spend, over time, more than it can afford.
00:16:43.000 | Doing so violates what economists call the government's intertemporal budget constraint.
00:16:49.000 | Hence, a positive fiscal gap is a direct measure of the unsustainability of current fiscal policy.
00:16:56.000 | Fourth, eliminating the infinite horizon fiscal gap is a zero-sum game across generations.
00:17:02.000 | Hence, the fiscal gap tells us the fiscal burden that will be imposed on today's and tomorrow's children if current adults don't pay more to, or receive less from, the government.
00:17:13.000 | Understanding the fiscal burdens our kids could face from the fiscal gap is called generational accounting.
00:17:19.000 | Fifth, the machinery of fiscal gap accounting tells us the size of the adjustment needed to balance the government's intertemporal budget constraint,
00:17:28.000 | and how the magnitude of the requisite adjustments depend on when the adjustment begins.
00:17:34.000 | The U.S. Fiscal Gap
00:17:37.000 | The U.S. fiscal gap currently stands at $210 trillion.
00:17:43.000 | This figure is my own calculation based on the Congressional Budget Office's July 2014 75-year Alternative Fiscal Scenario (AFS) projection.
00:17:54.000 | Constructing the infinite horizon fiscal gap from the CBO's AFS projection takes less than five minutes.
00:18:00.000 | One simply needs to extend CBO's projection into the future and engage, via Excel, in some high school algebra to form the appropriate present values of expenditures and revenues.
00:18:11.000 | Yet the CBO refuses to make the infinite horizon fiscal gap calculation, and continues to focus attention almost exclusively on official debt.
00:18:20.000 | In so doing, the CBO is, in my opinion, deliberately misleading the public and Congress about our nation's true fiscal condition.
00:18:30.000 | The size of the U.S. fiscal gap, $210 trillion, is massive.
00:18:36.000 | It's 16 times larger than official U.S. debt, which indicates precisely how useless official debt is for understanding our nation's true fiscal position.
00:18:48.000 | U.S. GDP currently stands at $18 trillion.
00:18:52.000 | Hence, the fiscal gap represents almost 12 years of GDP.
00:18:58.000 | The fiscal gap can also be compared with the present value of the CBO's projection of GDP extended through the infinite horizon.
00:19:05.000 | Doing so indicates that the fiscal gap is 10.5% of GDP.
00:19:12.000 | This means we need to either reduce the time path of government expenditures by 10.5% of GDP, or raise the time path of government revenues by 10.5% of GDP.
00:19:26.000 | Alternatively, we can enact a combination of spending cuts and tax increases that amount to 10.5% of annual GDP.
00:19:37.000 | This adjustment needs to begin immediately and continue forever.
00:19:43.000 | Waiting to adjust will leave current adult generations either fully or partially off the hook and make the fiscal burden on young and future generations that much larger.
00:19:57.000 | What's needed to close the fiscal gap?
00:20:00.000 | Our $210 trillion fiscal gap represents 58% of the present value of projected future taxes.
00:20:10.000 | Hence, eliminating the fiscal gap via tax hikes requires an immediate and permanent 58% hike in federal taxes.
00:20:21.000 | Stated differently, the overall federal government is 58% underfinanced.
00:20:28.000 | By way of comparison, the Social Security system taken by itself is 33% underfinanced, i.e. its infinite horizon fiscal gap reported in Table VIF-1 of the 2014 Trustees Report is 33% of the present value of projected Social Security taxes.
00:20:45.000 | Another comparison is Detroit prior to declaring bankruptcy.
00:20:49.000 | The city appears to have been roughly 25% underfunded.
00:20:54.000 | Hence, the U.S. is in far worse fiscal shape than was Detroit before it went broke.
00:21:02.000 | Another option is to cut spending on all expenditures apart from servicing official debt to close the fiscal gap.
00:21:10.000 | Doing so requires an immediate and permanent 38% spending cut.
00:21:19.000 | The Price of Delay
00:21:22.000 | Table 1 below shows the requisite tax hike or spending cuts needed to eliminate the fiscal gap if such adjustments are postponed into the future.
00:21:31.000 | Waiting, for example, for a decade to permanently raise revenues requires a 64.4% tax hike starting at that date.
00:21:40.000 | Alternatively, spending would need to be cut not by 37.7% but by 40.4% starting in 2025.
00:21:51.000 | Obviously, the longer we wait to adjust, the worse the impact on our children and grandchildren.
00:21:58.000 | If, for example, we wait until 2035 before adjusting via tax hikes, we'll sentence today's newborns to lifetime tax payments that are 70.4% larger than what arise under current law.
00:22:14.000 | You can look at the table yourself in the linked document if you'd like to read the table.
00:22:21.000 | Our Nation's True Deficit
00:22:23.000 | In 2013, the fiscal gap stood at $205 trillion.
00:22:29.000 | In 2014, it was $210 trillion.
00:22:34.000 | Hence, the country's true 2014 deficit, the increase in its fiscal gap, was $5 trillion, not the $483 billion increase in official debt reported by the CBO.
00:22:50.000 | Why did the fiscal gap rise so dramatically?
00:22:54.000 | A major reason is that the baby boom generation got one year closer to collecting what will ultimately be about $40,000 in Social Security, Medicare, and Medicaid benefits per person per year.
00:23:06.000 | Hence, the present value of these obligations rose due simply to interest.
00:23:11.000 | Stated differently, the fiscal gap is, in effect, our nation's credit card bill.
00:23:16.000 | And, like our own credit card balances, the fiscal gap accrues interest.
00:23:21.000 | If we fail to pay interest on the fiscal gap, it will get larger.
00:23:25.000 | The growth in the U.S. fiscal gap
00:23:28.000 | As indicated in the chart below, the fiscal gap has risen dramatically over the past dozen years.
00:23:33.000 | This reflects interest accrual.
00:23:36.000 | But the major reasons for the growth in the fiscal gap from $60 trillion in 2003 to $210 trillion today are tax cuts, increases in Medicaid and Medicare benefit levels, additional defense spending, and the introduction of Medicare Part D.
00:23:54.000 | The U.S. fiscal gap was reduced from $222 trillion to $205 trillion in 2013 due to tax and spending legislation.
00:24:06.000 | You can again reference the chart in the linked document.
00:24:11.000 | Fiscal gaps in other developed countries
00:24:14.000 | Table 2 compares the 2012 fiscal gaps in the U.S. with those in major European countries.
00:24:21.000 | The fiscal gaps for the EU countries were calculated by the European Commission.
00:24:25.000 | As is immediately clear, among the countries listed, the U.S. is in the worst fiscal shape by a considerable margin.
00:24:33.000 | It's also clear that there is little correspondence between official debt-to-GDP ratios and fiscal gaps measured as a ratio of the present value of future GDP.
00:24:42.000 | In 2012, both the U.S. and the Netherlands had debt-to-GDP ratios of roughly 70%.
00:24:49.000 | Yet the U.S. fiscal gap, scaled by the present value of GDP, was over twice that of the Netherlands.
00:24:56.000 | Or consider Italy, with its 127% 2012 debt-to-GDP ratio.
00:25:02.000 | Its 2012 fiscal gap is -2.3% of the present value of future GDP.
00:25:09.000 | What explains Italy's negative fiscal gap?
00:25:12.000 | The answer is tight projected control of government-paid health expenditures, plus two major pension reforms that have reduced future pension benefits by close to 40%.
00:25:23.000 | Again, the chart is in the linked document.
00:25:26.000 | Infinite Horizon fiscal gap accounting has almost universal support among economists.
00:25:32.000 | Claiming, as I am, that the United States is broke, that the official government debt is economically meaningless, that the use of federal debt by Congress and the Congressional Budget Office and other parts of the government to guide fiscal policy is deeply misguided,
00:25:46.000 | and that fiscal gap accounting over the Infinite Horizon is the only meaningfully way to assess a country's fiscal condition could readily be dismissed as the strong views of an extreme economist.
00:25:58.000 | Unfortunately, that's not the case.
00:26:01.000 | At www.theinformact.org, over 1,200 of our nation's economists have endorsed the Inform Act,
00:26:11.000 | a bipartisan bill that requires the Congressional Budget Office, the Office of Management and Budget, and the General Accountability Office to do both fiscal gap and generational accounting on an ongoing basis.
00:26:23.000 | The list of economists includes a who's who of the profession.
00:26:27.000 | Each of the top 25 economics departments is well represented on the list.
00:26:32.000 | What's more, 17 Nobel laureates in economics have endorsed the Inform Act.
00:26:37.000 | In addition to economists, the site records endorsements from former top government officials like former secretaries of Treasury, former secretary of state, former director of the Office of Management and Budget, and former secretary of commerce, George Shultz.
00:26:50.000 | The other remarkable aspect of this list is its inclusion of economists from both ends of the political spectrum.
00:26:56.000 | The fact that essentially the entire economics profession is publicly and very strongly endorsing fiscal gap accounting should not be taken lightly as, unfortunately, has been the case to date by the CBO, OMB, and GAO.
00:27:12.000 | These agencies shouldn't need an act of Congress to start forming meaningful measures of our country's fiscal position and the dangers it holds for our children.
00:27:22.000 | Economic Fallout from Postwar Generational Policy
00:27:27.000 | U.S. postwar generational policy is accurately characterized as "take as you go."
00:27:34.000 | Over the decades, Republican and Democratic Congresses and administrations have taken ever-larger amounts of resources from young workers and transferred them to old retirees.
00:27:46.000 | The resources taken from the young to give to the old were called, in the main, taxes.
00:27:52.000 | And the young were effectively told, "Don't worry. We are calling these resources taxes, but when you are old, you will receive massive transfer payments that more than make up for what you are paying now."
00:28:04.000 | The impact of this policy was predictable.
00:28:07.000 | Older generations consumed more, younger generations had no or little reason to consume less, and the national saving rate fell.
00:28:16.000 | Chart 2 below documents the post-1950 decline in our national saving rate, virtually all of which can be traced to increases in private consumption.
00:28:26.000 | And as chart 3 shows, those within the household sector who consumed the most were older generations.
00:28:33.000 | The chart provided by Professor Ronald Lee of the University of California at Berkeley shows a dramatic increase over time in the absolute and relative consumption of the elderly.
00:28:44.000 | Countries that save less, invest less.
00:28:47.000 | And chart 2 shows not just a remarkable postwar decline in the U.S. net national saving rate, it also shows a remarkable postwar decline in our nation's net domestic investment rate.
00:29:00.000 | Given that investment is one of the key factors underlying real wage growth, it's not surprising that average real wages of U.S. workers have grown so little in recent decades.
00:29:11.000 | There are obviously other factors involved, relatively poor primary and secondary education, competition with foreign workers, and competition with smart machines and robots.
00:29:22.000 | But having a net domestic investment rate of 4% rather than 15% is a prescription for limited real wage growth.
00:29:31.000 | Conclusion, the emperor's new clothes.
00:29:34.000 | Make no mistake, the standard measure of fiscal excess and generational policy, the government's debt, is, economically speaking, content free.
00:29:46.000 | Thus, we find ourselves, quite frankly, in Hans Christian Andersen's story of the emperor's new clothes with his chief tailors comprising the CBO, OMB, GAO, the IMF, the World Bank, and the OECD.
00:30:02.000 | In Andersen's story, convincing the king that he was, in fact, naked proved an impossible task.
00:30:09.000 | Indeed, at the end of the story, when a young child shouts that the king, who is leading a parade to celebrate his new clothes, is naked, the crowd stops cheering and starts murmuring.
00:30:19.000 | But then, as the king ignores the child and continues his promenade, the crowd starts cheering once again.
00:30:27.000 | Distinguished members of the Senate Budget Committee, you are, by analogy, the crowd in this story.
00:30:33.000 | You can continue to steer America's fiscal policy using a metric, the federal debt, that the economics profession, whether on the left, right, or in the center, is saying, "loud and clear is a number in search of a concept."
00:30:47.000 | Or, you can organize passage of the INFORM Act and also take the painful steps needed to eliminate our nation's massive fiscal gap.
00:30:55.000 | At www.thepurpleplans.org, I've laid out a series of very simple fiscal and other reforms that can close our country's fiscal gap.
00:31:05.000 | These reform proposals have been endorsed by economists with, again, widely varying political beliefs.
00:31:11.000 | They are called "purple plans" because they are designed to appeal to red Republicans and blue Democrats.
00:31:17.000 | As these plans make clear, we don't need to abandon any generation. We don't need to eliminate social insurance, and we don't need to discard the poor to turn things around.
00:31:26.000 | What we do need is to understand the fiscal hole we've placed ourselves and our children and start digging ourselves out in a sensible, efficient, and humane manner.
00:31:38.000 | That concludes Professor Kotlikoff's paper. If you'd like to take a look at the charts that were referenced, feel free to click the link in the description box either on your phone or on the blog post for today's show at RadicalPersonalFinance.com and you can review the original version.
00:31:58.000 | Fairly succinctly, that paper lays out the fundamental problem. The promises of the U.S. federal government are far in excess of the actual budget and the income, the revenues, of the government.
00:32:18.000 | As such, either revenue will increase or expenditures will decrease, or both. Now, of course, Professor Kotlikoff tells the Senate Budget Committee that there's still time, there's still hope.
00:32:34.000 | And he makes his recommendations on how things can be done at thepurpleplans.org. Massive tax increases, cuts in spending, etc. I remain unconvinced that things will change.
00:32:48.000 | I see no politician that I'm aware of making these things a serious issue. Everybody seems to be just simply ignoring things, hoping that they'll go on and future generations can deal with it.
00:33:01.000 | And that seems to be, from all I can figure out, that seems to be the standard practice of those who get involved in government. I don't anticipate resolution to this anytime in the coming decade or two.
00:33:17.000 | And I don't know what the ultimate resolution will be. My guess is that it'll be a combination of many things, a giant muddle. My guess is that there'll be various forms of default.
00:33:34.000 | Perhaps inflation will decrease the cost to the US government. Perhaps there'll be changes in various programs. For example, one measure of default is in this context.
00:33:49.000 | When I use the word default, a lot of people immediately go to the concept of bankruptcy, that we're just not going to send payments of any kind.
00:33:55.000 | That's not generally how government defaults seem to work. Yes, they do include that. But that scenario is unlikely or is at least unlikely at this point in time.
00:34:06.000 | But defaults can include things like, "Hey, we promised Joshua, we promised you that we would send you a social security check that would come in at the age of 67.
00:34:15.000 | But we'll actually start that social security check coming in at the age of 75." That's a form of default. Those are the types of changes. So are social security, Medicare, Medicaid. Those are the types of changes that'll happen in social programs.
00:34:29.000 | And perhaps many other things. We will discuss this theme in coming years from time to time. But Professor Kotlikoff laid out there the fundamental reasons why I see trouble on the horizon.
00:34:46.000 | Now, a couple of things of what I am and am not saying. Because usually the normal response to something like this is, "Well, Joshua, what do I do?"
00:34:54.000 | And people go in either one of two directions most frequently. They're going in the direction of keeping our heads buried in the sand saying, "No, no, no. Everything's always been fine. It's just going to be fine just like it is now."
00:35:03.000 | Our normalcy bias kicks in and we seek to ignore things. That's one extreme. Another extreme is freak out. Freak out and it's all going to be solved right today.
00:35:13.000 | So I don't predict. Personally, my opinion, just my opinion, Joshua, to you, is I don't see any sense of immediate collapse. I don't like the word collapse. I think things are usually slow and difficult.
00:35:27.000 | So I'm not predicting any kind of immediate collapse. The best I can guess is this will play out over the coming decades of my life. Is it two decades, three decades? I have no idea. Time will tell.
00:35:40.000 | And I do know that things have a remarkable – if history is any indication, things have a remarkable pattern of changing fairly quickly.
00:35:50.000 | Political will is a tricky and fickle thing to predict. As you watch political wrangling and fighting among politicians in the coming years and coming decades, keep these ideas and these numbers in mind.
00:36:06.000 | And you can safely ignore much of the conversation. If people are not talking on a magnitude of a 58% tax hike across the board so that the total tax revenue of the U.S. government increases by 60%, if somebody is not talking on that scale, just ignore them.
00:36:29.000 | If the scale is, "Oh, we're going to tax the rich or tax the poor and raise revenues by 2% or 3%," it's got to be 60% across the board. Or if somebody is not talking about a 38% – to use Kotlikoff's numbers here – a 40% cut in all federal spending or numbers on that magnitude, you can safely ignore them.
00:36:53.000 | The problem is not limited to Democrats or Republicans. They're both fully responsible. Deficits and debt have increased under Republicans and under Democrats. Both parties bear full responsibility for the problem.
00:37:08.000 | So what can you do? That's the first question that most people ask. Well, start by researching these questions. Research, read Professor Kotlikoff's testimony, read some of his other writings and articles on the subject, read some of the other economists who have written things with him.
00:37:27.000 | And if you find something that's a powerful rebuttal of his or other ideas, feel free to send it to me. I always look for – whenever I have a position or I especially do it when I'm going to go public with something on a show, I search for the best rebuttals that I can find.
00:37:43.000 | I have trouble finding any reasonable rebuttal to some of the ideas that I just read to you. If you're aware of something, send it to me and maybe you can prove me wrong. That'd be great. But start by being aware of the subject. Start by talking about it.
00:38:02.000 | See, most of the arguments, especially the political arguments that people make are so surface and it's a total waste of time, especially many of the financial arguments. 85 percent of the federal budget is fixed. There's no change whatsoever. It's completely nondiscretionary.
00:38:21.000 | 85 percent of the federal budget is fixed with all of the social programs, Medicare, Medicaid, Social Security, and defense spending. And there's no ability for President Trump or President Obama or whomever the next president is to change that.
00:38:35.000 | So there's very little reason to argue vigorously about a measly 15 percent of the budget when across the board, you need a 40 percent budget cut. Each of the politicians has their favorite area of interest. But mostly, it's a dog and pony show.
00:38:50.000 | Nobody actually wants to get serious and make major cuts to defense spending. Nobody wants to get serious and make major cuts. Nobody wants to get serious and even raise major taxes. It's not politically feasible.
00:39:01.000 | So the shell game will continue. But you can talk about it. Talk, that's why I'm bringing it to you. I'm doing what I can do. And perhaps, I don't know the level of importance to place to some of these things. You can plan for it yourself.
00:39:16.000 | It's a bit hypocritical for any of us to start telling other people that they should plan to do without social programs or they should plan to do without these things when we're not willing to follow through ourselves.
00:39:31.000 | So that means you got to lead by example. I love to jump up on my social program and preach about the immorality of theft. It's immoral for me to steal from you to pay for my dad's health expenses.
00:39:47.000 | But it's a bit hypocritical if I preach that in the public and then turn around and cash the checks at night. And that's where good financial planning comes in. We've got to build resiliency behind our financial plans. We've got to adjust our budgets.
00:40:02.000 | Adjust our budgets to do without the Social Security payments. Adjust our budgets to do without the Medicare subsidies. We have to do the hard work now while the checks still cash to be prepared for the day when they bounce.
00:40:21.000 | One challenge I've faced has often been an ability to understand the scope and pace of history. I'm 32 years old. That means that my political awareness probably starts from the time I was about 15, which would be the year 2000.
00:40:46.000 | That includes the United States, a President Bush, and a President Obama, and now a President Trump. And I've often found that very challenging because during these years, all things considered, things have been pretty good.
00:41:01.000 | When I read about American history and I read about the hard times, it seems so distant. So I've tried to shore up my own personal understanding by reading more history. I've just finished a book called The Silk Roads, A New History of the World.
00:41:15.000 | And in The Silk Roads, the author traces through about 5,000 or 6,000 years of history throughout the East. And it's fascinating to watch the empires rise and the empire fall. And I've learned a lot of lessons from reading it, a lot of financial lessons, just seeing this broad scope.
00:41:35.000 | And I've learned that there's always opportunity for those who prepare during good times for the bad times. Things will change. There's an ebb and flow. Governments come and go. The empires rise and fall.
00:41:59.000 | The money is used and then it's debased and then it's used and it's debased. Inflation comes, deflation comes, recessions come, booms come. Very hard to know what happens and predict what happens on the macro scale with governments and countries and regions.
00:42:19.000 | But there's always opportunity for individuals. And that's you and that's me. So let's do the hard work today of building financial freedom. Let's do the hard work today of weaning ourselves off from suckling at the federal teat. Do the hard work today to plan for your family.
00:42:37.000 | Do the hard work today of helping your parents get free. Do the hard work today of disconnecting yourself from the federal funds. You'll find a lot more freedom today and you'll be prepared to stand tall and to stand strong in a day when men's hearts fail them for fear because the funding gets cut off.
00:42:59.000 | As I close today's show, I need to close again with a warning. There's a tendency when if you're newly exposed to this, I've watched this happen time and again, if this is the first time you've heard about the fiscal problems of the US government and you've heard how severe they are, there's a tendency to freak out.
00:43:18.000 | There's a tendency to make zero hedge.com your homepage. There's a tendency to start ordering gold Roman Empire coins from internet websites. Please don't do that. Don't do that. The same things that you do to prepare for next year, to prepare for financial independence, will prepare you for some of these things.
00:43:41.000 | I just want to add this to your thinking and I want to make this a normal topic of discussion among thoughtful, intelligent people. So please don't freak out. There is nothing this year or next year that's going to change. Things are going to continue on in the next few years just like they have in the last few years. None of this is short term. None of this is immediate.
00:44:02.000 | But this does need to factor into your thinking over the coming decades. Who knows how many decades? I don't have a clue. But if you plan to see coming decades, pay attention.
00:44:17.000 | This show is part of the Radical Life Media network of podcasts and resources. Find out more at radicallifemedia.com.
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