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    Uncle Sam has worse woes than Greece

    07/28/2010

    Democracy and Power 108:  Obfuscation

    Wherever politics intrudes upon economic life, political success is readily attained by saying what people like to hear rather than what is demonstrably true. Instead of safeguarding truth and honesty, the state then tends to become a major source of insincerity and mendacity. – Hans F. Sennholz

    Uncle Sam has worse woes than Greece

    Laurence Kotlikoff, an economist at Boston University, in the Financial Times opines the United States debt is worse than Greece.  Remember Greece has experienced government employee riots, and roiled the European bond markets.  Kotlikoff explains how government labeling can deceive and distort the actual size of the debt.  Kotlikoff, using the federal governments on going deception on the Social Security and Medicare, writes:

    Greek debt totals 120 per cent of gross domestic product, twice the US figure. But debt alone tells us little about a country’s fiscal condition. Economists call this the labelling problem, because governments can describe receipts and payments in any way they like. Payroll taxes to fund pensions and healthcare can, for instance, be labelled as borrowing, with the future benefits called repayment less a future tax. Measured thus, the US budget deficit is 15 per cent of GDP, not 9 per cent.

    Argentina, France, Greece are prime examples of countries deceptive labeling which often cause financial, political and social strife.  Unfortunately, Kotlikoff refers to America as the grand master of deception:

    But all these countries have something to learn from the real labelling master: Uncle Sam. During the past half-century, the US has sold tens of trillions of unofficial IOUs, leaving it with liabilities to pay Social Security, Medicare and Medicaid benefits that total 40 times official debt. So is US debt actually 40 times larger than reported? Is this year’s deficit 15 per cent of GDP or 9 per cent? It’s your pick, since we are in a fiscal wonderland of measurement without meaning.

    Kotlikoff and professors at Freiburg University have developed the “fiscal gap,” measuring the present value difference between all future expenditures and receipts.  Greece has 11.5 per cent of GDP fiscal gap.  Using the Congressional Budget Office (CBO) projections, the US has a 12.2 percent fiscal gap.  Tragically, it is worse.  Part of the 12.2 percent fiscal gap, assumes 7.2 per cent reduction of debt.  Kotlikoff explains:

    But the assumptions underlying this 7.2 per cent adjustment are highly speculative, including a substantial rise in the share of taxpayers facing the Alternative Minimum Tax, once called the “millionaires tax” for targeting only the rich. The CBO also assumes that real wage growth will push all workers into much higher tax brackets, and that Congress will slash discretionary spending as well as greatly limit growth in Medicare and Medicaid benefits. Each supposition runs counter to recent experience.

    The Democracy and Power Lesson 108:

    Obfuscation

    …, the state then tends to become a major source of insincerity and mendacity. – Hans F. Sennholz


    Knowing their constituents are rationally ignorant, and fearing legislated failures, the politician’s speech is seldom precise or logically reasoned.  Seeking a favorable image, the politician talks in generalities, exaggerates and obfuscates. 

    Presently, only an informed and active citizenry can cause good governance.  Join FreedomWorks. Save democracy and America.