Worried about the economic future of your children, grandchildren, and great-grandchildren? Brace yourself for a big number. By one prominent economist’s calculation, the U.S. federal government faces a long-term “fiscal gap”—the difference between projected future expenditures and receipts—of about $200 trillion.
This sounds like the kind of thing that’s embraced by deficit hawks and small-government types on the Right and strongly resisted by most Democrats. In fact, the fiscal gap is a nonpartisan accounting concept. Twelve winners of the Nobel prize for economics have endorsed a bill to require the federal government to do an official annual calculation of the fiscal gap (as opposed to the $200 trillion figure, which is a rough and unofficial estimate). The luminary endorsers of the bill, who rarely find common ground on political issues, include liberal Kenneth Arrow and conservative Robert Lucas.
The existence of a huge fiscal gap says America is spending beyond its means, but it doesn’t necessarily mean the government needs another big round of cuts, at the expense of social programs and the military, when the new fiscal year begins on Oct. 1.
Some spending pays for itself in the long run by strengthening the economy’s ability to generate growth and tax revenue. Education and infrastructure are potential examples. Increasing that kind of spending can actually shrink the long-term fiscal gap.
“We’re not an anti-spending group. We’re a smart spending group,” says Nick Troiano, co-founder of The Can Kicks Back, a youth advocacy group that has rallied support for the legislation.
Boston University economist Laurence Kotlikoff says fiscal gap accounting would enable “grown-up” discussions about what kinds of spending are worth it. “It’s not the case that no investment can pay for itself,” he says. “Is this going to make the fiscal gap worse? That’s an intelligent discussion. Can we afford this if it doesn’t pay for itself? It’s just what a grown-up would ask.”
Kotlikoff is the economist behind the $200 trillion fiscal gap estimate and is spearheading the drive to get economists—Nobelists, former government officials, and others—to endorse the bill.
The Intergenerational Financial Obligations Reform Act, or Inform Act, as the bill is called, has bipartisan sponsorship. Senators John Thune, a Republican from South Dakota, and Tim Kaine, a Democrat from Virginia, were the initial sponsors. In the House it’s sponsored by Jim Cooper, a Tennessee Democrat, and Aaron Schock, an Illinois Republican.
The 12 Nobelists who have signed on so far are Arrow, James Heckman, Finn Kydland, Lucas, Eric Maskin, Dale Mortensen, Roger Myerson, Edmund Phelps, Thomas Sargent, Vernon Smith, William Sharpe, and Oliver Williamson.
Despite its bipartisan backing, the bill may have a hard time getting attention in Congress at a time when Democrats and Republicans are fighting over more immediate threats, such as a possible government shutdown or a default on the national debt.
The Inform Act would require government agencies to prepare not only a measure of the fiscal gap, but also a generational accounting, which says how much future generations would have to be squeezed (through higher taxes and/or lower spending) to close the gap. Congress could also ask the executive branch to use the methods to evaluate the fiscal impact of proposed legislation. Kotlikoff says Norway and the Netherlands already measure their fiscal gap.
The fiscal gap is much bigger than the debt the federal government owes to the public, which is around $11 trillion, because it includes more things. Technically, it’s the value in today’s dollars of all projected future expenditures, including debt payments, minus all projected future taxes and other receipts, into the indefinite future.
Kotlikoff put the fiscal gap at $222 trillion as of 2012 and estimates that because of tax hikes and sequestration, the gap is now at about $200 trillion even. A $22 trillion improvement in one year is impressive and inspiring. Still, the remaining shortfall is equal to 10 percent of the national gross domestic product every year, indefinitely. It’s up from around $60 trillion in 2003, he estimates.
“We’ve been spending our kids’ money for decades,” Kotlikoff says. “It’s time we started acting like adults.”