Lessons in how to make $43 trillion disappear

June 2, 2003, 1:23AM

Lessons in how to make $43 trillion disappear
By SCOTT BURNS
Universal Press Syndicate
ON Friday, May 16, the word was out. A $350 billion tax cut was a done deal.

So why did the stock market sink that day? Why did it plunge the following Monday, losing 2.5 percent of its value?

One possible explanation is Treasury Secretary John Snow and his comments on the dollar. Another is concern about new terrorist attacks. But let me suggest a third possibility. Despite efforts to suppress it, word is getting around we can't afford a tax cut.

The story starts one night in January, only days after Treasury Secretary Snow had replaced Paul O'Neill. A cell phone rang as two men were leaving a restaurant in Santa Fe, N.M. The caller told Boston University economist Laurence Kotlikoff that six months of work by two economists was going to be deleted from the president's budget. The budget was due to be published in February. I know this happened because I was the second man: Kotlikoff was in Santa Fe working on a book project with me.

The material to be deleted from the budget document was an updating of generational accounting. O'Neill had requested an estimate of the government's true long-term obligations.

The estimate would include the formal debt of the U.S. Treasury plus equally serious government promises to provide retirement income and medical care. (Readers who think promises of Social Security and Medicare aren't as serious as U.S. Treasury bond promises should visit the nearest elderly person.)

The resulting information might easily have been lost in a document whose online girth is measured in megabytes.

Except for one thing.

The new accounting shows the United States is broke.

It shows the true obligations of government were 10 times larger than Treasury debt held by the public. It shows the present value of these unfunded obligations is a mind-numbing $43 trillion.

In a recent telephone conversation I asked one of the project economists, Jagadeesh Gokhale, why he thought his work was cut. Gokhale, a senior economist for the Federal Reserve Bank of Cleveland, was circumspect. He suggested the figures were a surprise to the new Treasury secretary.

Here's another interpretation: Snow's first task was to sell the president's tax cut. The sales job would be awkward if an official government document announced we were already $43 trillion in the hole.

The Federal Reserve, by the way, recently put the net worth of all households at $39 trillion. This problem goes way beyond taxing the rich, the poor or the middle class.

So the generational accounting figures disappeared from the budget.

But they did not cease to exist. In early March the other economist on the project, Kent Smetters, testified before the Subcommittee on the Constitution of the United States in the House of Representatives. Smetters, an expert in Social Security and Medicare, is at the Wharton School in Philadelphia.

Asked to comment on the Balanced Budget Amendment, Smetters was direct, saying, "I support practically any effort to make it harder for one generation to pass large fiscal burdens to future generations ... ."

Unfortunately, he noted, government cash accounting is a poor basis for a Balanced Budget Amendment. "The government reports that the national debt in 2003 was about $3.8 trillion in the form of government `debt held by the public.' But that number ignores massive imbalances in Medicare and Social Security programs and the government's other programs.

"When the liabilities associated with those programs are taken into account, the nation's fiscal policy is currently off-balance by over $43.4 trillion in present value, a number that is not reported in standard budget documents," he said (italics added).

The American Enterprise Institute will soon publish a pamphlet, co-authored by Jagadeesh Gokhale and Kent Smetters. The draft copy does more than lay out the size of the government's unfunded liabilities. It shows how much the current generation is benefiting at the expense of the next.

It shows, for instance, that past and current generations of Social Security recipients will receive $8.7 trillion more in benefits than they will pay in employment taxes.

Republicans and Democrats have distracted us with unending battles between haves and have-nots for decades. Over the same period they have bankrupted the country.

Perhaps that terror, not the terrorism of al-Qaida or currency traders, may explain the odd market decline after a tax cut that was supposed to make stocks soar.

On the war in Iraq. On the military. On grants for anything and everything.

The problem is that we were supposed to be saving our money in the 1980's and 1990's and the government spent it instead. We needed to be saving about 10-15% of the budget for future Social Security obligations as the baby boom population retired. We didn't do it.

Now, there will be a lot of Social Security demands on the government for baby boomer retirees from 2010 to about 2035 (when I retire), and demands for Medicare, too. The hospital costs will explode as these people demand care. Finally, as boomers retire they will probably vote themselves EVEN MORE benefits (like a Pharmacy benefit).

Someone needs to be standing at the door of the empty bank vault and tell these people that there's no money left.

We need to pull back from obligations like Iraq and Afghanistan because in 5 more years we won't even be able to afford to keep our tanks maintained. Maybe we can draft retirees to fight?

Post #104,564 by lincoln 6/2/03 5:07:43 PM Reply	Lessons in how to make $43 trillion disappear June 2, 2003, 1:23AM Lessons in how to make $43 trillion disappear By SCOTT BURNS Universal Press Syndicate ON Friday, May 16, the word was out. A $350 billion tax cut was a done deal. So why did the stock market sink that day? Why did it plunge the following Monday, losing 2.5 percent of its value? One possible explanation is Treasury Secretary John Snow and his comments on the dollar. Another is concern about new terrorist attacks. But let me suggest a third possibility. Despite efforts to suppress it, word is getting around we can't afford a tax cut. The story starts one night in January, only days after Treasury Secretary Snow had replaced Paul O'Neill. A cell phone rang as two men were leaving a restaurant in Santa Fe, N.M. The caller told Boston University economist Laurence Kotlikoff that six months of work by two economists was going to be deleted from the president's budget. The budget was due to be published in February. I know this happened because I was the second man: Kotlikoff was in Santa Fe working on a book project with me. The material to be deleted from the budget document was an updating of generational accounting. O'Neill had requested an estimate of the government's true long-term obligations. The estimate would include the formal debt of the U.S. Treasury plus equally serious government promises to provide retirement income and medical care. (Readers who think promises of Social Security and Medicare aren't as serious as U.S. Treasury bond promises should visit the nearest elderly person.) The resulting information might easily have been lost in a document whose online girth is measured in megabytes. Except for one thing. The new accounting shows the United States is broke. It shows the true obligations of government were 10 times larger than Treasury debt held by the public. It shows the present value of these unfunded obligations is a mind-numbing $43 trillion. In a recent telephone conversation I asked one of the project economists, Jagadeesh Gokhale, why he thought his work was cut. Gokhale, a senior economist for the Federal Reserve Bank of Cleveland, was circumspect. He suggested the figures were a surprise to the new Treasury secretary. Here's another interpretation: Snow's first task was to sell the president's tax cut. The sales job would be awkward if an official government document announced we were already $43 trillion in the hole. The Federal Reserve, by the way, recently put the net worth of all households at $39 trillion. This problem goes way beyond taxing the rich, the poor or the middle class. So the generational accounting figures disappeared from the budget. But they did not cease to exist. In early March the other economist on the project, Kent Smetters, testified before the Subcommittee on the Constitution of the United States in the House of Representatives. Smetters, an expert in Social Security and Medicare, is at the Wharton School in Philadelphia. Asked to comment on the Balanced Budget Amendment, Smetters was direct, saying, "I support practically any effort to make it harder for one generation to pass large fiscal burdens to future generations ... ." Unfortunately, he noted, government cash accounting is a poor basis for a Balanced Budget Amendment. "The government reports that the national debt in 2003 was about $3.8 trillion in the form of government `debt held by the public.' But that number ignores massive imbalances in Medicare and Social Security programs and the government's other programs. "When the liabilities associated with those programs are taken into account, the nation's fiscal policy is currently off-balance by over $43.4 trillion in present value, a number that is not reported in standard budget documents," he said (italics added). The American Enterprise Institute will soon publish a pamphlet, co-authored by Jagadeesh Gokhale and Kent Smetters. The draft copy does more than lay out the size of the government's unfunded liabilities. It shows how much the current generation is benefiting at the expense of the next. It shows, for instance, that past and current generations of Social Security recipients will receive $8.7 trillion more in benefits than they will pay in employment taxes. Republicans and Democrats have distracted us with unending battles between haves and have-nots for decades. Over the same period they have bankrupted the country. Perhaps that terror, not the terrorism of al-Qaida or currency traders, may explain the odd market decline after a tax cut that was supposed to make stocks soar. lincoln "Four score and seven years ago, I had a better sig" [link\|http://users3.ev1.net/~bconnors/resume.htm\|VB/SQL resume] [link\|http://users3.ev1.net/~bconnors/tandem_resume.htm\|Tandem resume] [link\|mailto:bconnors@ev1.net\|contact me]
Post #104,574 by orion 6/2/03 7:51:15 PM Reply	Big question where did a majority of the money go? What is the thing we are spending the most on? *"If you're going to cheat, cheat fair. If there's anything I hate it's a crooked crook!" -Moe Howard*
Post #107,698 by gdaustin 6/28/03 1:23:57 PM Reply	We are spending the money... On the war in Iraq. On the military. On grants for anything and everything. The problem is that we were supposed to be saving our money in the 1980's and 1990's and the government spent it instead. We needed to be saving about 10-15% of the budget for future Social Security obligations as the baby boom population retired. We didn't do it. Now, there will be a lot of Social Security demands on the government for baby boomer retirees from 2010 to about 2035 (when I retire), and demands for Medicare, too. The hospital costs will explode as these people demand care. Finally, as boomers retire they will probably vote themselves EVEN MORE benefits (like a Pharmacy benefit). Someone needs to be standing at the door of the empty bank vault and tell these people that there's no money left. We need to pull back from obligations like Iraq and Afghanistan because in 5 more years we won't even be able to afford to keep our tanks maintained. Maybe we can draft retirees to fight?
Post #104,830 by jbrabeck 6/4/03 12:03:14 PM Reply	Have the link? When they took the Fourth Amendment, I was quiet because I didn't deal drugs. When they took the Fifth Amendment, I was quiet because I was innocent. When they took the Second Amendment, I was quiet because I didn't own a gun. Now they've taken the First Amendment, and I can't say anything about it.
Post #107,697 by gdaustin 6/28/03 1:16:36 PM Reply	Scott Burns - Smart Man I read him in the Dallas Morning News. One of the few things that makes the paper worth buying. The answers will be something like. We'll basically have to screw either the baby boomers by defaulting on Social Security, or maybe we'll actually make it to the buster generation (like me).

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