Larry Kotlikoff is interviewed by Glenn Loury. Kotlikoff says that unfunded liabilities are 8 times GDP. Our on-the-books deficit is only 1 times GDP.
Have a nice day.
Larry Kotlikoff is interviewed by Glenn Loury. Kotlikoff says that unfunded liabilities are 8 times GDP. Our on-the-books deficit is only 1 times GDP.
Have a nice day.
Most (all?) of these are also quasi-inflation-linked, which demonstrates the absurdity of thinking we can inflate our way to a better fiscal position.
The years when the US had high growth, high employment, balanced budgets low inflation and a near-zero trade balance (like early 1990s) were according to this measure years when the true debt/GDP ratio was in the hundreds of percent. If that doesn’t make you into a deficit dove I don’t what will. Larry has been crying wolf for decades but some of those decades had pretty good numbers.
Unfunded liability metrics need proper context. Maybe it’s in the link, but usually unfunded liabilities are presented as some big scary standalone number. Unfunded liabilities should be presented in the context on the PV of all future GDP, not present GDP. That’s the true ability to pay.
For example, using a quick back of the envelope, I estimate the PV of the next 100 years of GDP as 205x current GDP (4% NGDP growth, discounted at 30Y treasury + 50bps). If the unfunded liability is 8x current GDP, that implies an adjustment of 3.2% of GDP is required to close the gap. A bit painful, but hardly a catastrophic problem.
Moreover, there may be no need to close the gap. An economy which has nominal growth of 4% annually with a 4% of GDP annual deficit will have its debt to GDP ratio hit 100% of GDP and remain there. On a PV basis, unless you assume a very high discount rate, this economy will have a massive unfunded liability, yet there’s no reason why a country can’t maintain a 100% debt to GDP ratio indefinitely.
What has the deficit been in the last year? What are the plans to reduce that back to 4% of GDP/year?
The 2020/2021 deficits are largely discretionary/temporary. The February 2021, the CBO projected the average annual deficit from 2022-2031 to be 4.35% with the debt held by the public rising slightly from 102% to 107% of GDP over that same time period.
Obviously, this forecast could be derailed by any number of things, most notably another economic recession or the inability of politicians to give up multi-trillion stimulus programs. Maybe that level of deficit is a bit high for a baseline which envisions unemployment returning to 4%. But the baseline forecast as of early 2021 was basically a 4% annual deficit scenario for the next decade.
https://www.cbo.gov/publication/56991
LOL! And what were the projections from 10 years ago, Justin?
But at the next crisis, the deficit spending will inexorably increase. So keep spending increases at least below the growth trendline to not have the debt ratio steadily creep up.
It seems the era of Keynes is firmly over so let’s not even pretend paying back the deficit in a subsequent growth era.
I agree. I don’t think deficits ever have to be paid back with surpluses, but ideally the average non-crisis deficit as % of GDP would be less than the NGDP growth rate.
Nobody thinks 4% is a reasonable discount rate.