Larry Kotlikoff Tells Us Why We Should Not Use Infinite Horizon Budget Accounting

August 01, 2014

In a New York Times column, Boston University economist Larry Kotlikoff told readers why we should not use infinite horizon budget accounting. Kotlikoff showed how this accounting could be used to scare people to promote a political agenda, while providing no information whatsoever.

For example, after telling us how much money his 94-year-old mother is drawing from Social Security and a widow’s benefit from his father’s job he ominously reports:

“you’ll find that the program’s unfunded obligation is $24.9 trillion ‘through the infinite horizon’ (or a mere $10.6 trillion, as calculated through 2088). That’s nearly twice the $12.6 trillion in public debt held by the United States government.”

Are you scared? Hey $24.9 trillion a really big number. That’s more than even Bill Gates will see in his lifetime. Does it mean our kids will be living in poverty?

Not exactly. Kotlikoff could have pulled a number from the same table in the Social Security trustees report to tell readers that the unfunded liability is equal to 1.4 percent of future income. If we just restrict our focus to the 75-year planning horizon (sorry folks, we don’t get to make policy for people living 100 years from now), the shortfall is 1.0 percent of GDP.

That’s not trivial, but it is considerably less than the combined cost of Iraq and Afghanistan wars at their peak. Furthermore, if we go out 40 years and assume that our children get their share of the economy’s growth (as opposed to a situation in which it all goes to Bill Gates’ kids), their before tax income will be more than 80 percent higher than it is today.

This means that even if they pay 2-3 percentage points more in Social Security taxes to cover the cost of their longer retirements (they will live longer than us), they will still have incomes that are more than 70 percent higher than we do today. Are you scared yet?

Of course we may continue to see the same sort of upward redistribution in future decades as we have in the last three decades. In that case any increase in Social Security taxes will be a burden on our children and grandchildren. But they stand to lose far more from the upward redistribution than the tax increase, which should make anyone wonder why there is much attention focused on the latter. (Btw, most people have not see big gains in life expectancy, these gains, like the gains income, have been concentrated among the wealthy.)

It is also worth noting that the scary fiscal gap that Kotlikoff threatens readers with ($210 trillion is his final number) would disappear entirely if we paid the same amount per person for our health care as people in other wealthy countries. Currently we pay more than twice as much as the average for Germany, Canada, the U.K. and other rich countries with nothing to show for it in terms of outcomes. We pay twice as much because our doctors get paid twice as much, as do the drug companies and medical equipment makers. If we want to make sure that our kids enjoy a good standard of living, why not focus on these ripoffs and ways to end them rather than just scaring people with really big numbers. (Free trade would go a long way on this one, if only policy wasn’t dominated by protectionists.)

The point here is straightforward. Kotlikoff’s budget accounting is a way to produce really big  numbers to scare people so as to advance an agenda for cutting Social Security and Medicare. It is not a way to inform people, which should be the main purpose of our accounting. The public has to decide the balance of spending and taxes on various programs. They can only make decisions that reflect their concerns and values if they know what is at stake. Kotlokoff’s accounting takes them in the opposite direction.

One other item that is worth mentioning on this issue is that the New York Times continues to ignore the assessment of its public editor, Margaret Sullivan and former Washington Bureau chief and current Upshot editor David Leonhardt. In reporting the NYT’s commitment to putting numbers in a context that would be understandable to most of its readers Sullivan commented:

“Part of the problem, he [Leonhardt] said, is that ‘the human mind isn’t equipped’ to deal with very large numbers. When people see these numbers, he said, they read it as ‘a lot of money’ or ‘a really big number.'”

That was written almost 10 months ago. Yet the paper’s reporting on budget issues still just gives really big numbers, as did this column, providing no context that would make it understandable to readers. What possible excuse can there be for this failure? No one thinks these numbers are meaningful to more than a tiny fraction of the paper’s readers. It is not difficult to use percentages — all the NYT reporters can make the calculation with a computer in a fraction of second. What is going on here?



Since Kotlikoff would present his infinite horizon accounting as a comprehensive measure of the burdens of government debt it is important to point out that in very important ways it is not. Perhaps the most obvious is the granting of patent and copyright monopolies. These monopolies are essentially ways in which the government finances innovation and creative work. In Kotlikoff’s accounting, if the government were to commit itself to spend 0.3 percent of GDP (@ $50 billion a year) to finance the research and development of new drugs, this would be added to his infinite horizon debt calculation. However if the government grants patent monopolies that raise the price of drugs by 2.0 percentage points of GDP (@$340 billion a year) this will not appear in Kotlikoff’s debt calculations even though the burdens to future generations will be far greater.

In the same vein, if the government sells off assets it will reduce its debt, while there is no measure of the additional costs imposed on future generations from no longer having the benefit of the asset. For example if the government sells off the air waves, so that future generations have to pay large fees for telecommunications, Kotlikoff’s measure of debt will not pick up these fees. The same would apply to the use of any natural resource like beaches and parks.

Finally, the measure takes no account of environmental costs. If the government spends money now on reducing greenhouse gas emissions, this will directly add to Kotlikoff’s measure of the debt. On the other hand, if it opts not to spend, and thereby subjects future generations to enormous expenses due to damage from storms and rising oceans (including the budgetary expense of dealing with disasters) there is no measure of the resulting liability created.

In short, Kotlikoff’s measure is far from being a comprehensive assessment of future liabilities created by current government actions. It selectively imputes costs associated with some programs, while completely ignoring other costs which could be considerably larger and as readily quantifiable.



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