US Fiscal Meltdown Within Spitting Distance

We’re all about the economy this week, it seems, because that’s what’s driving the conversation all over the blogosphere.

I like Laurence Kotklikoff, not because I’ve ever met him or even necessarily because I believe the same as he does on economics, I like this guy because he thinks Paul Krugman’s an ideological idiot of the far left and lets his bias cloud his writings on economics.

What Kotklikoff wrote about Krugman in July 10, 2010;

I wish I were as sure of anything as Paul Krugman is of everything. But it’s his unfounded moral superiority that really goads.In his July 2nd NY Times column, Myths of Austerity, Krugman writes “When I was young and naïve, I believed that important people took positions based on careful considerations of the options. Now I know better. Much of what Serious People believe rests on prejudice, not analysis.”

I agree with this last sentence, but I’d substitute “Paul Krugman” for “Serious People.”

What I and other economists expected, when Krugman was chosen to write for the Times, was impartial, fact-based analysis, showcasing economics’ ability to shed real light on critical issues of the day. We also expected him to act like a professional economist and represent fairly alternative policy positions before drawing his conclusion.

Instead, we’ve been served a highly political, pretentious rant, of which this column is a fine example. I share Krugman’s social concerns, but his ratio of politics and frequent personal attacks to economics is appallingly high.

In his column, Krugman derides those who are rightfully alarmed by America’s demonstrable fiscal insolvency and pushing for immediate policy adjustments as “policy elites” trafficking in “figments of imagination,” and engaged in “sheer speculation,” with no basis “on either evidence or careful analysis.”

The Congressional Budget Office’s (CBO) 75-year fiscal forecast (called the Alternative Fiscal Scenario) is no figment of imagination. This year’s forecast, appeared two days before Krugman’s piece and shows that the U.S. is in terrible fiscal shape – worse than Greece. Perhaps Krugman missed it.

Then we have this article today by Kotklikoff about his proposed health care plan. It’s called the “The Purple Health Plan” and from what I read, it looks halfway decent.  Although it probably doesn’t fit into the Conservative mindset too well.

The two parties are having a heated debate over the Republican plan to slice $61 billion off Uncle Sam’s projected $3.6 trillion budget. If the Republicans get their way, the deficit will fall from 9.5 percent of gross domestic product to 9.1 percent. If they don’t, they’ll probably shut the government for a couple of days. Then they’ll compromise on, say, a $40 billion budget cut, having proved they gave it their best shot.

Arguing over lowering our deficit by just 0.4 percent of GDP when we need to run massive surpluses to deal with the baby boomers’ impending retirement is, pick your metaphor — rearranging the Titanic’s furniture, Nero’s fiddling, Custer’s Last Stand.

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The CBO releases its realistic long-term forecast — the alternative fiscal scenario — every June. In between, it provides us with periodic updates of its unrealistic 10-year baseline scenario, based on “current law.” Congress, for political reasons, forces the agency to interpret current law in ways that generally make spending much lower and taxes much higher than is likely.

Take It Seriously

Consequently, no one should take the projected levels of spending and taxes in CBO’s baseline scenario seriously. But everyone should take very seriously updates to the baseline. Why? Because these changes give us a pretty good idea of how the next alternative fiscal scenario will differ from the previous one.

~~

In January, the CBO modified its 10-year baseline forecast, taking into account the December deal. By my calculations, this meant the 90 percent threshold would be crossed in 2019.

What a Difference

A lot can change in a few weeks. In February, the president released his budget and, lo and behold, it proposes maintaining the Bush tax cuts for all except the rich not through 2013, as in the December deal, but indefinitely. In so doing, the president conveniently took the issue of tax increases off the next election’s table.

On March 18, when the CBO released a new forecast that incorporated the president’s budget, the 90 percent mark had moved up to 2017.

Actually, 2017 is optimistic. Uncle Sam’s creditors will soon start charging exorbitant interest rates — like those Greece, Ireland and Portugal now face. The market’s concern with those countries’ bonds is outright default, which is unlikely in the U.S. What is likely is rising inflation as the Federal Reserve continues to print vast quantities of money to help pay the Treasury’s bills.

I generally don’t give investment advice, but Bill Gross, co-founder of PIMCO and manager of the world’s largest bond mutual fund, has it right. It’s time to dump all but your very short-term U.S. Treasuries and other dollar-denominated bonds. A safer alternative is Treasury inflation protected securities, or TIPS.

~~

There is one bright spot. Paul Ryan, chairman of the House Budget Committee, has included a version of the Rivlin-Ryan Medicare plan in the Republican budget proposal. This bipartisan proposal, co-authored with Alice Rivlin, former CBO director and head of the Office of Management and Budget under Bill Clinton, would transform Medicare from its current fee-for-service, defined-benefit structure into a defined contribution system in which the government’s liability is strictly capped.

Rivlin-Ryan would be a huge step in the right direction, but what’s really needed is a complete redo that would keep total government health-care spending where it is now, at about 10 percent of GDP.

Common Ground

To that end, I launched www.thepurplehealthplan.org last week to solicit endorsements for what I call the Purple Health Plan – – a proposal that offers common ground to both Republicans and Democrats. To date, five Nobel laureates in economics, George Akerlof, Edmund Phelps, Thomas Schelling, Vernon Smith and William Sharpe, have signed on. So have other prominent economists.

If you’re a Democrat, don’t worry. This system is more or less what’s in place in Germany, Holland, Switzerland and Israel — hardly right-wing bastions. If you’re a Republican, don’t worry. This is a voucher system that’s fair to all and keeps government spending from exploding.

H/T Memeorandum

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