- Feb 12, 2007
- 59,384
- 24,018
- 2,290
A thoughtful analysis of the United States financial mess. When apples to apples comparisons are made, we are in worse shape than Greece - largely due to the accounting gimmicks applied to the Social Security Trust Fund.
Greek debt totals 120 per cent of gross domestic product, twice the US figure. But debt alone tells us little about a countrys fiscal condition. Economists call this the labelling problem, because governments can describe receipts and payments in any way they like. Payroll taxes to fund pensions and healthcare can, for instance, be labelled as borrowing, with the future benefits called repayment less a future tax. Measured thus, the US budget deficit is 15 per cent of GDP, not 9 per cent.
...
Fortunately, theory suggests a label-free measure of fiscal status: the fiscal gap, or the present value difference between all future expenditures and receipts. The Greek fiscal gap is staggering. Calculations developed with my colleagues at Freiberg University put it at 11.5 per cent of the value of Greeces future GDP. And this huge figure already incorporates Greeces recently legislated fiscal policy retrenchment. But the US figure, based on the Congressional Budget Offices just-released projections, is even larger: 12.2 per cent.
Clearly, Greece is in terrible fiscal shape. To get its books in order it would have to pull in its belt each year by another 11.5 per cent of GDP. This provides new meaning to the word draconian. But the US is in much worse shape, because the CBOs projections that reveal the 12.2 per cent fiscal gap already assume a 7.2 per cent of GDP belt-tightening by 2020.
But the assumptions underlying this 7.2 per cent adjustment are highly speculative, including a substantial rise in the share of taxpayers facing the Alternative Minimum Tax, once called the millionaires tax for targeting only the rich. The CBO also assumes that real wage growth will push all workers into much higher tax brackets, and that Congress will slash discretionary spending as well as greatly limit growth in Medicare and Medicaid benefits. Each supposition runs counter to recent experience.
Wishing wont fix Americas fiscal mess. The US is one foot away from a deep and permanent economic grave. It is far past time to do meaningful long-term fiscal planning, level with the public, and implement radical reforms that permanently put Americas fiscal house in order.
FT.com / Comment / Opinion - Uncle Sam has worse woes than Greece
Greek debt totals 120 per cent of gross domestic product, twice the US figure. But debt alone tells us little about a countrys fiscal condition. Economists call this the labelling problem, because governments can describe receipts and payments in any way they like. Payroll taxes to fund pensions and healthcare can, for instance, be labelled as borrowing, with the future benefits called repayment less a future tax. Measured thus, the US budget deficit is 15 per cent of GDP, not 9 per cent.
...
Fortunately, theory suggests a label-free measure of fiscal status: the fiscal gap, or the present value difference between all future expenditures and receipts. The Greek fiscal gap is staggering. Calculations developed with my colleagues at Freiberg University put it at 11.5 per cent of the value of Greeces future GDP. And this huge figure already incorporates Greeces recently legislated fiscal policy retrenchment. But the US figure, based on the Congressional Budget Offices just-released projections, is even larger: 12.2 per cent.
Clearly, Greece is in terrible fiscal shape. To get its books in order it would have to pull in its belt each year by another 11.5 per cent of GDP. This provides new meaning to the word draconian. But the US is in much worse shape, because the CBOs projections that reveal the 12.2 per cent fiscal gap already assume a 7.2 per cent of GDP belt-tightening by 2020.
But the assumptions underlying this 7.2 per cent adjustment are highly speculative, including a substantial rise in the share of taxpayers facing the Alternative Minimum Tax, once called the millionaires tax for targeting only the rich. The CBO also assumes that real wage growth will push all workers into much higher tax brackets, and that Congress will slash discretionary spending as well as greatly limit growth in Medicare and Medicaid benefits. Each supposition runs counter to recent experience.
Wishing wont fix Americas fiscal mess. The US is one foot away from a deep and permanent economic grave. It is far past time to do meaningful long-term fiscal planning, level with the public, and implement radical reforms that permanently put Americas fiscal house in order.
FT.com / Comment / Opinion - Uncle Sam has worse woes than Greece
