May 28, 2013

Don’t Let Elderly Die Without Paying Their Bills: Kotlikoff

Economist and gadfly presidential candidate sees progress in coming move to switch to ‘fiscal gap and generational accounting’

The wording about getting the elderly to pay up before dying may be harsh but the reality of a crushing deficit on the prospects of the young is far harsher, says Laurence Kotlikoff, a Boston University economist.

Laurence KotlikoffOfficial debt numbers vastly understate America’s true indebtedness, but in the coming weeks the U.S. may see a signal change in our means of tackling the problem, Kotlikoff says. Kotlikoff (left) told AdvisorOne that he was advising a U.S. senator on legislation that would institute “fiscal gap and generational accounting on a routine basis” in government data.

The idea is for U.S. economic data to offer a true measure of government indebtedness by looking at all projected spending—including off-the-books Social Security commitments—and all projected revenue.

Official statistics put U.S. public debt at $16.8 trillion, but according to Kotlikoff the true fiscal gap is some 12 times that amount, at more than $200 trillion, indicating that the U.S. economy is objectively in far worse shape than politicians let on.

The gadfly economist, who ran for president in 2012 on a third-party Internet-based platform, wouldn’t name the senator introducing the accounting change, citing efforts under way to gather bipartisan support, but he expects introduction of the bill in a matter of weeks.

Kotlikoff, who helped draft the bill’s language, pledges his assistance to any policymaker of either party who wants to address America’s challenges.

“I am willing to talk to any member of Congress anytime, day or night,” he says, noting that time is not on our side as the medicine needed to cure U.S. economic ills becomes progressively harsher.

“Every year we don’t address them, we let older people pass away without letting them play their roll to contribute to the solution,” he says, alluding to his oft-stated critique of a system he says showers benefits on the affluent elderly to the disadvantage of struggling young Americans.

“Rich older people need to pay more in taxes and consume less,” the 62-year-old economist says.

“If you let people off the hook from contributing, they’ll consume more. There’ll be less domestic investment. We’re adding to our productive capital at a much lower rate. Our kids get stuck with a bill [the elderly] should have paid plus a worse economy,” he says.

Kotlikoff’s solution is to replace income and payroll taxes with a broad-based consumption tax that taxes people in proportion to their spending.

“It’s a way to get Warren Buffett to pay even more,” he says, while a monthly rebate for those living at or below the poverty line will ensure the poor pay no net taxes.

These and a host of other economic policies are what Kotlikoff refers to as his “purple plans,” nonpartisan solutions that should appeal to red Republicans and blue Democrats alike, and for which he has created several websites spelling out the details.

Kotlikoff says his policies are based on widely accepted principles that most economists share, and takes strong exception to those who have publicly differed, like New York Times columnist and Nobel Prize-winning economist Paul Krugman.

“Paul Krugman has moved away from economics to politics,” he says. “He should hand back his degree. He’s doing a disservice to the profession.”

Kotlikoff’s purple plans include everything from Social Security and the financial system to education and health care reform. (“My purple health plan…would eliminate most of the bureaucracy that the president’s plan has put into place. Everybody needs a basic plan without micromanagement of the health care system.”)

Failure to make the structural reforms he proposes will lead to a world of hurt, Kotlikoff predicts:

“We’ll end up with high tax rates, high inflation, very low growth—the kinds of problems we see in Argentina.”

Most of these difficulties, he says—returning to his generational theme—will fall on the young.

“Kids are already terribly challenged by poor education, Asian competition. Young people will have less wherewithal—when they’re old, there’ll be less wealth in the country. The long-term feedback effects are not good.”

A high-tech economy, often viewed as a boon to productivity, presents challenges to an ill-prepared work force, he says.

“I don’t think the Internet is creating a lot of jobs for high school graduates, college graduates. It’s helping the tech-savvy; it’s not helping the typical young American,” he says. “The guy who invented supermarket checkout machines put a lot of people out of work.”

Striking a futuristic chord, Kotlikoff says that the problem of “smart machines” will only grow. “Smart cars will take over driving; there’ll be no taxi cabs in the future.”

Distilling the problem to its essence, Kotlikoff says “capitalism is very cruel,” and therefore the government’s role should be to ease the economy’s ill effects through its tax and spending policies.

“We have to redistribute in a very serious way,” meaning from the wealthy old to the poorer young. “And we want to give incentives for people to work, so we need the lowest marginal tax rates possible.”

The economist says he’s done the only comprehensive study on marginal tax rates. “It’s all over the place,” meaning that effective tax rates shift up and down through various ages and incomes. “[Policymakers] have no idea what they’re doing in total.”

It needn’t be so, Kotlikoff says, noting that Canada, Australia and New Zealand offer more rational economic policies, as well as Chile, a country whose president and most senior ministers are economists by profession.

But Kotlikoff does not view Santiago or Toronto as any kind of haven, saying he wants to help fix problems here at home. The former presidential contender says he has not ruled out another run in 2016.

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