Even the Conservative Economist

The current Economist has an interesting piece, Hidden dangers: The American government’s accounts look about as reliable as Enron’s (article here–subscription required). The story reports on a study by two AEI economists, Jagadeesh Gokhale and Kent Smetters, that uses two new measures of how sustainable deficits are. One of them is the Generational Imbalance (GI) index, which measures (in net present value) how much society will spend on the current generation over their lifetimes versus how much society will collect from that generation over their lifetimes. They estimate that Medicare alone represents a transfer of $20 trillion (1.7 times GDP in today’s dollars) from future generations to the current one!

This seemed a bit high at first, so I took a look at the 2003 Status of the Social Security and Medicare Programs, where I found this graph:

I didn’t run the numbers, but based on this the Gokhale and Smetters number seems plausible. Not surprisingly, the AEI economists use their result to argue against expanding Medicare and Social Security benefits (a position I agree with, unless taxes are raised or other spending cut to pay for them). On the other hand, exacerbating the transfer from “the children” to the current generation via massive tax cuts and the accompanying deficits seems like an equally bad idea. Oh wait, I forgot, the solution is trivial: use more tax cuts to increase revenue–we better get taxes down and pronto!

Back to The Economist‘s assessment of the situation:

As the late Herbert Stein, a noted economist, once said, “If something cannot go on forever, it will stop.” One way or another, America’s budget gap will have to be closed. The question is, will it be done responsibly, by coming clean about the hidden liabilities now and taking the necessary, if painful, steps to deal with them? Or will the top management, like Enron’s, stave off admitting the true state of America’s finances until it is forced to do so by some spectacular collapse?

Indeed.

AB