NCPA - National Center for Policy Analysis


July 27, 2010

Greek debt totals 120 percent of gross domestic product (GDP), twice the U.S. figure.  But debt alone tells us little about a country's fiscal condition.  Economists call this the labeling problem because governments can describe receipts and payments in any way they like.  Payroll taxes to fund pensions and health care can, for instance, be labeled as borrowing, with the future benefits called repayment less a future tax.  Measured thus, the U.S. budget deficit is 15 percent of GDP, not 9 percent, says Laurence Kotlikoff, professor of economics at Boston University. 

The Greek fiscal gap is staggering, says Kotlikoff: 

  • Calculations developed with his colleagues at Freiberg University put it at 11.5 percent of the value of Greece's future GDP; and this huge figure already incorporates Greece's recently legislated fiscal policy retrenchment.
  • But the U.S. figure, based on the Congressional Budget Office's (CBO) just-released projections, is even larger -- 12.2 percent. 

Clearly, Greece is in terrible fiscal shape, says Kotlikoff: 

  • To get its books in order it would have to pull in its belt each year by another 11.5 percent of GDP.
  • But the United States is in much worse shape, because the CBO's projections that reveal the 12.2 percent fiscal gap already assume a 7.2 percent of GDP belt-tightening by 2020. 

But the assumptions underlying this 7.2 percent 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, says Kotlikoff. 

Wishing won't fix America's fiscal mess.  The United States 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 America's fiscal house in order, says Kotlikoff. 

Source: Laurence Kotlikoff, "Uncle Sam has worse woes than Greece," Financial Times, July 25, 2010. 

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