Sunday, April 6, 2014

Mind the fiscal gap?

By Robert H.

Is fiscal gap accounting something I shouldn't think is stupid?

Basically the idea behind fiscal gap accounting is that you get the best estimate of our fiscal situation not by looking at US debt held by the public and maybe projecting it out over x years, but rather by adding up all our future obligations and subtracting all our future income, holding policy constant.

I've always thought it's dumb for three reasons:

1. It operates on an infinite timeline.  Assuming we are going to, to pick random examples, keep paying out SSI obligations and keep taking in gas taxes at current rates forever strikes me as an ahistorical and useless way of thinking.

That said, this may be stupid on my part.  The social discount rate means that a dollar spent on SSI 700 years from now doesn't count very much in assessing the current fiscal gap.  But that means fiscal gapers have to estimate the social discount rate for America over a decades long timeframe, and that also strikes me as crazy and impossible.

2. Related to 1, the fiscal gap gyrates from year to year in ways that don't seem helpful for policy makers.  I can't find a chart of the fiscal gap that goes back to the war (a bad sign in and of itself), but here's a chart showing the projected fiscal gap rise by 300 percent over the last ten years.  Should I be 4 times more concerned about the deficit than in 2003?  Really?  How many fiscal gapers were only 25 percent as concerned about the deficit ten years ago?

3. The market for US debt appears to be totally unrelated to the fiscal gap.  Again, the fiscal gap says our fiscal situation is four times worse off than 2003, but treasuries have significantly lower yields than ten years ago.  Fiscal gapers  seem to fail the market test.

I could use more info, though.  Has anyone correlated fiscal gaps and debt yields over time across countries?


So all that said, accounting is related to math and I am about as numerate as a puffin.  Is the fiscal gap more useful than I give it credit for?

To be clear, my current strategy is to figure that the markets especially and democracy less so are better than me at figuring out how worried to be about the debt, and using them to guide my thinking.  People who buy treasuries and elected politicians don't seem very worried.  As a check, I note that fiscal crises have been extremely rare over a century plus of modern welfare states.  So I'm pretty confident we will eventually get around to dealing with the deficit before it is a big deal.

Then the fiscal gapers start screaming no, every second of delay costs us 400 billion dollars, or whatever, and my equanimity gets perturbed.  Should I listen to them?

No comments:

Post a Comment