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?

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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?

1. Bad incentives 2. ? 3. Crisis!

By Robert H.

I am made very nervous by public choice stories that end in doomsday.  Take these examples: 1. As soon as the people realize they can vote themselves subsidies, they will vote themselves more and more until the economy collapses.  2. Because a possible debt crisis is a long way off but tax hikes and budget cuts happen now, politicians will always face pressure to please current voters and hurt future ones, never getting serious about the deficit until crisis is upon us.  3.  If markets start poking up interest rates and servicing our debt becomes a crushing burden, the fed will feel pressured to enact looser and looser policy to keep rates down until an inflationary disaster.

To state the obvious, in a rich, transparent democracy like America, there is a huge and powerful constituency that wants to avoid doomsday (everyone) and widespread access to good data about the likelyhood of doomsday.

So, to take one example, are politicians pressured to borrow now at the expense of future generations?  Probably.  Will this lead to a fiscal crisis?  Probably not.  You would expect rational voters likely to see a fiscal crisis in their lifetime push for balanced budgets.  If it looks like the debt to GDP ratio won't be sustainable in 20 years, maybe the 80 year olds don't care (they will be dead by then).  But the 20, 40, and maybe 60 year olds do.  As we approach fiscal crisis danger territory, older and older voters should start getting politically involved for austerity until the fiscal crisis is averted, later than would be optimal but far earlier than is dangerous.

Because the constituency against doomsday is so large and powerful, it is hard to tell public choice stories where rational actors end up dooming America.  Doomsday takes either 1. Ignorant voters (and why do you think you are so much smarter) or 2. Bad institutions that a.  hide key facts from voters, b. make coordination hard (IE, climate change is a global problem but there are no global institutions capable of dealing with it), or c. Put power in the hands of people who prefer doomsday to the alternative (IE, ruling junta would rather control a collapsing economy then risk losing control of a free one).  I would say Europe has suffered from a mix of all three factors under 2, hence the crises there.

Climate Change vs. Fiscal Crisis

There has been a spirited debate about whether people should compare the long-term debt to climate change.  Here's  former Treasury official Steve Rattner, quoted by Joe Scarborough:

"We are putting millions of tons of carbon in the air every day; we are also adding billions of dollars to our future entitlement obligations every day. We are borrowing (stealing?) from our children to pay far more in benefits to seniors than we are paying into the system.We have something like $60 trillion in unfunded liabilities to Medicare and Social Security. Paul Krugman would like us to just wait until those programs run out of money, at which point those unfunded liabilities would be just that much larger."

In other words, just like Krugman doesn't want us to wait when it comes to addressing climate change, he shouldn't want us to wait when it comes to addressing the deficit.

Krugman has responded to these types of arguments, and you can read that, but I think he's a little too clever and subtle to thoroughly convince the economically ignorant (aka, me) .  So I propose a simpler distinction that can illuminate the difference between climate change and the deficit: you can put off a future problem until it is a present problem, but once a problem shows up and bad things start happening, it is impossible to ignore the problem.  It will affect you.

And that's climate change.  Climate change is here.  Global temperatures are up.  Extreme weather events are up.  Climate change is doing bad things, to us, right now (key words in that article, "which has already begun to cause trouble").  You simply can't argue that climate change won't have bad consequences, it is having them.

That's not true with the deficit.  Fiscal crisis is not here (in America).  Inflation is not up.  Interest rates are not up.  Yields on treasuries are not up.  Etc.  For the time being, the deficit isn't doing anything bad.  If you are worried about America having a fiscal crisis because of its deficit, you are worried about the future.  We don't have that problem yet.  And even if you disagree with that, you have to acknowledge that Krugman thinks the deficit isn't doing anything bad right now, just like he thinks climate change is.

So yeah, that's the distinction.  When a bully is threatening you from across the playground, you can ignore him.  When he's punching you in the face, you've got to deal with it (or at least, have a really good reason why you should still ignore himt).  That's not proof that Krugman is right -- sometimes you shouldn't ignore the bully across the playground -- it's just proof that the comparison is dumb.