Mind the [Fiscal] Gap

In this episode of EconTalk, Russ Roberts hosts Laurence Kotlikoff, a professor of economics at Boston University. Roberts and Kotlikoff discuss the fiscal health of the US federal government, and the so-called “fiscal gap” between official government debt and outstanding government obligations such as Social Security and defense spending.

1- Throughout the conversation, Kotlikoff mentions the (2014) $205 trillion fiscal gap between government debt and outstanding government obligations. Kotlikoff asserts that federal taxes will have to be raised significantly or government spending will have to be cut substantially to pay for government debt and forthcoming obligations.

Should the federal government raise taxes or cut government spending to minimize the national debt problem? If the federal government opts to raise taxes, which taxes should it raise? If the federal government cuts spending, which programs, agencies, or initiatives should it prioritize?

2- Kotlikoff criticizes America’s accounting of its financial records and debt obligations for covering up the $205 trillion fiscal gap. Kotlikoff argues that both the Bill Clinton and George W. Bush administrations were aware of the fiscal gap, but removed it from their economic plans. Kotlikoff goes as far to label the government’s accounting as worse than that of Bernie Madoff or Enron.

To what extent does Kotlikoff convince you that the US government underestimates or misrepresents the true scale of its debt problems? Is it fair to compare the government’s accounting shortcomings to that of Bernie Madoff or Enron, given the difficulty in measuring the numerous government assets and liabilities? Explain.

3- Kotlikoff argues that when countries are broke, they print money at a rapid and irresponsible pace, leading to inflation or hyperinflation. Kotlikoff considers printing money at an excessive rate to be the means by which the United States can declare bankruptcy. During 2020, The Fed printed money at astounding levels, and for the past two years, the CPI has been well above the Fed’s target rate of 2%.

To what extent do you consider the extent to which the United States printed money in 2020 to be a declaration of bankruptcy? Just how necessary was it for the United States to print money at record levels in 2020 to finance government stimulus? Was the abundance of money printed in 2020 directly responsible for the 2022 inflationary crisis?

4- In the past, Wall Street has failed to foresee recessions and economic downturns. Kotlikoff mentions the cases of Bear Stearns and Lehman Brothers, whose respective stock prices crashed rapidly. During the past year stock indexes have risen, in spite of a widespread fear that the United States is destined for a recession. 

How much is the health of Wall Street an adequate indicator of the overall health of the American economy? Do you think that Wall Street’s current success reflects an economy that is healthy nationwide, and why? If not Wall Street, what are the best indicators of the economy’s overall health? 

5- Kotlikoff credits a collective panic for causing the Great Recession, and criticizes both Bush and Obama for inciting the panic. In recent years, President Biden has been criticized for not panicking about high inflation rates and declaring the overall health of the economy to be prosperous.

To what extent do you agree with Kotlikoff that a collective panic is what caused the Great Recession? What sort of obligation do elected officials and government representatives have to express positivity during stressful times? Do you concur with President Biden’s long-standing strategy of viewing current economic conditions in a positive light? Why, or why not?

6- Kotlikoff, along with many other economists, fears that the debt crisis is portrayed as a left vs right conflict, when in reality the true conflict is between adults and children. Kotlikoff feels for the younger generation that will have to pay for the national debt.

Do you view the debt crisis as a political or generational conflict? Explain. What consequences do you foresee from the recent federal debt ceiling battle and Washington’s ongoing failure to fully address the national debt problem?

7- Kotlikoff advocates for reform of the tax, Social Security, and health care systems. Kotlikoff argues that economists could best fix the economic problems and fractured systems in America, and wishes that politicians would listen to economists. Roberts disagrees with Kotlikoff’s viewpoint that politicians should listen to economists, worrying that politicians will listen to the wrong economists.

How can these systems best be reformed, to maximize economic efficiency and fairness? Do you share in Kotlikoff’s desire that politicians listen to economists, or agree with Roberts’ dissent and fear that politicians will listen to unqualified economists?

Kyle Fowler is a student at Indiana University studying Accounting and Finance and is a 2023 Summer Scholar at Liberty Fund.