Dimensions: 8.25'' x 5.50'' AEI Press  (Washington) Publication Date: July 2003 Paperback ISBN: 0-8447-7167-8 Price: $ 15.00 Add to Cart   Examination Copies

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Many appreciate that the federal government's finances are shaky. However, few realize how really bad they are because most evaluations are based on what happened in the past--not what is likely to happen in the future. Although we are accustomed to hearing that today's federal debt held by the public amounts to $3.5 trillion, the important--but often overlooked--question concerns how much debt we will incur going forward.

As we approach a time when entitlement outlays will dominate federal spending, Jagadeesh Gokhale and Kent Smetters recommend shifting to a new, forward-looking method of analyzing our fiscal position. Combining outstanding debt with future revenue shortfalls, they calculate the United States' "Fiscal Imbalance"--the amount of money that the federal government must have in hand today to sustain current tax and spending policies indefinitely--at a heart-stopping $44.2 trillion, considerably outstripping debt currently held by the public. Although policymakers prefer to ignore it, they do so at our peril: Because the government does not have an extra $44.2 trillion, it must raise an equivalent sum by dramatically increasing taxes or drastically reducing spending.

Not only do traditional fiscal measures considerably understate the government's financial shortfall, focusing exclusively on them introduces a policy bias: Some policies that could improve the government's overall financial position appear unattractive because they cause larger deficits in the near term. A dismal economic arithmetic will eventually force a move toward sustainable policies, forcing sacrifices by some generations. In order to distribute the burden fairly, we must know how alternative reforms will divide it among different generations. To that end, Gokhale and Smetters construct "Generational Imbalance" measures for programs funded with dedicated revenues--to identify past and living generations' contributions to those programs' Fiscal Imbalances. Together, the Fiscal and Generational Imbalance measures constitute a powerful tool-set. They would help lawmakers design reforms best suited for meeting the challenges posed by the retirement and health security needs of our progressively aging society. [more...]

Jagadeesh Gokhale is a visiting scholar at the American Enterprise Institute and a senior economic advisor to the Federal Reserve Bank of Cleveland. Kent Smetters was deputy assistant secretary for economic policy at the U.S. Department of Treasury from 2001 to 2002. He is currently an assistant professor at the University of Pennsylvania.