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A National Debt Of $14 Trillion? Try $211 Trillion

Laurence J. Kotlikoff served as a senior economist on President Ronald Reagan's Council of Economic Advisers and is a professor of economics at Boston University. (Courtesy of Boston University)

When Standard & Poor's reduced the nation's credit rating from AAA to AA-plus, the United States suffered the first downgrade to its credit rating ever. S&P took this action despite the plan Congress passed this past week to raise the debt limit.

The downgrade, S&P said, "reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics."

It's those medium- and long-term debt problems that also worry economics professor Laurence J. Kotlikoff, who served as a senior economist on President Reagan's Council of Economic Advisers. He says the national debt, which the U.S. Treasury has accounted at about $14 trillion, is just the tip of the iceberg.

"We have all these unofficial debts that are massive compared to the official debt," Kotlikoff tells David Greene, guest host of weekends on All Things Considered. "We're focused just on the official debt, so we're trying to balance the wrong books."

Kotlikoff explains that America's "unofficial" payment obligations — like Social Security, Medicare and Medicaid benefits — jack up the debt figure substantially.

"If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. That's the fiscal gap," he says. "That's our true indebtedness."

We don't hear more about this enormous number, Kotlikoff says, because politicians have chosen their language carefully to keep most of the problem off the books.

"Why are these guys thinking about balancing the budget?" he says. "They should try and think about our long-term fiscal problems."

According to Kotlikoff, one of the biggest fiscal problems Congress should focus on is America's obligation to make Social Security payments to future generations of the elderly.

"We've got 78 million baby boomers who are poised to collect, in about 15 to 20 years, about $40,000 per person. Multiply 78 million by $40,000 — you're talking about more than $3 trillion a year just to give to a portion of the population," he says. "That's an enormous bill that's overhanging our heads, and Congress isn't focused on it."

"We've consistently done too little too late, looked too short-term, said the future would take care of itself, we'll deal with that tomorrow," he says. "Well, guess what? You can't keep putting off these problems."

To eliminate the fiscal gap, Kotlikoff says, the U.S. would have to have tax increases and spending reductions far beyond what's being negotiated right now in Washington.

"What you have to do is either immediately and permanently raise taxes by about two-thirds, or immediately and permanently cut every dollar of spending by 40 percent forever. The [Congressional Budget Office's] numbers say we have an absolutely enormous problem facing us."

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Transcript

DAVID GREENE, Host:

Now, S&P says this downgrade might not even be the last one if the nation's debt keeps ballooning. So how to turn this around? Listen to the prescription from Boston University economist Laurence Kotlikoff.

LAURENCE KOTLIKOFF: What you have to do is either immediately and permanently raise taxes by about two-thirds, or immediately and permanently cut every dollar of spending by 40 percent forever. So I'm talking about cutting Medicare benefits, Medicaid, Social Security, defense spending, you name it, by 40 percent forever, starting today. That's what the CBO's numbers say we have an absolutely enormous problem facing us.

GREENE: Big tax increases, huge cuts to military spending and entitlement programs - good luck getting that through Congress - and the problem Kotlikoff says is a whole lot bigger than this $14 debt we've been talking about.

KOTLIKOFF: If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract off all the taxes that we expect to collect, the difference is 211 trillion. That's the fiscal gap. That's our true indebtedness.

GREENE: It's a big number. Why aren't we hearing more about that as these big debates and all the drama go on in Washington?

KOTLIKOFF: Well, the politicians have chosen their language carefully to keep most of the problem off the books, and they've done this for decades. So this is Enron accounting to the 10th power, I mean, millionth power, actually.

GREENE: Quite a strong accusation.

KOTLIKOFF: Well, it's, you know, it's true. Why are these guys thinking about balancing the budget? They should try and think about our long-term fiscal problems. We've got 78 million baby boomers who are poised to collect, in about 15 to 20 years, about $40,000 per person. Multiply 78 million by 40,000, you're talking about more than $3 trillion a year in today's dollars just to give to a portion of the population. That's an enormous bill that's overhanging our heads, and Congress isn't focused on it.

GREENE: So Americans just watch this drama play out in Washington. I mean, is your message to them that this was all just a useless process?

KOTLIKOFF: This is a sideshow. The Democrats and Republicans have been having a food fight for decades. Underneath that façade of conflict, what's really going on is that older generations are taking from young generations on a ongoing basis. And we've consistently done too little, too late, looked too short-term. Well, guess what? You can't keep putting off these problems. And we've used language to disguise what's really going on here, which is this mess of Ponzi scheme.

GREENE: We've been speaking to Laurence Kotlikoff, professor of economics at Boston University. He joined us from member station WBUR in Boston. Thank you so much, professor.

KOTLIKOFF: My pleasure. Transcript provided by NPR, Copyright NPR.

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