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Its author, Laurence Kotlikoff, says the present value of our federal government’s future liabilities overwhelms the present value of future tax receipts. Bad news for our grandkids, in other words. Doomsday is right around the corner, just like all those books have been trying to tell us for at least the last forty years.
Having spent much of my career in corporate finance, consequently having become intimately familiar with discounted cash flow analysis (the key to which lies in the assumptions that lead to the end result), I went through the article carefully, looking for the key assumptions behind the present value calculations. What was assumed about the future tax inflows from 401Ks and IRAs? What was assumed about future economic growth, productivity growth, population growth? What was assumed about the fixed/variable/semivariable costs of government programs? Do they all really vary directly with GDP, or was that just a convenient way to simplify the financial model? Was it assumed that the debt would eventually have to be paid off? If so, when and why was it assumed that debt rollover would become impossible?
[A while back, I took a shot at predicting some possible outcomes two generations down the road; it could no doubt be improved, but it did reveal some not-so-gloomy potential outcomes.]
Anyway, the assumptions have a significant impact on the outcome, and I’ve already emphasized how important the answer to that last question is. All by itself, it could spell the difference between doomsday and dreamscape. In one case, our kids would have to come up with sufficient taxes to pay not just the interest on their T-bonds, but also the principal to eliminate them; in the other case, all they’d have to come up with is enough taxes to pay themselves the interest—and keep rolling their T-bonds over and over, content with their financial assets (some of it money, some of it T-bonds) and a low-inflation environment, just like we’re doing today.
Unfortunately, I couldn’t find the answers in the article. So I asked the author. Later this week, I’ll publish his response to my email, if I get one—along with a few of my comments, of course. [Click on the thumbnail below to see the questions I asked.]
www.optimist123.com...