The ‘infinite-horizon fiscal gap’ is just an infinity of nonsense – try measuring that!

The ‘infinite-horizon fiscal gap’ is just an infinity of nonsense. That is, if such a level of ridiculousness can be measured, which it cannot. So suffice to say a pretty large dose of nonsense. Certainly nothing to take seriously. Anyone who sprouts this nonsense declares themselves unqualified to discuss notions of sovereignty and the capacities of a currency-issuing state. But while some mainstream economists are firmly stuck in their Groupthink-riddled stupors with their ‘infinite-horizon fiscal gap’ calculations producing ever increasing (scaremungous) $ sums that the US government is allegedly unable to ever pay, the movers and shakers of the political scene, such as the Koch Brothers in the US, feel no compunction to stick with a consistent line attacking fiscal deficits. A few years ago they were predicting mayhem and insolvency just like the stupified academics. How things change when some dollars are up for grabs even if the fiscal deficit has to rise to transfer that largesse to the non-government sector. Then it is look the other way on the deficit and send us the cash. Sickening.

Yesterday (October 24, 2017) a report in a service that provides investment advice (I won’t link to it because it has goldbug adverts etc), ran a story on Laurence Kotlikoff.

Laurence Kotlikoff who is an American academic has been predicting (or rather asserting) that the US has run out of money for many years now.

Kotlikoff’s predictions are like a crack in an old vinyl record – click, click, click, moronic, moronic, click, click

Back in 1991, he was carrying on about the “fiscal burden current generations are placing on future generations”. He wrote then that (Source):

The federal deficit is widely viewed as the United States’ number one economic problem … As the underlying credo of fiscal policy is to cut spending or raise taxes to make the deficit zero, the attention given to how to define the deficit is not surprising … unless policy toward existing generations, including those who have just been born, is substantially altered (for example, through a real adherence to the just enacted budget deal), future generations will face a roughly 20% larger net tax burden over the course of their lifetimes than current newborns.

Okay, we can go back even further than 1991 if we wanted to where Kotlikoff was making the same sorts of statements.

The difference is that in more recent times his claims have become more strident – moving from the intergenerational burden shift to his latest claims about the US going broke.

He has consistently claimed that social security and healthcare systems were sending the US bankrupt.

In 2005, he was predicting that the US was “in the worst long-term fiscal shape of any OECD country”:

There is, of course, a limit to how much a government can extract from the young to accommodate the old. When that limit is reached, governments go broke. Of the ten countries considered here, the U.S. appears the most likely to hit this limit.

And the theme continued to the present day with Kotlikoff becoming increasingly aggressive in his predictions and using the same old argument with new ramped up figures as time passed.

His technique is to make some calculations based on current fiscal and demographic parameters, add in a whole lot of irrelevant alleged ‘costs’ or ‘debts’, extrapolate them out to infinity, which then produces some ridiculously large number that most people cannot even pronounce much less appreciate the scale and conclude government insolvency is beckoning.

Its been like that for 3 or more decades. The only difference is the lines on his face become more pronounced and his hair has greyed and thinned.

Of course, the current young adults who were entering the world in the early 1990s are not paying a “20% larger net tax burden” nor will.

Of course, the US government is not about to go broke, nor will.

This is not to say that the US government should not attempt to rein in the very expensive health care system that they have created under pressure from the greedy medical profession, the grasping pharmaceutical companies and the medical technology companies. But that necessity is nothing to do with the US government not being able to afford to maintain such a system in financial terms.

It is just about releasing itself from the captive rent-seekers who plunder the public purse for their own gain and deliver sub-optimal outcomes in terms of advancing well-being.

I wrote about that issue in these blogs (among others):

1. The US should have universal public health care.

2. A government can always afford high-quality health care provision.

In 2015, Kotlikoff appeared before the US Budget Committee (February 25, 2017). He tendered this written document – America’s Fiscal Insolvency and Its Generational Consequences.

He told the Senate:

Let me get right to the point. Our country is broke. It’s not broke in 75 years or 50 years or 25 years or 10 years. It’s broke today. Indeed, it may well be in worse fiscal shape than any developed country, including Greece.

Whenever a commentator or an economist conflates the fiscal outlook for a nation that issues its own currency (for example, the US) with the outlook for a nation that uses a foreign currency (for example, Greece) you know one thing for certain – they have not understood what currency sovereignty is.

They also have not understood (or choose to ignore for political/ideological reasons) the capacities that the former type of government has relative to the limitations faced by the latter type.

Broke means not being able to meet one’s outstanding liabilities. If you assert this in the present tense then it means that the bills that are coming due now are being dishonoured due to a lack of funds.

He gave that evidence nearly three years ago. It was false testimony. The US has kept paying all its outstanding liabilities as they have come due.

So it was not broke then. Nor is it broke today. And nor will it ever be so – unless it chooses for whatever reason to deny its own currency-capacity and deliberately default on these liabilities.

It simply doesn’t help anyone understand the political choices when these fake statements are bandied around in the public domain by so-called experts.

Kotlikoff thinks that we should actually used what he calls – infinite-horizon fiscal accounting – to really expose the extend of the fiscal problem facing the US government.

This is a technique he has been using for years which he knows produces these scaremungous, off-the-planet numbers that boggle the mind.

At that point, the average person will be groomed into believing that social security privatisation or cutting government welfare payments etc are going to save the nation from bankruptcy – even if they have no idea as to why or what the arguments are.

Big is scary. Big has to be paid back. But our kids will do the paying back. At least until we move on another generation and then their kids will have to pay it back and so the stupid narrative continues.

Kotlikoff told the US Senate that the US government has regularly defaulted on its outstanding Treasury bonds:

Yes, the Treasury bonds bear “the full faith and credit of the U.S. government.” But those fancy, legal words don’t make those bonds safe in any real economic sense. Our government has periodically defaulted on the real value of official debt by running inflation. In 1946, for example, it wiped out a quarter of the real value of War Bonds by lifting price controls. In the 1970s, our government used inflation to wipe out hundreds of billions of dollars in the real value of federal debt.

Notice immediately how he conflates concepts – runs things together to confuse and confound.

When we talk about going broke – or defaulting – we are referring to the ability to service and pay back any outstanding nominal liabilities.

A bank doesn’t say to me that I have to pay them back in real terms when I borrow to fund a home purchase. I pay a periodic monetary amount and as long as I keep paying that I am solvent in terms of that debt commitment.

The rise and fall of the inflation rate clearly impacts on the real burden of that debt commitment but I am not defaulting if the real commitment is falling.

For a government, the same logic follows. It is clear that the fixed nominal value on a treasury bond will vary in real terms as the price level varies and shift real burdens between creditor and debtor accordingly.

But that doesn’t accord with going broke or defaulting. That is just a misuse of the terminology – rendering it without meaning.

Kotlikoff speaks like that because he knows people are typically not that discerning and so it ‘sounds about right’, which reinforces his claim to credibility when, in fact, he has none.

The infinite-horizon fiscal gap he advocates is based on the idea that:

All government obligations and all government receipts, no matter what they are called, need to be properly valued in the present taking into account their likelihood of payment by and to the government.

So, it follows that “high future transfer payments” and “low future levels of taxation” have to be accounted for, because otherwise, it places:

… our children and grandchildren under a fiscal Sword of Damocles that gravely endangers their economic futures.

What Kotlikoff regularly produces is a summation of the known liabilities and all the so-called unfunded liabilities – such as future social security pensions.

The features of the ‘infinite-horizon fiscal gap’ are:

1. “it puts everything on the books”.

2. “a positive fiscal gap means the government is attempting to spend, over time, more than it can afford … Hence, a positive fiscal gap is a direct measure of the unsustainability of current fiscal policy.”

3. “the fiscal gap tells us the fiscal burden that will be imposed on today’s and tomorrow’s children if current adults don’t pay more to or receive less from the government.”

He then told the US Senate that the ‘fiscal gap” was “massive” ($US210 trillion) – “almost 12 years of GDP” (in 2015). Scaremungous!

He told the Senate that “Another comparison is Detroit prior to declaring bankruptcy. The city appears to have been roughly 25 percent underfunded. Hence, the U.S. is in far worse fiscal shape than was Detroit before it went broke.”

So now he is conflating the US federal currency-issuer with a state in the US. A totally fake comparison.


Think about this. What happens if the government privatises some major public asset? Well according to Kotlikoff, the ‘infinite-horizon fiscal gap’ would decline because the sale would reduce debt.

But what about the flow of benefits that the community would enjoy from public use of this asset? They are excluded from his measure.

What about the increased productivity that comes from public education and investment in public infrastructure, that the private sector leverages off? Excluded.

What about climate change allevation, which might add to current government outlays but save a fortune in the future? The outlays are included but the future savings are excluded.

So, even on its own logic, the ‘infinite-horizon fiscal gap’ is highly misleading. It does not measure anything like the net future liabilities of the federal government.

The recent story I mentioned above (but did not link to) just provided some updated scaremungous numbers using Kotlikoff’s approach and quoted him as saying:

Our country is broke … We are in worse shape than Russia, China or any developed nation …

The article repeated Kotlikoff’s claims that US “government officials are well-aware that many of America’s debts and accruing liabilities are being written off the book … they are keeping their mouths shut.”

He claims that “politicians and insiders have access to key data buried in footnotes about unfunded liabilities, which indicated their are huge problems in the economy”. But they lie and say “overall everything is OK”.

So scaremungery mixes with conspiracy theory – the usual duet.

The journalist who says he has an MBA (wow!) concludes that:

Kotlikoff is correct on one crucial point: America is unable to meet its obligations as they become due. That is the definition of bankruptcy.

In a sense, it should hardly come as a surprise that politicians are hiding this fact.

Okay, where is the evidence that the US government has not paid out or honoured any liability that has been maturing? There is no evidence.

Where is the evidence that it has refused to pay a pension that was due? There is no evidence.

To claim otherwise is a lie.

Once we escape from the Kotlikoff logic it is clear that none of his predictions have come true because they are flawed at the most elemental level.

I wrote this blog – Social security insolvency 101 – in 2009, to provide the framework for understanding why the likes of Kotlikoff should be ignored.

Another related blog (from 2012) – Accounting smokescreens excite the conservatives – is worth re-reading.

The scaremungous estimates that Kotlikoff and his ilk continually pump out into the public debate and which are repeated by mindless media commentators, parading as financial wizards, are really elaborate smokescreens about nations that have full currency sovereignty.

No matter what accounting structures are created for the US Social Security and Medicare systems, which require cash to flow into various accounts and spending to be taken out in particular ways, the reality is that these are voluntary arrangements imposed by the government upon itself.

And a fiat currency issuing government can always ensure benefits are paid (in nominal terms). That capacity is intrinsic to the monetary system.

However, to obscure that intrinsic capacity successive generations of politicians have placed a series of restrictive layers on top which the conservatives then focus on and pursue their anti-government agenda by purporting to the public that these voluntary layers are in some way binding to any federal government.

It is, in fact, meaningless to say the future pension entitlements are ‘unfunded’ and therefore a dangerous, hidden item that renders the US government insolvent.

If non-government households, for example, started racking up future liabilities for which it had no discernable income capacity to ensure they could meet these liabilities then we might call them ‘unfunded’ and be alarmed about them

Take the emerging car loan train wreck that in the US and the UK (sorry about the mixed transport pun). That is a problem which I will write about another day.

But the US government can relax any of these voluntary accounting constraints anytime it desires if there was the political will.

Taxpayers do not fund anything in a fiat monetary system and the government doesn’t need any ‘funding’ to provide whatever goods and services to the non-government sector it chooses.

Please read my blog – Taxpayers do not fund anything – for more discussion on this point.

If there are goods and services for sale in 2050 in US dollars the US government will be able to purchase them, irrespective of the public debt ratio. The real challenge is to ensure that pensions translate into better real outcomes (higher living standards).

The summary facts are as follows:

  • The US government could pay all of the benefits in each year with the stroke of a computer key. The only question would be if the nominal transfers were possible in real terms – that is, will there be enough real goods and services for older Americans to enjoy in say 2050.
  • There is no need to eliminate any deficits in contrived Social Security Trust Funds – now or later. They are accounting fictions. The reality is summary fact 1.
  • There is no impending financial crisis in the US Social Security Trust Fund. The US government can always fund any entitlements at any time – summary fact 1.
  • The billions that go to Social Security each year will not make it harder to find money for other government programs or require large and growing tax increases. The US government is not financially compromised in meeting spending on Y by spending on X. It might be politically compromised but that is nothing to do with the underlying features of the monetary system and the capacities that the US government enjoys as the monopoly issuer of the currency. Summary Fact 1 again.
  • Younger workers have nothing at all to worry about the fact that their parents and grandparents are enjoying benefits from the Funds. The largest problem facing younger workers is the entrenched unemployment and rising duration of unemployment brought upon by the failure of the US government to expand its deficit enough to support appropriate levels of job creation. This unemployment will cause intergenerational disadvantage and trying to cut spending now to “fix up social security” will worsen the situation for younger workers.

Which brings me to the final point – the Koch Brothers.

There is a great story in the Intercept (October 14, 2017) – Koch Brothers’ Internal Strategy Memo on Selling Tax Cuts: Ignore The Deficit – which highlights the lack of integrity of the anti-deficit crowd.

Recall the Koch Brothers leading the charge about the Obama deficits:

Their political network aired an unending cascade of campaign advertisements against Democratic politicians, sponsored several national bus tours, and paid organizers in communities across the country to mobilize public demonstrations, all focused on the dangers of increasing the deficit.

One such ad even warned that government debt would lead to a Chinese takeover of America – which, for many voters, is a concern linked to debt.

Here is the ad:

If it wasn’t so influential it would be pure comedy.

Anyway, it seems that with the Republicans in control now the Koch Brothers have changed their tune:

… the Koch brothers are poised to reap a windfall of billions of dollars through tax cuts, they have a new message: Don’t worry about the deficit.

An intercepted memo from the Koch Brothers to their network on “how to sell tax reform legislation” indicated that lobbyists neede to “avoid becoming distracted by deficit concerns”.

A quote from the memo reads:

Avoid getting distracted on revenue neutrality; economic growth increases revenues. Some Republican Senators have expressed concern over supporting comprehensive tax reform that adds to short-term deficits. Though we fully appreciate those concerns, the long-term economic growth that would result from the first comprehensive tax reform in a generation would help to offset short-term deficits over time. That was the result of the Kennedy and Reagan tax reforms-there’s no reason this time will be any different.

Hypocrisy knows no bounds.

The rest of the Intercept article is worth reading.


It is the same pattern – rehearsed endlessly – over time and across space.

The Koch Brothers and their ilk shift from attacking deficits when they can benefit to supporting them when the opposite would costs them dollars. There is no purity in their position. Pure greed.

At least Kotlikoff, stuck in the academy making himself delirious on ever increasing $ numbers and pumping ever more drastic scenarios – is consistent, like a stuck record.

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.

This Post Has 13 Comments

  1. Bill,

    I just read that Intercept article. There are comments from readers indicating an awareness of modern monetary systems, such as:

    “They never really worry about the deficit because they know that the government’s deficit is the private sector’s surplus.”

    Which is good to see.

  2. Much worse than nonsense it’s effects are positively EVIL. All this nonsense serves the deliberate marginalisation of a large cohort of the society. Instead of ministering to the needs of this cohort, the large segment without jobs and mired in poverty, none of which is necessary for a monetary sovereign nation, the situation is deliberately made worse. And that is pure evil.

  3. Well, you are keen to have a fictionalized story to project the MMT principles and philosophy, Kotlikoff provides one; all it needs is a cliff-hanger scenario (health-care, robotics, household debt/unemployment, social upheaval) and a poisonous dose of hypocritical elitism.

    Add a high profile cast-list, some scintillating screen-play and an inspiring soundtrack; all you’re years of endeavour could be encapsulated in a spectacular night at the cinema.

  4. Dear Bill

    The Republican view of deficits is very simple: Deficits caused by social programs for the poor are very dangerous and a crushing burden on future generations. Deficits caused by tax cuts for the rich are stimulatory and will leave a bigger pie for future generations.

    To Republicans, a billion is not always a billion. No, Sir, 10 billion spent on a social program is a lot, LOT of money, but 100 billion spent on the military is peanuts.

    Peter is 25 years old. His disposable income is 36,000 and he pays 1000 dollars in rent per month. He has no savings. Assuming that Peter, a very health-conscious guy with very longevous ancestors, will live to be 100 years old, then he has an unfunded rent liability of 900,000. That is 25! times his annual disposable income. How can he even sleep at night?

    Regards. James

  5. Unfortunately we have a small army out there, comprised of MBA’s, economics grads, who believe they “know” how the monetary system works because they were University educated in the fields relating to money.
    Most of these people will never let go of of their hard won “understanding” of the way things work; it seems too much of a leap, especially when they know their careers may depend on that “understanding”.

  6. I have not commented here in quite some time.
    I started reading your fine blog in 2009. I was searching the literature and web for information that would help me understand the financial crisis that had just occurred. I knew that the information content in the mainstream news and journals was nil, and finally had some time to devote to the search for the truth.
    I was born in the same month and year as Kotlikoff. I have learned a tremendous amount in the last 8 years, having discovered the works of the MMT school and others with insights into the power system we live under. Kotlikoff seems to have learned nothing in that same period of time.
    Unfortunately, I have also discovered that most, even academics who should be, are not always expanding their knowledge. Bill, you have written about this issue as well.
    I thank you for your work and continue to read and try to understand. Kotlikoff is an embarrassment, and a danger to our society.

  7. Same stuff going on like a stuck, defective CD ( to update from Bill’s vinyl!) in the UK with the Tories uttering ‘Venezuela’, ‘Greece’, ‘bankrupt’, ‘no money’ like some compulsion disorder.

    I’ve tried to challenge my Tory M.P on all of this but he won’t reply properly insisting he can’t ‘account for the opinions of other M.Ps’- despite the fact that it is his leader spouting this stuff, he feels he ‘can’t comment.’

  8. Bill, could you please include an apt photo or image with each of your blog posts to assist with posting your extremely important articles on social media as currently when posting your articles, they appear without an image which greatly reduces the hit rate for potential readers. A powerful image can make a huge difference on how many people are ultimately reached. We are running out of time as the world is being systematically destroyed on so many levels.

    Another great article by the way, thanks again.

  9. This is a great article.

    Clear, logical, and it succinctly describes the nonsense Laurence Kotlikoff spews and the reality of our monetary system.

    I will say this again. I am very lucky to have exposed to MMT!

    I can’t wait for that article on car loan catastrophe.

    Finally, the Koch brother are human wastes.

  10. In NZ the government have recently announced they will start to contribute money to the NZ Superannuation Fund. I am two minds about this. I wonder if the money would be better spent directly investing in the NZ economy in education, public infrastructure and job creation rather than in financial instruments like shares in overseas companies? I read I believe on Bill’s blog about the Norwegian Sovereign Wealth Fund that it had its up sides and how it is useful in controlling inflation from the oil bonanza and possibly paying for imports in foreign currency in the future. But I suspect the NZ situation is different. What is the point of the government “saving” the money it can create at whim when it can always pay in nominal terms for services in the future? The key is surely will we make a productive enough economy so that my one child’s labour can pay for her two aged parents one day? Everyone seems to love the super fund in NZ. But I have my doubts.

  11. Kotlikoff is an example of a common and bizarre phenomenon: an economist who talks total nonsense on one aspect of economics (the deficit) but who is very clued up on other aspects (banking in Kotlikoff’s case).

    A possible solution to “deficit and debt phobia” would be to adopt the permanent zero interest rate idea advocated by Warren Mosler (and Milton Friedman). That’s a system where the only state liability is base money, which of course is very little different to government debt, especially at low rates of interest.

    The debt would then disappear, and “debt-phobes” would be utterly lost and baffled. That system would rule out interest rate adjustments, so stimulus would be “fiscal only”. Politicians (aka neanderthals) wouldn’t wear that in the US. But if some other country implemented the idea, and make it work, the US might eventually follow.

  12. Just because something hasn’t crashed yet doesn’t mean it won’t. Rome took a good 400 years to collapse, but when it finally did in 455, Roman citizens were happy to be made the slaves of the invading Vandals, their life was so miserable. You sound like Rome 200 years in, blissfully ignorant that funding future costs with fiat currency only raises those future costs. A doctor in 2070 would not want to be paid in your clown money at the same rates he received in 2018. Inflation is the threat, gold is the shield.

    (In 376, the Visigoths crossed the Danube River – a traditional boundary of the Roman Empire – and swarmed southward. Two years later, the Visigoths defeated the Romans at the battle of Adrianople, further weakening the Empire. Further west, the Vandals crossed the Rhine River – another traditional boundary of the Empire- in 406. They continued their assault southward to Spain, crossing the Pyrenees Mountains in 409. A year later, the Visigoths sacked Rome and continued on to Spain. In 429, the Vandals crossed the Strait of Gibraltar and reached the shores of Africa. They continued their assault eastward along the coast and re-crossed the Mediterranean to make a landing in Italy. In 455 they followed in the footsteps of the Visigoths and sacked Rome. )

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