Eric Sprott: Inform Act to Bring a Dose of Fiscal Sanity & Awareness to US Public?

Thanks to Boston University’s Larry Kotlikoff, it now seems like the U.S. might be getting closer to acknowledging that it has a serious fiscal problem; or at least this is what one might infer from the strong support from Congressmen and Senators from both sides of the aisle, as well as from fifteen Nobel Laureates in Economics (see Figure 2 for a complete list) and thousands of business leaders and economists from all stripes, for a new bill called the Intergenerational Financial Obligations Reform Act or “Inform Act”.
We find it appalling that, while some of the world’s brightest economists consider this an issue of paramount importance, notwithstanding its introduction to the Senate and the House, the “Inform Act” completely flew under the radar of the mainstream media.
Hopefully, if this becomes law, it will not be possible for people to keep their head in the sand on fiscal responsibility.

 

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By: Eric Sprott and Etienne Bordeleau, Markets at a Glance:

We have long been advocates of fiscal responsibility, as evidenced by previous “Markets at a Glance” such as “The Detroit Template”, “Have we lost control yet?”, “Ignoring the Obvious” and “The Solution…is the Problem” series. The perpetual underlying issue is that governments promise too much, then borrow to try to keep up, but given the scale of the promises relative to their means, inevitably have to renege on those promises. This creates a situation where ordinary citizens are fooled into thinking that the government will provide for them ad infinitum [forever], and as a result do not save enough and consume too much.

Thanks to Boston University’s Larry Kotlikoff, it now seems like the U.S. might be getting closer to acknowledging that it has a serious fiscal problem; or at least this is what one might infer from the strong support from Congressmen and Senators from both sides of the aisle, as well as from fifteen Nobel Laureates in Economics (see Figure 2 for a complete list) and thousands of business leaders and economists from all stripes, for a new bill called the Intergenerational Financial Obligations Reform Act or “Inform Act”.

We find it appalling that, while some of the world’s brightest economists consider this an issue of paramount importance, notwithstanding its introduction to the Senate and the House, the “Inform Act” completely flew under the radar of the mainstream media. Hopefully, if this becomes law, it will not be possible for people to keep their head in the sand on fiscal responsibility.

The “Inform Act” is a bi-partisan bill that was introduced in the Senate and that will be introduced shortly in the House of Representatives that would require the “Congressional Budget Office (CBO), the General Accountability Office (GAO), and the Office of Management and Budget (OMB) to do fiscal gap accounting and generational accounting on an annual basis and, upon request by Congress, to use these accounting methods to evaluate major proposed changes in fiscal legislation.”1 In other words, it would require the U.S. government to evaluate its budget deficit by estimating the net present value of all its future payments and receipts, instead of arbitrarily deciding which items make it to the budget or not, as is currently the case. Thus, fiscal gap accounting would better represent the present and future liabilities of the government to its citizens and, as the thinking goes, allow for better decision making.

While not perfect, fiscal gap accounting is a huge improvement to the current system of “cash deficit accounting”, which ignores most future obligations the government has and henceforth prevents any meaningful discussion of issues before they occur (i.e. prevents the government from being proactive). For example, while politicians in Washington regularly argue about extending the debt limit, they fail to recognize that most of the Federal government’s obligations are not in the form of public debt, but more akin to pension and benefit commitments.

Another benefit of this method is that it takes into account not just current U.S. citizens but their offspring as well. While it is not politically very rewarding (for obvious reasons), taking into account future generations of taxpayers makes perfect sense when designing multigenerational policies such as social security, medical care and environmental policy. A failure to consider the future impact of policies is most likely what put the U.S. public finances in such a bad shape in the first place.

The direness of the situation is quite obvious in Figure 1 below, which shows the difference between expected spending and revenues, as calculated by the Congressional Budget Office (CBO), and which is also the basis for the calculation of the fiscal gap. While Washington congratulates itself for its slight forecasted decline over the next few years, it should reaccelerate quite meaningfully afterwards if no change is made to future commitments. This is why the Inform Act is so important; it forces politicians to focus on the longer term, not the next few years until re-election.

Figure 1: Total Federal Government Deficit (Spending minus revenues) – Constant 2013 Billion
maag-12-2013-1.gif
Source: CBO Long-Term Budget Outlook & Sprott Calculations

But, as discussed in our previous article “The Detroit Template”2, chronic underfunding of future liabilities is a broad problem which affects corporations, municipalities and states as well. Unfortunately, those issues are ignored by the mainstream media until, as in the case of Detroit, it is already too late. As a result, most citizens remain uninformed about the unsustainability of the income or benefits they receive and cannot plan accordingly.

The case of Detroit should not be brushed off as an anomaly but rather should be viewed as a template for what will happen if the government continues to overpromise relative to its means. As calculated by Professor Kotlikoff, the current fiscal gap is about $222 trillion and closing it would require either a permanent tax increase of 64% or a 40% reduction in all expenditures3. Clearly, this cannot end well.
Trivium 5 oz 2To conclude, we support the “Inform Act” as a first step in the right direction. Once passed, the mainstream media will not be able to ignore those important issues. However, it is only that, a first step, as simply acknowledging the extent of fiscal unsustainability does nothing to remedy the problem. The real pain will come when pensioners see their benefits cut or, alternatively, when the ever shrinking workforce has to contribute more in the form of higher taxes. As evidenced by the case of Detroit, the longer we wait, the worse it gets. So far, the mainstream media seems reluctant, as per normal, to inform us about the “Inform Act”.

For more information on the “Inform Act”, please visit: http://www.theinformact.org/

figure 2: Nobel Laureates supporting the Inform Act

Name Affiliation
Dale Mortensen Northwestern University
Edmund Phelps Columbia University
Eric Maskin Harvard University
Finn E. Kydland University of California at Santa Barbara
Harry Markowitz University of California at San Diego
James Heckman University of Chicago
Kenneth Arrow Stanford University
Oliver Williamson University of California at Berkeley
Robert Engle New York University
Robert Lucas University of Chicago
Roger Myerson University of Chicago
Thomas C. Schelling Harvard University and University of Maryland
Thomas Sargent New York University
Vernon Smith Chapman University
William Sharpe Stanford University

Source: http://www.theinformact.org/

1 Source: http://www.theinformact.org/
2 http://www.sprott.com/markets-at-a-glance/the-detroit-template/
3 See Professor Kotlikoff’s website at: http://www.kotlikoff.net/

Comments

  1. Despite the sense it makes, I find the notion that there will ever be rule of law or transparency in banking, economics or the government is somewhere between romantic and naive.
     
    We saw gold not become a tier one asset which it should have and should be, we see a volcker rule with no teeth, position limits with enough holes to drive my challenger through. It is all a mirage, just like everything else. The sytem has to break, or they will give up their crimes on their own ( unlikely ).

  2. This is way too little and way too late.
    GAAP accounting?  Puleeeze. 
    $220,000,000,000,000 in accrued liabilities is a figure impossible to comprehend.
    Paying it is inconceivable.
    Just the accounting of Social Security, now running a $90,000,000,000 annual deficit, is an impossible situation. 
    SS runs out in 2029, flat broke. 
    There is not enough political courage to do anything with this program much less anything else. SS is only a $3,000,000,000,000 problem today.
    The political class and its handlers are  bought and paid for. 
    I’ve  been listening to this same argument since 1981 when the debt was $900,000,000,000. 
    What’s different now? 
    Not much.   A different generation mouthing the same moist sentiments with no political will to do jack.  
    With a $17,000,000,000,000 debt climbing at $1,000,000,000,000 a year.  DDSS

    • Those reasons are why I’m backing away from the system. We have a few guys on here who say that being all in in metals is like being in a cult, and other idiots who talk about playing the paper game.. I echo Chris Duane’s sentiments that I hope they get their faces melted off.. because at some point it can’t not come.
       
      Math can only be defied for so long ( as long as this mirage lasts), and it has been painful, but I’m happy to be in early because you can’t get in late.

    • I’ve never heard anyone here saying being all in on metals is like being in a cult.
       
      What is wrong with playing paper mkts for short term gains?

    • Yet social security would be solvent today if congress hadn’t raided the funds.

    • good for you on all counts mikey ballz.

    • @AGXIIK,
      I am hoping it lasts until 2029.  That means I got to collect it for 9 years before it went belly up.  Not that it would have any purchasing power on the way to extinction.  That would get me to the ripe old age of 71 and I could live off my stack till I die.  Hopefully leaving a small stack to my family too.  Yoo Hoo, I made it…  I hope, lol.

  3. God forbid the media should have to begin reporting such topics. This would be counterproductive to the elite owners of the media conglomerates. I think they simply will not report it, no matter how prominent the subject might become. The media is not leftist nor party affiliated, they are simply there to further the agenda and both sides of the aisle follow the very same agenda. While they will poke fun at the sitting president, they will not attack the establishment’s agenda, period!
     
    There is a club, and we aren’t in it!

  4. What the world really needs is a television network not owned by the elite willing to broadcast the truth.

  5. Sanity and awareness to the American public? Sinclair links a story on zerohedge about the London gold vaults being empty, and a comment there links to a youtube video on a guy trying to sell a 1oz gold maple leaf on the sidewalk in front of a coin shop in the L.A. area. This takes place when gold was at $1595 the oz. Asking price? $25. That is $25 below stated value on canadian coin. Any takers? No! Sheesh, the video goes on for 10 minutes of him trying to sell it to numerous people. If there is any hope of awarness going on out there on the streets will someone please let me know….. 

    https://www.youtube.com/watch?v=ndshbH3qZ6Y&feature=c4-overview-vl&list=PLa8S4GilqogSviCmzIY1jzXCSKcPw5XKl

  6. hromano1030  I heaar you there.  My wife just turned 63 and has been collecting the first tranche of the $305,000 the SS Nazis stole from here during her 45 year working and business career.  I just applied and turn 62 in 2 months so I expect to collect some of the $360,000 these same Nazis stole from me during my 43 year work and business career. 
    Now its a revenue versus mortality race for me and my wife.  Do we outlive SS or does it go broke even faster? Does inflation chew through the FIAT to the point that our monthly income is bupkes.  We are very aware of both potential events–Social Security going out of business or inflation being the biggest culprit.  The Chained CPI inflation adjustment of 1.5% is a joke.  We’ll take that extra $23 a month coming in next year and go have a fine repast ———at Subway Sandwich. 
    Oh, and yes, oneof the reasons we stacked was due to the painful math of Social Security.  Taken out 20 years, that Hedonics dog food inflation adjustment paradigm will mean just that.   Or maybe the SOBs who now term Social Security as a Federal Benefit, or entitlement, just like SNAP, EBT and Veterans benefits, will just shut off the spigot or reduce the benefits in a negative inverse adjustment to the BLSBS inflation index, moving the payments in reverse, just like they did to the Veterans in the latest budget fandango fiasco headed up by Senator Harry Reed–may he rot in hell.
    Maybe we’ll move to a warmer clime in a friendlier venue, like you did to stretch the budget further. Who knows.

    • Inflation scares me the most’ deflation would be a gift.  I have a small fixed pension that was frozen a few years back. It is a car payment plus a nice night out on the town in todays value, i am expecting it is beer money in 40 years.

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