kens*ten: a political blog

Welcome to the United States of Greece

The International Monetary Fund (IMF) released a report on the American financial situation in July which garnered little public attention — until this week. Each year the IMF collects and reviews economic data and then meets with government policy makers to provide their recommendations. 

This year, buried within bureaucratic econo-speak the IMF provided a rather stark wake-up call:

The United States is facing major fiscal and generational imbalances. The combination of high fiscal deficits, an aging population and rapid growth in government-provided healthcare benefits have put the fiscal accounts on an unsustainable path. (emphasis added)

Translation from econo-speak: The US government consistently spends more than it collects in taxes, and promises even more money for benefit programs it can’t possibly afford.

Since we can’t do anything about the population aging (short of death panels), the alternatives are cutting spending and ending the government-run healthcare benefits. Hmm, sounds like the Republican agenda.

The IMF Report continues:

The main drivers of the fiscal gap are rising healthcare costs that under current law will boost mandatory spending to above 18 percent of GDP by 2050. Since the federal government has historically collected about 18.4 percent of GDP in tax revenues, this means that mandatory programs may absorb all federal revenues sometime around 2050, or as early as 2026 when the cost of servicing the debt is added. (emphasis added)

 
Translation: The benefit programs the government has promised will soak up every single dollar the government collects in taxes as early as 2026 — in sixteen short years.

And now, the IMF’s coup de grâce:

The fiscal adjustment would entail significant adjustments in taxes and/or transfers.

We estimate an adjustment between 7 ¾ and 14 ½ percent of every future year’s GDP to restore sustainability and fiscal equity. (emphasis added)

Translation: Either the US government has to raise taxes in an amount equal to 7.75 to 14.5% of GDP or else cut benefits by a similar amount. Keep in mind, that the IMF found the US government already collects revenues equal to 18.4% of GDP.
 
Therefore, the IMF recommends that tax increases or benefit cuts of 43% (7.75/18.4=0.4305) to 79% (14.5/18.4=0.7880) are required to bring us back to even.
 
How does that “Recovery Summer” feel now?
 
In a Bloomberg op-ed, Boston University economics Professor Laurence Kotlikoff writes:

So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Is the IMF bonkers? No. It has done its homework. (emphasis added)

Even assuming the best case scenario (7.75% GDP adjustment) and splitting the difference – equal parts tax increases and spending cuts — results in a 23.5% tax rise along with a similar sized benefits cut.

And this isn’t a one-time deal. The IMF is talking about an annual (i.e. permanent) commitment because we still have to pay down the huge structural debt.

Given the state of American politics, what is the probability of elected officials prescribing this foul-tasting fiscal medicine?

Answer: None at all.

Thanks to the Obamanomics response to the “Great Recession”, the United States faces the same future as Greeceminus the European Union bailout.

© 2010 by kens*ten. All rights reserved.

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Written by kensten

08/11/2010 at 8:00 pm

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