Friday, August 13, 2010

Friday 8-13-10

U.S. Is Bankrupt and We Don't Even Know: Laurence Kotlikoff

Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.

What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. 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.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

‘Unofficial’ Liabilities

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$4 Trillion Bill

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Worse Than Greece

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run.

This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance.

Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.

My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”

http://www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and-we-don-t-even-know-commentary-by-laurence-kotlikoff.html


What's Your Identity Worth?
Identity theft has met the law of supply and demand. The law of supply and demand won.

Yes, identity theft is now so pervasive that the value of individual identities has fallen sharply. What's more, a wealthy person's identity, with perfect credit, isn't worth much more than a deadbeat's identity.

That value, by the way, is about $10, perhaps a little more. Just a few years ago, the black-market price for a pilfered identity was $100 or more. But today, hackers are stealing so many more identities, that the value of each one has sharply declined.

Indeed, about 11 million Americans suffered some form of data compromise in 2009. Many of these victims suffered nothing worse than fraudulent charges on a credit card, but identity theft is a crime with the potential to turn your life upside down. (If you have any doubt, read these horror stories).

Most identity theft stems from lax security at department stores, credit card processing centers, hotels, the military, and universities.

If you serve in the military or attend a university, you can't do much to prevent identity theft stemming from lax security at these institutions. Pay cash at department stores and hotels to prevent hackers from picking your credit card number out of a poorly secured data stream. At hotels, though, you'll probably need a credit card to check in. Pay cash in advance, and ask the hotel clerk not to authorize any payment on it unless there's an outstanding balance.

An increasing number of hackers target individual victims over the Internet. Identity thieves may pose as your friend on Facebook, and then steal whatever personal information you reveal. They can also trick you into visiting a fraudulent Web site posing as a legitimate one. This is common with online banking scams, where identity thieves drain your account after stealing your log-on password. Then they try to steal enough personal information to apply for credit in your name.

The antidote for dealing with online identity theft is to be skeptical. Do you really need 14 million friends? That's the approximate number of friends Lady Gaga now has on Facebook. Ask strangers who want to be your friend, "How do you know me?" If your new "friend" tells you that another friend referred them to you, ask that friend for confirmation.

A common ruse on or off social networking Web sites is an e-mail with an infected file attachment. If you click on the attachment, a remote administration "Trojan Horse" program may take over your PC. From that point forward, the Trojan may send everything you type or view to points unknown.

Another common scam is a bogus email, allegedly from a bank or online merchant. The message contains a link routing you to an authentic-looking, but phony, Web site. There, you're prompted to enter sensitive information such as your password, your Social Security number, etc. A hacker may even plant malicious software in the servers that direct traffic on the Internet. Even if you type in the correct address of a website (e.g., of a bank), the software sends you to a bogus one, where thieves can steal your personal information.

Protect yourself by never clicking on unfamiliar attachments or entering personal information into an online form in response to an unsolicited e-mail message. If you're not sure, call the company sending you the e-mail. Don't call any number listed in the message, either. It's probably a fake listing. Instead, call the number on any statement the company has sent you, or look it up.

Fortunately, it's difficult even for the best hackers to duplicate the "look and feel" of a commercial website. Also, be alert to misspellings. Another tip-off is if the website doesn't display the "lock" icon at the bottom of your screen. If you have any suspicion the website isn't real, again, call the company.

More advanced "spyware" installs itself on your PC as soon as you view an infected Web page in your browser or e-mail reader. Protect yourself against this attack by using a free program called No-Script. It's available for Firefox, and it preemptively blocks all potentially dangerous content from being loaded into your browser. You can authorize individual components of the Web page to load by right clicking on the No-Script icon. For Web sites you trust completely, instruct No-Script to load the entire page.

Identity theft is big business. It's not going away anytime soon, either, because both online marketing companies and the government find the data you leave behind very useful. So don't rely on the government to come up with a "solution" to identity theft. Rely on yourself.

http://nestmannblog.sovereignsociety.com/2010/08/whats-your-identity-worth-.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+marknestmann+%28Mark+Nestmann%29

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