Tag Archives: funding gap

Mind the Funding Gap: France’s New Students Plan ‘Places Sticking-Plaster Over Gaping Wound’!


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Plugging the $202trn Gap: Laurence J. Kotlikoff’s Solution to the US Federal Debt

Laurence J. Kotlikoff, who received his PhD in Economics from Harvard University in 1977 and has since gone on to advise more international governments and corporations than anyone sane can really stand, has been warning for some time that the United States of America is far from being in rude fiscal health. On the contrary, in August 2010 Kotlikoff – presently William Warren FairField Professor at Boston University – estimated a funding gap of US$202 trillion, a sum more than 15 times the official federal debt. Kotlikoff illustrates how he arrives at this barely conceivable figure by pointing out that most US government liabilities are not labelled as such: 78 million baby boomers stand to collect social welfare and healthcare payments that will total about US$4 trillion annually. Moreover, Kotlikoff notes that this untenable situation ‘will stop in a very nasty manner’: massive benefit cuts, astronomical tax increases and Weimar-style monetary policy all foreshadow a sober future for the fading hyperpower.

Yet in a 2006 essay published in the Federal Reserve Bank of St. Louis Review, Kotlikoff – writing about what was then thought to be a US$65.9 trillion fiscal hole – proposes a triple-tier solution to America’s financial predicament:

1. Tax reform. Personal income tax, corporation tax, payroll tax and the estates and gift tax would be replaced by a consumption tax of 33% to be levied on all final goods and services, with a rebate mechanism ensuring that poor households would pay no consumption taxes in real terms;

2. Social security reform. Substitution of the existing social security retirement system with a national insurance scheme where contributions would be held as private property by individual employees;

3. Healthcare reform. The introduction of a universal health insurance scheme which would give American citizens vouchers for healthcare costs based on expected expenditures over the calendar year, with insurance companies making up the difference in the event that the actual costs exceed expected costs, and pocketing the difference if the expected costs turn out to be an overestimate.

Kotlikoff’s proposals are remarkable for at least two reasons: firstly, they are an ingenious and progressive attempt to solve one of the most intractable problems of any kind ever faced by a government when most analysts are advocating either ‘Keynesian’ splurges for which the money does not exist or the effective capitulation of the state to private interest groups; and secondly, despite his clear eminence in the field of economics, these ideas are unlikely to ever be seriously considered by a political class that seems content to expend its energies in cultural and military conflicts rather than on attaining salvation for nothing less than the future of the country.

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