Beware of Policies and Legislation Based on the Generational Accounting Scam
The Peter G. Peterson Foundation (PGPF) and its allied army of associated deficit hawks want 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. Generational Accounting is an invalid long-range projection method that doesn't take into account inflation, the projected value of the Government's capability to issue fiat currency and reserves in the amounts needed to fulfill Congressional appropriations, and re-pay its debts, the projected non-Government assets corresponding to government liabilities, the likely economic impacts of Government spending, surpluses, and deficits, the impact of accumulating errors on projections, and the biases inherent in pessimistic AND contradictory assumptions. It is a green eye shade method that ignores both economic and political reality.
If you want America to end deficit terrorism and austerity, and to have the fiscal policy space it needs to begin to restore the American Dream, then you need to defeat proposed policies or legislation which puts building blocks in place to bias fiscal policy towards austerity and the economic decline it will surely produce for ourselves, our children, and for their children. Proposed policies and legislation of this kind must be defeated for the following seven reasons.
First, the dangerous practice of making policy makers focus on deficit neutrality as THE key evaluation criterion for new government fiscal policy, has introduced a bias towards austerity policies over the past 37 years that is largely responsible for the higher levels of unemployment, the unremitting downward pressure on wages, and growing inequality in America. The proposed requirement for CBO, GAO, and OMB to perform annual fiscal gap and generational accounting will heavily reinforce and extend the already ridiculous evaluations of fiscal legislation for deficit neutrality and fiscal gaps, rather than for the real economic and societal impacts of fiscal legislation performed by these agencies.
These evaluations are now based on invalid projections over a ten year period. But legislation inspired by the generational accounting point of view would require the same kinds of evaluations, and even more invalid and outlandish projections over a 75 year period. To extend the projection period out to 75 years and include “liabilities” that have no legal accounting status at all at this time, will only strengthen the destructive bias towards austerity that is producing an economy that increasingly vacillates between stagnation and dangerous volatility, and creates a more grossly unequal America.
Second, it is beyond the capacity of CBO, OMB, and GAO to make meaningful projections using 75 year time frames at all. Current fiscal gap evaluation practices by these agencies may rightly be called science fiction because of the notorious deviations of their projections from reality even as little as four months into the future, and certainly over the ten year period they now cover. But to double-down on this bias towards austerity by institutionalizing inter-generational accounting and projections of “unfunded liabilities” is to turn our current ten-year projection practices into pure fantasy 75 year ones. It is both fiscal irresponsibility and fiscal insanity to take such projections seriously.
Third, passing generational accounting-based legislation will strengthen the official status of the myth that Governments issuing their own non-convertible fiat currencies having free-floating exchange rates, and no debts in a currency they don't issue, still have Inter-temporal Government Budget Constraints (IGBCs). They do not! And the US, as one of these governments, has no such constraint with respect to financial solvency.
Since it doesn't, the US has policy space to cope with recessions and depressions that many nations, including the nations of the Eurozone don't have. Passing generational accounting-based legislation will only hamstring the US in using the policy space given us by the Constitution and the Founding Fathers to rebuild a rapidly declining America.
There is so much to do! We must not be prevented from doing it by a network of deficit terrorist fiscal legislation.
Fourth, passing generational account-based legislation can only happen over the objections of the American people. All the public opinion polls make it clear that super majorities are opposed to any safety net cuts at all, and even favor expansions or enhancements of safety net programs. They also want full employment.
But, partisans of such policies and legislation are ignoring what people want and are calling for “bipartisanship” because they want to claim that if both parties jump off the successive, artificial fiscal cliffs they construct to prepare the way for austerity together, with joined hands, then neither party will suffer disproportionate damage. And then, members of both parties can breach the public trust with impunity and vote against the clearly expressed will of the American people in various polls.
In short, the “bipartisanship” of generational accounting-based legislation supporters is not about sweetness, and light, and reasonableness and harmony, and the American people coming together to act “responsibly.” Instead, it is about the kind of noxious bipartisanship that aligns a group of high-placed elites in a conspiracy against what the American people have repeatedly said they really want: full employment and strengthened social safety net programs.
Fifth, there is no “fiscal gap” or fiscal “burden” on our children and future generations even assuming that current law is retained without any changes. Generational accounting doesn't project revenue from the possible use of platinum coin seigniorage as miscellaneous receipts, even though the capability to use it is part of current law. If it did, it would have to conclude that there is no “burden,” because there is no real “fiscal gap.” There is just an accounting gap which the President can plug at will when he chooses to order the Secretary of the Treasury to have the Mint cover the “unfunded liabilities” with a platinum coin(s).
Even if platinum coin seigniorage isn't used to “fund” the liabilities, however, there is no problem if Congress lifts the debt ceiling routinely, as it used to do before the debt ceiling became politicized, so that the Treasury “funds” liabilities using sales of debt instruments. If one assumes that the practice of lifting the debt ceiling routinely is reasserted in the future, then again, the “unfunded liabilities” would disappear from generational accounting.
Sixth, proposed generational accounting-based legislation reinforces a definition of fiscal sustainability that supports austerity. Under it, fiscal sustainability means closing or shrinking the projected gap between tax and other revenues, and Government spending to some, unknown acceptable level of “unfunded liabilities,” (really, “conditional projected net obligations”). The common sense meaning of fiscal sustainability is the extent to which patterns and practices of Government spending do not undermine the capability of the Government to continue to spend, including deficit spend, to achieve its public purposes. These definitions are not the same. They only correspond if there is an IGBC. But, again, there is no IGBC, so the generational accounting-based notion of fiscal sustainability remains one that biases policy towards government austerity.
Seventh, Generational and fiscal gap accounting, contrary to what its supporters claim, leave important things off the books, and include many “liabilities” that are not, in fact, “liabilities.” Again, miscellaneous receipts from platinum coin seigniorage are evidently not considered in the generational accounts, even though having such receipts is a possibility under current law, and substantial miscellaneous receipts already exist for coin seigniorage involving other types of coins. On the other hand, many liabilities that are not legally on any “books” are included in such accounting, while the asset side is given short shrift.
Generational accounting supporters have called attention to the “unfunded liabilities” they project for the Government; but they have failed to take into account the additions to the non-government sector from projected Government deficit spending. This is incomplete, inaccurate, and biased accounting.
The accounting relationship between the US Government and the non-government sector is given by the equation: Government Deficits (whether “funded” by debt, reserve, or currency liabilities) = Non-Government Savings. So, for every liability the government generates, there is an equal volume of assets added to the Non-Government sectors.
Where is that reality in the generational accounting/fiscal gap/”fiscal burden” approach? Where is the recognition for example, that if the “unfunded liability” 75 years out is equal to $222 Trillion, then if it were “funded” either through direct government creation of reserves or through selling debt instruments, or through some combination of the two, the $222 Trillion “funded liability” would then be matched by $222 Trillion in non-government assets?
Summing up, proposed generational account-based legislation biases fiscal policy towards austerity. As such, it is fiscally irresponsible. It would enshrine in legislation a method and associated economic models and theories that are pure nonsense. Passing such legislation would not only create bad economic effects, but it would cloud our thinking about how best to respond to the failure of the analysis it would engender.
Real Fiscal Responsibility can only be achieved if we defeat any and all generational accounting-based legislation. We must do that to safeguard the Federal Government fiscal policy space we will need if we're going to recapture America for the 99% and reduce the growing inequality that austerity in Government spending has created among us.
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(Cross-posted from New Economic Perspectives.)