Friday, May 30, 2008

Richard Fisher's storm on the horizon

Richard Fisher, president of the Federal Reserve Bank of Dallas, gave a few days ago a speech about some of the challenges the US economy faces over the coming decades. In a nutshell, the current sub-prime debacle and the federal debt are nothing compared to the burden of the entitlement programs of Social Security and Medicare. The numbers he cites are truly sobering.

First, he thinks that the government projection of fiscal surpluses in 2012 are right up there with unicorns and flying pigs. Indeed, it is obvious that if spending has vastly outpaced revenues for the last seven years, a sudden reversal is highly unlikely, even when factoring out war spending. Even a change of administration cannot make this happen. But this is, relatively, a minor problem.

Second, he comes to the conclusion that the unfunded part of Social Security amounts in present value terms to almost one year of GDP. This comes from lengthened lives not followed by lengthened work lives, and lower fertility. We knew that, but it is important to remind us about the scope of the problem.

Third, Richard Fisher claims that the unfunded liabilities for Medicare are, in present values: two years of GDP for hospital stays, two yearly GDPs for medical visits and one yearly GDP for the recently introduced drug benefits.

Add this up, we have six years worth of GDP in unfunded liabilities for the US. As a point of comparison, the current public debt is about 40% of GDP. This amounts to $330,000 per capita. This could be paid by a permanent 68% increase in income tax revenue, or reduce government spending by 97% (not a typo).

These are truly scary numbers, but they do not include other unfunded liabilities that Richard Fisher is not talking about: the medical care for the veterans of the current wars, the replacement of infrastructure that has been postponed beyond reason, and the consequences of climatic change.

Rarely do you see a Federal Reserve official be so frank and direct about economic predictions. Time to take this seriously.


Independent Accountant said...

David Walker, formerly of the GAO, has screamed about the $53 trillion of unfunded liabilities referred to here for years. No one in Congress is interested. My response: don't worry, be happy. Hyperinflation is coming. Study why the Mark hyperinflated in 1922-23. Disagreeing with Keynes, I can do that since I'm not an academic, who wrote "The Economic Consequences of the Peace", I believe German war reparations were not the hyperinflation's cause, but Germany's social security system which began under Bismark. Which beginning date has been reported variously as 1872, 1881 and 1889.

VIlfredo said...

The problem is political. As long as politicians care only about the next election and the electorate has no foresight about proposed policies, there is not going to be any change. And the US electorate seems rather resigned to its fate than willing to do anything about it.