Sunday, October 29, 2006

Wake Up: A Storm is Coming!

A looming fiscal generational storm promises to make coping with Katrina look like child’s play. Yesterday’s Washington Post had an informative article on a very important long run macro challenge. The article “GAO Chief Warns Economic Disaster Looms” described the Concord Coalition's "Fiscal Wake-Up Tour," a series of forums designed to educate the public about the growing structural deficits that we will incur as a result of the impending retirement of the “Baby Boom” generation and rising health care costs. The star of the tour is David Walker, Comptroller General of the United States Government Accountability Office, which evaluates the performance of the federal government. Walker is dedicated to educating folks about the need for “generationally responsible” fiscal policy.

This statement from the article is on the money:
“The subject is short on political theatrics and long on complicated economics, scary graphs and very big numbers. It reveals serious problems and offers no easy solutions. Anybody who wanted to deal with it seriously would have to talk about raising taxes and cutting benefits, nasty nostrums that might doom any candidate who prescribed them.” In other words no politician is going to touch the subject of unsustainable long run deficits until the chickens come home to roost.

Luckily in this wired age, I didn’t have to just read about the tour. There is a webcast available of the event held at the University of Texas, complete with slides and a budget simulator. The webcast was scarier than Halloween.

Another great resource on our long run debt challenge is a recent book called The Coming Generational Storm. Authors Laurence Kotlikoff and Scott Burns warn that if our government continues on the course it has set, we'll see skyrocketing tax rates, drastically lower retirement and health benefits, high inflation, a rapidly depreciating dollar, unemployment, and political instability." The Coming Generational Storm is must read economics. There really is no such thing as a free lunch, and we’ll start to pay long after this course is over. If you are tired of reading, you can hear Professor Kotlikoff discuss his book at MIT by clicking here.

Chapter 15 on “Politics, Deficits, and Debts” in your Colander text provides a good background for thinking about deficits and debt. This is an interesting (if depressing) topic for the Discussion Board. Will there be a generational storm? What should we be doing now to prepare?

Here are some potential final exam questions on “Politics, Deficits, and Debts”:

1. What is a budget deficit?
2. What is a structural deficit?
3. Define the national or public government debt?
4. What are the implications of the fact that the U.S. Social Security System is a largely unfunded "pay as you go" system?
5. What are the challenges to the Social Security System and the federal budget that will arise with the retirement of the baby boomers?
6. Why do economists measure the national debt relative to GDP?
7. External government debt is________? What challenge does it present?

Extra Credit:

Send me the answer to any of the above final exam questions. If you are the first student to send me an e-mail ( with a given answer, you will be rewarded with two extra credit Discussion Board points. Only two points extra credit per student can be earned in any given week from the blog questions.

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