Do not…I repeat, do not…be afraid of big numbers!

August 1st, 2014 at 2:15 pm

I was just about to ding Larry Kotlikoff for some serious malpractice re his NYT oped this morning when I recalled that Dean Baker has built a cottage industry around the point I wanted to make. And sure enough, here it is from Dean’s blog [my bold]:

[Kotlikoff writes re Social Security:] “you’ll find that the program’s unfunded obligation is $24.9 trillion ‘through the infinite horizon’ (or a mere $10.6 trillion, as calculated through 2088). That’s nearly twice the $12.6 trillion in public debt held by the United States government.”

Are you scared? Hey $24.9 trillion a really big number. That’s more than even Bill Gates will see in his lifetime. Does it mean our kids will be living in poverty?

Not exactly. Kotlikoff could have pulled a number from the same table in the Social Security trustees report to tell readers that the unfunded liability is equal to 1.4 percent of future income. If we just restrict our focus to the 75-year planning horizon (sorry folks, we don’t get to make policy for people living 100 years from now), the shortfall is 1.0 percent of GDP.

Of course, the numbers ‘1’ or even ‘1.4’ don’t sound scary at all, though the shortfall they represent is not trivial and must be addressed, the sooner the better. But as Dean notes, these GDP shares were in the very same table and the fact that Kotlikoff ignored them is proof that he’s more interested in generating fear than insight. It makes no more sense to fret over disembodied trillions in “infinite liabilities” than to kvell that over the “infinite horizon” we’ll have $1,816.7 trillion in GDP. Woohoo! Start the party.

One should also be aware that 75-year or, even worse, “infinite” forecasts are, in the words of Paul Krugman, “a particular boring type of science fiction.”

And I haven’t even gotten started on the mishegoss of “generational accounting” touted by Kotlifkoff, which is handily covered by Dean and by my CBPP colleague Paul Van de Water here.

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7 comments in reply to "Do not…I repeat, do not…be afraid of big numbers!"

  1. Larry Signor says:

    Let us build a model. Posit a 3 yr. old economic actor (my grandson), who is financially viable for the next 18 years. In 18 years he will begin paying his rent, $12,000/ year, adjusted for 2% annual inflation. This obligation has a 50 year time line (approximately his life expectancy). He, at that point, would have an “unfunded” liability in excess of $700,000.00. With ~4 million 3 year old actors in our economy today, that is an aggregate “unfunded” liability of 2.8 trillion dollars. Obviously, these irresponsible spend thrifts are already bankrupt. To fix this disaster, I am going to give my grandson $10.00/week and make him sleep in the barn so he will be motivated to curb his profligate consumption. Yeah. That will work. We can call it the “Kotlikoff Model”, or something.

    • Jared Bernstein says:

      Good plan…not!

    • Robert Buttons says:

      It seems so simple….I can’t understand why your model didn’t work for Greece, Argentina or Venezuela.

      • smith says:

        If you have information or data that shows the economic woes of Greece, Argentina, or Venezuela, stemmed primarily or significantly from problems with underfunded government mandated universal retirement programs, that weren’t addressed 25 years in advance of any expected shortfall, please enlighten us.

  2. Rima S. Regas says:

    No self-respecting economist should begin an op-ed with a comparison between an economy and a household budget. He did, though, and it went downhill from there.

    • Bearpaw says:

      “No self-respecting economist …”:

      Well, there you have the problem in a nutshell.

      Honestly, it seems like most of the people who pretend that an “infinite horizon” economic prediction is meaningful are the same people who don’t really plan beyond the next financial quarter or election cycle.

    • PeonInChief says:

      Yes, and we don’t compare household budgets to business budgets either, since families don’t lay off little Johnny because he’s four and is just an expense in a downturn.