This is a very pleasant book to read but at the same time it conveys quite a gloomy message. It repeatedly asserts that the United States is bankrupt, more so than the most pessimistic believe. The tone is apocalyptic and at times the American reader must find the situation so hopeless that he may be tempted to escape such a hell on earth by either taking hard drugs or joining some sect. Fortunately, the authors offer some solutions. The authors' argument is that to measure the real debt of the American government one has to use not the official debt in the hands of the public but the true debt, known to economists as the fiscal gap, which includes all the off-the-book obligations of the government net of future taxes. This true debt is accordingly more than 20 times larger than the official one and 14 times larger than the gross national product. Imagine a household with a debt equal to 14 times its annual income.
These off-the-book obligations include the requirement, under current law, to pay today's seniors generous benefits in Social Security, Medicare and Medicaid through the rest of their days and to pay today's baby boomers, when fully retired, even more generous benefits in Social Security, Medicare and Medicaid. They include the requirement to pay for all future military expenditures, all future welfare benefits, all education outlays. The list goes on particularly with the aging of the population.
In ‘The Clash of Generations’, Laurence Kotlikoff and Scott Burns document in a very lively way the last decades of unsustainable financing schemes. They explain how successive administrations have shortsightedly developed a variety of programs on the backs of future generations. They offer some ways out that imply radical reform of the tax system, the healthcare system, and the Social Security system. Throughout the book the authors insist that they are not doing all this just for themselves. As they write, ‘We have to fix America's fiscal mess before our kids inherit it’.
The solution offered by the authors is a set of policies that they call purple plans ‘because both red Republicans and blue Democrats will like what they see’. The book emphasizes four plans. First, the Purple Financial Plan that is concerned primarily with reform of the financial sector and whose central feature is to greatly limit the roles of banks. Second, the Purple Health Plan that envisions a voucher system that would provide universal basic health care for all while maintaining a role for private health insurance companies and private health care providers. Third, the Purple Tax Plan that would replace federal personal and corporate income taxes with a flat tax on consumption, eliminate the cap on Social Security contributions, and allow exemptions for low-income families. Finally, the Purple Personal Security Plan that would gradually move Social Security from a pay-as-you- goes system to a funded system.
After reading this book I had two reactions, a positive and a negative one. The positive reaction stems from the way it is extremely well written, a rare mixture of academic seriousness and lively tone. The negative reaction arises from the feeling that the authors overstate their case. We all agree with the generational accounting standpoint they adopt and with their view that official public debt does not measure correctly the extent of the indebtedness of a country. We all agree that serious reforms are needed. At the same time, we quickly realise that the dramatic figures the authors reach depend on a number of assumptions they make concerning notably the discount rate and the future growth rate. Above all it is hard to accept the idea that everything is going to remain constant in the future.
For someone who knows quite well the American and the European situations, some statements are hard to swallow. This is the case when the authors compare the United States with Cyprus or Greece or when they write, ‘The United States will become the poor kid on the block’. Both the demographic and economic prospects are far better in the United States than in Europe. Americans have a rather low longevity, a reasonable fertility rate and their prospects of growth are far better than those in the majority of European countries, particularly Cyprus and Greece.
Reading ‘The Clash of Generations’ after Kotlikoff and Burns’ broadly acclaimed ‘The Coming Generational Storm’ reminds me of ‘The Boy Who Cried Wolf’, the Aesop's fable that tells the story of a shepherd boy who repeatedly tricks nearby villagers into thinking a wolf is attacking his flock. When a wolf actually does appear, the villagers do not trust the boy's cries for help, and the flock is destroyed.
Two last comments. First, the authors in their obsessive concern for intergenerational redistribution do not seem to be worried by the issue of intragenerational distribution of income. We know that most of the programs they are discussing have a redistributive component. This is clearly the case with Social Security, Medicaid and to a certain extent Medicare. In their assessment of these programs and in the design of reforms one would have liked them to deal with this major mission of the American welfare state. Second, there is the environmental burden that we leave to future generations. In my view this represents a much heavier liability than the fiscal gap.
