General Relativity Fiscal Language

Economist Laurence Kotlikoff on the difference between taxing and borrowing, government debts, and financial sustainability

videos | May 16, 2014

What are the similarities between Albert Einstein’s theory of general relativity and measurement of fiscal variables? Are the governments always able to fulfill their obligations to the people? Professor of Economics at Boston University Laurence Kotlikoff warns about possible bad outcomes of current socio-economic policy.

The official account of the government, the official deficit, the stock of debt, which is the sum of all the past deficits – that will be affected by what words we use. Also what taxes are set to be collected this year is a matter of the government’s language, how it labels receipts, the receipts that it’s taking from the people, the transfer payments it’s making – they will be dependent on the choice of words.

Right now in the world we have a lot of countries some of which have large official debts compared to their gross domestic product, compared to the size of their economy. And many people think they’re in big trouble because they have this large debt to GDP ratio. Other countries, like the United States, have a lower debt to GDP ratio, and people think they’re not in bad shape, fiscally speaking. If the debt is not well-defined, then how can that be a measure of what kind of trouble the country is in in terms of its fiscal situation? So we need to ask our theory, we need to ask the economic theory what is the right thing to measure when it comes to fiscal policy and its sustainability.

What the government has done is to promise things that are not sustainable, they’ve told the baby boom generation that we’re going to get a huge amount of money in the future but there’s no ability to pay for it because there’s not enough young people earning enough money to take from them to give to us. So this Ponzi scheme, this take-as-you-go policy of taking from the young, giving to the old using language to disguise the obligations of future young people to pay this, that is going to lead to a very bad outcome for the US and other countries over time.

Professor, Department of Economics, Boston University
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