“Shattering The American Dream”: The US Government’s Ponzi Scheme

Friday, May 4, 2012
By Paul Martin

by Richard Evens, Larry Kotlikoff, and Kerk Phillips

The sustainability of government finances is very much the topic of the day. But the issue poses serious questions for the future, particularly how well off today’s younger generations will be compared with their parents. This column argues that the Ponzi scheme being played by the US government amounts to “fiscal child abuse” and is close to game over. For today’s children the American dream will be just that – a dream.

Fiscal sustainability and generational equity are two of the most pressing policy issues of our times. Yet these two highly related concerns are difficult to clearly define, let alone measure.

The standard metric of long-term fiscal imbalance is official government debt (Reinhart and Rogoff 2009). But, as shown in Green and Kotlikoff (2009), official debt, like time and distance in physics, is not a well-defined economic concept.

In physics, the measurement of time and distance depends on one’s frame of reference, which can be viewed as one’s language. Measurement of debt is also language dependent.

Unfortunately, language is highly flexible. And there is an infinite number of ways to label an economy’s fiscal policy in neoclassical economies with rational agents, no matter how well or how poorly such economies function. Each labelling convention results in a different history and projected future time path of official debt. The same holds true of taxes, transfer payments, disposable income, personal saving, private saving, government saving, private wealth, and government wealth. Each of these measures is devoid of economic content.

The Rest…HERE

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