If an economist were president of the US

The Financial Review

PUBLISHED: 04 Feb 2012

Anna Bernasek NEW YORK

Republican presidential nominee hopefuls continue their merciless attacks on each other. President Barack Obama remains focused on his own tactics and manoeuvring before the November elections. Meanwhile, the big economic problems facing the nation remain unaddressed. So here’s a different idea. What would things be like if an economist were in charge?

Meet Larry Kotlikoff, a professor of economics at Boston University. He’s seeking the nomination of a third party, called Americans Elect, to enter the presidential race against Obama and Mitt Romney, the Republican frontrunner and likely nominee.

Kotlikoff’s message is simple: politicians have made a mess of things and can’t be trusted to fix the major economic problems confronting the nation. In his view only an economist who understands what’s at stake can get the job done.

“I’m trying to put the truth forward and I’m not shy about that,” Kotlikoff tells me. “The country has significant short-term problems, which the [US Federal Reserve] is predicting will last till 2014 at least. Then we have serious long-terms problems. Healthcare is making us broke, the tax system is a mess, social security is in worse financial shape than it’s ever been, and Wall Street still hasn’t been fixed. It remains as big a danger to Main Street as ever.”

Playing off the commonly used “red” Republican and “blue” Democrat imagery, Kotlikoff terms his plans “purple”. By that he means they are designed to appeal to liberals and conservatives.

So far, no one in the White House or in the Republican camp is paying much attention. After all, there’s never been an economist president and few would give a third-party candidate any chance of winning the presidency.

But Kotlikoff brings a focus on the key issues that’s lacking from the major candidates.

He believes unemployment is the immediate concern. By a combination of jawboning and compulsion he would get major companies to hire additional workers. Kotlikoff expects co-ordinated mass hiring to have positive knock-on effects. The housing sector would start to heal and consumer confidence would grow, encouraging even more hiring in a virtuous cycle of economic growth.

Once that’s under way, Kotlikoff would tackle long-term problems. This is where his years of study as an academic economist come in.

Kotlikoff’s best recognised contribution to the field of economics has been a way of accounting for national debt called generational accounting.

That eye-opening approach reveals the staggering financial burden the US is placing on its younger generations.

Officially, the US states its national debt at about $US15 trillion ($14 trillion). But, as measured by Kotlikoff, the debt is far higher. That’s because the great bulk of government obligations – Medicare, Medicaid and social security – are expected in the future and aren’t on the balance sheet today. Future obligations don’t show up in official debt numbers.

Kotlikoff’s method measures the present value of all future spending, including spending on Medicare, Medicaid and social security, and compares that with the present value of expected government receipts. The gap between the two represents government debt.

Just how big is US government debt according to Kotlikoff’s method? Fourteen times official debt, or $US211 trillion.

With Congress failing to reach agreement on savings of a mere $US1.2 trillion over the next 10 years, it’s little wonder Kotlikoff is alarmed. So what would he do?

Since healthcare costs account for 60 per cent of the gap, Kotlikoff would start with healthcare reform.

Worried that Obama’s reforms will do nothing to stop skyrocketing costs, Kotlikoff would give every American a voucher to buy a basic health insurance plan set by a panel of doctors. Under Kotlikoff’s plan, the cost to the government of providing everyone with a basic plan would not exceed 10 per cent of gross domestic product.

Today, the US spends 18 per cent of gross domestic product on healthcare. Individuals could buy supplementary insurance.

To make up the rest of the gap, Kotlikoff advocates changes to the government-funded retirement plan and simplification of the tax code. He also worries about the spectacular decline in national savings since World War II and his tax ideas derive from his intent to encourage saving and investment. In 1950, the national savings rate in the US was about 15 per cent. Today it is close to zero.

Not everyone agrees with Kotlikoff’s ideas about privatising social security, since he wants to provide a guaranteed minimum return backed by the government. Nor are most Americans ready for a switch to the consumption tax Kotlikoff favours. But it’s clear that some changes in each of these areas need to be part of any comprehensive solution to the nation’s long-run problems.

Kotlikoff would be the first to admit he lacks political experience. His purple plans run the risk of pleasing no one on the left or right. But before you dismiss him, consider this: he’s made an honest attempt at tackling the problems.