The Snowpack and the Avalanche: How to Understand Unfunded Federal Liabilities.

I begin with what I regard as the fundamental fact of modern economic life: the present value of the unfunded liabilities of the United States government.

The economist who has been most vocal about this is Prof. Lawrence Kotlikoff of Boston University. He releases an estimate every year. His estimate is this: somewhere in the range of $210 trillion.

Understand, this is not the future value of the unfunded liabilities of the federal government. This is the present market value of those unfunded liabilities. This is what the federal government should put aside today to invest in profitable investments that will enable these unfunded liabilities to be funded.

Comparable unfunded liabilities face every other Western government, including Japan. This is an international problem. It is a universal problem.

The response of all governments is the same: they ignore the problem.

This number — $210 trillion — is so large that it keeps anyone in Washington from discussing it publicly. It is so obvious that this problem cannot be solved that nobody bothers to discuss it. Why should anybody discuss a problem that inherently cannot be solved? So, nobody discusses it. It gets a little publicity each year in the alternative media, but it is off the table as a serious political topic in Washington.

It is the most important of all the political topics of Washington, simply because the numbers indicate the inevitability of a default. There will have to be a default. There is no maybe about it. Washington is not going to deal with this problem.

We like to say that Washington is going to kick the can. I have used that phrase. Lots of financial columnists have used this phrase. The problem is, the phrase is misleading.

The problem with the metaphor of can-kicking is this: the image does not address the fundamental element of the problem, namely, the progressive increase in the size of the can. It also does not convey the concept of a can which will at some point roll backward over the person who is attempting to kick it. We’re kicking the can up the hill, and the can keeps getting larger. But this is absent from the metaphor.

What is missing in the metaphor is the great discontinuity Kicking the can sounds like a continuous action that can go on indefinitely. It has gone on so long that virtually everybody believes, as far as his investment portfolio indicates, that the federal government can continue to kick the can indefinitely.

I prefer a different metaphor. I prefer the metaphor of the avalanche.

SNOWPACK AND AVALANCHE

What is happening is more like the snowpack in the Alps.

The snowpack gets larger and larger. The voting public should know that there is going to be an avalanche. But nobody in politics tells voters that there is going to be an avalanche. Everybody in Washington denies there is going to be an avalanche. Yet the snowpack gets larger, day after day.

Almost nobody moves out of the village that is nestled just below the snowpack. Almost everybody in the village agrees that the snowpack is not a big problem yet. Someday, over the rainbow, it will be a problem, but not yet.

Among economists, only the Austrians say that the snowpack will eventually break loose and cascade down the mountain. Every other school of economic opinion says that all change is marginal most of the time. Every other school says that the exceptions to this are inevitable, but these exceptions can only take place later. Much later.

Rival economic positions always believe that it is possible through fiscal policy, monetary policy, regulation, and other forms of government fine-tuning to delay the Great Default. Economists as a group never predict recessions on time. Austrian school economists tend to be more accurate in this regard. Once in a while, they guess right. They certainly did with respect to the 2008-9 recession.

Austrian economists believe that, at some point, a marginal change is going to be like a rifle fired in the valley beneath the snowpack. The sound will shake loose the snowpack. Austrian economists do not tell us who has the rifle, or what he is aiming at, but they are convinced that somebody has a rifle, and when he pulls the trigger, the sound is going to be sufficient to shake loose the snowpack.

The political problem for Austrian economists is that they insist that long-term safety inevitability depends on bringing an end to the constant expansion of the snowpack. This will mandate not simply a balanced federal budget, but a budget in surplus. Congress must melt the snow pack at the edges by means of reduction in the federal debt, but especially a reduction in the unfunded liabilities of Social Security, Medicare, and Medicaid. The only possible way of avoiding an avalanche is to melt the snow pack at the margins.

We all know what is likely to happen. The melting process will dislodge the snowpack. If the federal deficit is to move into surplus, there must be massive decreases in federal spending. There must also be decreases in taxation in order to get the economy growing sufficiently to meet the liabilities. But there is a risk that the act of going into surplus will be the equivalent of a rifle shot.

Austrian economists who are not on the payroll of a university, and who therefore are not afraid of controversy, also say that in one great day of deliverance, the federal government should repeal the Federal Reserve Act of 1913. This is a degree of discontinuity, of snowpack melting, that conventional economists say is not simply the equivalent of a rifle shot; it is the equivalent of a howitzer. This is why there is no other academic school of economic opinion that believes that central banks, all over the world, should be eliminated.

In American economic history textbooks, the greatest economic villain in the textbooks is always the same person: Pres. Andrew Jackson. He vetoed the bill to extend the life of the second Bank of the United States beyond the 20-year limit, 1816-1836. In 1832, Henry Clay and the Whigs in Congress passed a piece of legislation to extend the life of the bank, and Jackson vetoed it. Congress could not override the veto. Clay and the Whigs campaigned in the election of 1832 on this issue. The public wisely reelected Jackson and, in 1836, the Bank of the United States lost its support as a government-supported entity. In that same year, the federal government had no debt. This was the only year in American history when there was no federal debt.

Jackson is universally attacked as an economic ignoramus in the textbooks.

The Federal Reserve System is the third incarnation of the American central bank. It is sacrosanct in the textbooks. It is as untouchable as the Marshall Plan, the G. I. Bill of Rights, the graduated income tax, Social Security, and Medicare.

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