The myth of "unfunded liabilities"

Source: http://www.usdebtclock.org/

There has been a growing voice of doom, gloom and despair rising in the blogosphere and political circles related to the national debt. In addition to the actual record of national "debt" (about $17.6 trillion at the time of writing), the hysteria rises to a fever pitch when the so-called "unfunded liabilities" (obligations of the government mostly for future retirement payments and medical costs) are tacked on. 

Almost $120 Trillion! It's an astronomical number, so it simply has to be bad, right? Clearly our government is insolvent and we are just one more economic crisis away from financial Armageddon. Or so the soothsayers predict (while they peddle gold and silver to the frightened sheeple).

Unfortunately, this view has become widespread among various political groups, such as the "fiscal conservatives" and particularly the Libertarians -- largely due the Ron Paul's outspoken criticism of the Federal Reserve and relentless promotion of gold-backed money. 

[Note: I have much respect for Ron Paul and sympathize with the "Austrian Economics" concerns over banking excesses, irresponsible lending practices, "malinvestment", credit-induced asset bubbles, the impact of wealth inequality and low interest rates on the poor and elderly, and even the overreach of government in certain ways. However, I disagree with their views on money and how to fix banking since they are premised on a flawed understanding of modern monetary systems.]

It has also become quite popular among the "religious right" and evangelical camps who have found in the dire economic predictions support for their views on the Biblical "End Times", which (especially in the bible belt US culture) is often understood to be precipitated by a dire spiral into world-wide chaos and rise of evil government(s). Understanding this sub-cultural influence (which also pervades American politics) is important in order to realize the difficult task of educating both the broader population and the political leadership on good monetary and fiscal policy. There is almost a desire on the part of some to see financial collapse as it justifies their world view, political aims, and religious beliefs.

Now it is not my intent here to discuss Biblical paradigms, but suffice to say that there are many attempting to crack this nut and illustrate a much more hope-filled Scriptural viewpoint to counter the American apocalyptic narrative. And I am also not suggesting that we will not have another economic crisis. We are in a cycle of booms and busts that has been going on now for decades, and there are real changes we can and should make to our financial and banking system to reign back in the business of speculation and fraud. But gold money and 100% reserve banking are not the right answer. 

Understanding and using modern money properly is what's desperately needed.

1) There is no insolvency for a currency-issuing nation unless it has significant debt denominated in another currency (e.g. Argentina, which has subjected itself to Wall Street and their favorite courts in New York), or promises to convert that currency to something it cannot produce (hence the problem with the gold standard). 

2) There is no inevitable collapse of the US Dollar unless folly rules in DC and our political leadership makes the monumental error of deliberately defaulting on our debt obligations. We can ALWAYS pay our USD debts (both foreign and domestic) - we are the monopoly issuer of our currency. Same with Japan, Canada, UK, New Zealand, China and so many other nations (but NOT Eurolandia!) 

3) There is no reason that the crises caused by the financial sector should necessarily devastate the nation as a whole or the real economy and it's base of employment. We have chosen to respond in a way that has helped the banks while providing little no support for households and businesses - it doesn't have to be this way, but that's a topic for another day.

So what about these unfunded liabilities? Isn't this just too much money? Won't we have to raise taxes really high to pay for it all? Won't they burden the next generation and leave us with decades of austerity? Is America at the end of its economic strength and we're entering the demise of our global power? 

Happily, the answers are all emphatically, "No!"

• Firstly, unfunded liabilities are simply an accounting entry that tries to forecast what our future monetary obligations are in certain categories - usually social security and healthcare. Well why stop there? What about our unfunded liabilities for the military? Shall we forecast that spending out 20 years? What about congress and other government salaries, pensions and other costs? Are those "unfunded liabilities"? Why aren't they on the list? These numbers are accounting reports and simply have no meaning in terms of the ability to "afford" or "pay for" these needs.
• Secondly, as the currency-issuer, we can ALWAYS direct our government to make any payments in our national currency. We can never run out! Yes, this means we have to be responsible and we need to realize the effect of such actions in the economy, but that NEVER means we can't afford to pay. If something is for sale in US dollars, the US government can always afford it. 100% of government spending is done by crediting bank accounts with new money. It's that simple. 
• We've made spending look scary and complicated with things like government bond sales, trust funds, and special taxes named after the things we're spending on. These create a perception that our taxes fund social security or medicare or highway infrastructure, and that if the costs for these things rise our taxes will have to go up too! It simply isn't the case - we should know this simply by observing the Bush years where we cut taxes AND increased deficit spending (wars etc.) - and voila - it was all "paid for" without hyperinflation!
• Recall Al Gore's "lock box" idea during his presidential campaign. Consider the folly of taking a trillion dollars that could be being productive today and literally locking it up. How does that help those in the future? All this does is increase the likelihood of unemployment today due to a poor economy (assuming that money could otherwise have been used to buy goods and services), and it does nothing to help the future government's ability to credit bank accounts with the right amount when the time comes.
• There can never be an inter-generational fund transfer. Money changes hands between the living. Money today is used for people today. Money in the future will go to people in the future. No tax today can be saved up by the government and spent 20 years from now. Think of a Starbucks rewards card. Starbucks never has to collect cards back from customers in order to issue new ones out - they issue new cards (or add "Bucks" to the cards) anytime they want to if the demand is there. It is silly for Starbucks to "save" it's own rewards cards for future customers 20 years from now - once redeemed the "Bucks" vanish and they simply issue new ones whenever they need to. Their only constraint is in the real world - i.e. have they issued more than they can redeem for real coffee - they have no limit to how many rewards "Bucks" they create on their computers and put on cards. 

So we've established that the availability of dollars in the future is never the problem. Payments can always be made if the government exists and still taxes people in order to create ongoing demand for the money it creates. Remember that taxes serve a completely different purpose than "funding" government spending.  

Our "real" unfunded liability - the capital development of our nation

So what are our future liabilities? It's not money. Our real "un-produced" liability is the real goods and services necessary to meet the real needs of our nation/people. What do our future elderly and sick really need? They need doctors and nurses and caregivers to be educated and trained and paid so that there are enough of them to meet the real needs. They need good medicines and advances in medical technologies, and improved nutrition and wellness practices. They need hospitals and clinics and the ability to access them when they need help.


What does America need to prepare for the future and be prosperous now and then? It never needs to save up tax money to pay for things down the road. What we need is to develop the "capital" of our nation - both infrastructure and human capital. Investment today in research, funding promising technology advances that don't make economic sense yet for the private sector to invest in; develop state-of-the-art public infrastructure (roads, transportation systems, hospitals, schools, training facilities, research laboratories, etc.); provide universal high speed Internet access; support the continual improvement of our agriculture, food production, and the quality/nutritional value of our nation's food supply; invest in cleaner and sustainable energy sources that lower energy costs for business and consumers... all these things are what will ensure that future generations will have their needs met, not lock boxes full of "saved taxes".

Ironically and shamefully, our insistence that investment in these things is not affordable today is the very path whereby we will ensure that money won't be enough in the future. 

• If we haven't trained enough doctors, no amount of saved money will meet the medical needs of the future. We will need doctors and equipment. 
• If our public infrastructure is declining and our elderly can't reach a nearby clinic or hospital with adequate facilities and trained staff, a promise to pay the bill has little meaning. 
• If our education, scientific research, technology development is all falling behind major world nations, we won't be able to buy our children's jobs back later.

In summary, there is no such thing as an unfunded liability for a currency-issuing nation. But the myth is keeping us from investing in the very things our nation needs to have a robust economy today and a prosperous future that provides for the needs of our people. The answer to everything is not "more government", but in areas of public infrastructure and capital development, the use of government money is critical and affordable.