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Inform Act won't live up to its name

The Intergenerational Financial Obligations Reform Act may be more accurately called the Misinform or Disinform Act.

September 17, 2013|Michael Hiltzik
  • The Intergenerational Financial Obligations Reform Act, the brainchild of economist Laurence Kotlikoff, would require generational accounting of government spending. Kotlikoff says it would show that future generations have been bequeathed an insupportable tax burden already.
The Intergenerational Financial Obligations Reform Act, the brainchild… (Saul Loeb, AFP / Getty Images )

As every legislative craftsman knows, the trick in giving your bill a name is, first, come up with a title that yields a catchy acronym. Second, make sure the title doesn't explain what the bill does.

Hence, the Inform Act.

The name certainly is alluring. It sounds like a measure to make government more transparent to its citizens, which is exactly what its promoters say it is. But it may be more accurate to think of it as the Misinform or even Disinform Act.

You may be hearing a lot about the Inform Act in a few weeks. Its creators have been gathering signatures from prominent economists — 14 Nobel laureates! — and current and former government officials in preparation for taking out a full-page ad in the New York Times pushing its enactment. So you might want to know a little about it before the publicity train starts rolling.

Inform stands for the Intergenerational Financial Obligations Reform Act. Introduced by a Republican and Democrat in both houses of Congress, it's the brainchild of Laurence Kotlikoff, a Boston University economist who's respected as an expert on long-term fiscal issues but rather more controversial when it comes to his dabbling in policy prescriptions.

For years Kotlikoff has been pushing the notion of "generational theft" — that for the entire postwar period the United States has engaged in a "massive redistribution from the young to the old." This has been done mostly through Social Security and Medicare, which he reckons have made seniors richer and everyone else poorer or at least more debt-ridden. Preferential capital gains tax rates and other breaks have done their part, he says.

Kotlikoff says the remedy is "generational accounting," which compares spending today with a calculation of the tax burden it places on tomorrow's taxpayers.

If it's passed, the Inform Act would require three federal agencies — the Congressional Budget Office, the White House Office of Management and Budget and the Government Accountability Office — to gin up an annual generational account for the government as a whole and provide a generational accounting for proposed legislation whenever Congress asks.

Kotlikoff maintains that generational accounting is far superior to conventional deficit accounting when it comes to government spending. He says that it would show accurately that future generations have been bequeathed an insupportable tax burden already.

"This may be the most important fiscal bill of the postwar period," Kotlikoff says. That should give you an idea of the level of rhetoric that will be swirling around this measure.

Critics observe that simply balancing today's spending against tomorrow's tax payments leaves a lot out of the calculation of what government does.

For starters, generational accounting doesn't make a distinction between spending and investment. An appropriation to send a congressional committee on a junket to the Bahamas carries the same weight as building a schoolhouse or a bridge.

That's a real flaw. The government's decision in the 1950s to spend billions to create the interstate highway system shows up in generational accounts as a huge burden on post-1950s taxpayers. That's you and me. But we're obviously reaping economic benefits from that decision, as will our children and grandchildren.

The same goes for education, which obviously packs a lot of value for its youthful recipients, who are also the taxpayers of the future.

Kotlikoff responds that the gains from such investments will show up as an expansion of future tax revenues, narrowing the generational fiscal gap. The problem is that lots of government spending can't be analyzed on a cost-benefit basis. What's the value to tomorrow's generations of staving off a military attack today? Or opening a new national park? What's the social value tomorrow of a cancer cure discovered by a scientist educated at public expense today?

Kotlikoff's view of Social Security and Medicare, which is that they're devices for the old to rip off the young, is especially faulty. Middle- and high-income wage-earners are paying their own way in Social Security, as C. Eugene Steuerle of the Urban Institute has shown. According to his figures, a two-income couple who earned an average wage and retired in 2011 had paid an average $598,000 in Social Security taxes (adjusted for inflation) and will collect an average $556,000 in benefits. Sounds like they're redistributing their income to the young, not the other way around. Low-earning workers do much better, but that's a redistribution from rich to poor, not young to old.

Medicare's different. Because its costs are driven by overall healthcare spending costs, most seniors collect more in benefits than they paid in Medicare taxes. But that illustrates another flaw in generational accounting: It doesn't tell us anything new.

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