Countries around the world are broke, and this will have dire consequences for future generations, warns Laurence Kotlikoff. He says the only way to fix things is to put everything 'on the books'

Countries around the world are broke, and this will have dire consequences for future generations, warns Laurence Kotlikoff. He says the only way to fix things is to put everything 'on the books'

Boston University Professor of Economics Laurence Kotlikoff is blunt about the world's fiscal health. Many countries are insolvent, but don't know it, he says.

"They are measuring fiscal solvency, namely the official debt, which is really not an economic measure of anything, "says Professor Kotlikoff, who was named by the Economist newspaper as one of the world's 25 most influential economists.

He says that official debt includes only the obligations that politicians arbitrarily decide to put on the books. The need to meet the future obligations of a state pension system, for example, is not counted as part of the official debt.

"To say it is not a real obligation, or that it is not as important as paying off state bonds is not the case. It is probably less likely to be defaulted on than bonds, because there is more political support for pensions."

Similar off-the-books liabilities exist in all countries, says Kotlikoff. And the decision about what to include is a 'language' decision, not an economic one. Economics does not tell us how to measure the deficit, he says, just as physics doesn't tell us what time it is right now. The theory of relativity tells is that time and distance depend on how fast an observer moves and in what direction. Ultimately, they are determined by the frame of reference and the language used.

"Economics is the same. The deficit, debt, taxes, transfer payments, disposable income, private wealth, government wealth, personal saving – none of these are well defined economic concepts."

Countries around the world have been examining their fiscal affairs using measures that have no connection to them, says Kotlikoff, because nothing in economics pins down the language used.

"We need a measure that is independent of our choice of language, and which puts everything on the books  – and that measure is 'the fiscal gap'."

This gap is defined as the present value of all future outlays minus the present value of all future receipts. If it is positive, it means that the government has expenditures that in present values exceed its receipts.

"Major global economies face astronomical fiscal gaps, making them effectively bankrupt, among them the US, Russia, Japan, the UK, South Korea, the Netherlands, and very likely China."

Case in point: the US. Its official debt is US$20 trillion. But its fiscal gap is a staggering US$200 trillion, or 10% of the country's GDP. Almost everything, says Kotlikoff, has been left off the books.

"If we were to keep spending as we are now, in order to pay our bills, we would need to get 10% more GDP in extra taxes every year, forever. That is huge, and it means that the country is broke. I would not be buying long-term US government bonds, if I were you."

Eliminating this massive gap would require a tax hike of 53% or a spending cut of 35%, if action was taken immediately, he says. Delay for 20 years and the figures climb to 63% and 40% respectively.

Kotlikoff is in no doubt about the underlying cause of this gap – an aging population, coupled with a "post-war Ponzi scheme" financing of old-age pension and healthcare policies.

"This finance is called 'pay-as-you-go'. In fact, it is 'take-as-you-go', with each generation expropriating the next. And the expropriation is accelerating."

Kotlikoff says the only way forward is for governments to evaluate all spending and tax bills using fiscal gap accounting to see through time whether the gap was being closed.

"In the end, a fiscal policy that isn't sustainable means an economy that isn't sustainable."


*Professor Laurence Kotlikoff presented a seminar on ‘Our global economic future and how to fix it' in February, 2018, while at the University of Auckland Business School as Sir Douglas Myers Visiting Professor.

This article was first published in UABS Insights, and is reproduced with the permission of the University of Auckland Business School.

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Countries around the world are broke

Laughable. Just a little something about this "professor":

In his 2007 book, The Healthcare Fix, Kotlikoff proposed a major reform of the U.S. healthcare system, subsequently dubbed "The Purple Health Plan",[17] that would do away with Medicare, Medicaid, employer-based healthcare, and health exchanges established under the Affordable Care Act.[18] In their place, every American would receive a voucher for a basic health insurance policy

Vouchers? McHealthcare.

Game plan of neo-liberal "intelligentsia" to rob the working class:

1) We're broke!
2) We got no munnies except for the military. Always money for that.
3) We can't afford healthcare, social welfare, or any other programs for the poor or working class.
4) Privatise it all because "reasons".
5) Possibly win Nobel prize in economics.
6) Target next country and repeat step 1.

Not sure how you extrapolate to all that. In fact voucher systems would be a very liberal model for the US.

I think you miss the point that deficit are a way in which Government's can steal from the poor to give to the rich. These forms of deficit means asset prices go up which means people that own assets get richer.

I think you miss the point that deficit are a way in which Government's can steal from the poor to give to the rich.

Ridiculous statement.

President Trump's decision to slash taxes on companies is a case in point ... where it will create a greater deficit on the US government's books .... which will probably be gapped by cutting hard on services which the lower socio-economic groups rely on ... schools ... libraries ... healthcare ...

... his rich mates will make out like bandits ...

Yet he still has managed to con the poorer workers into believing he has their best interests at heart .... the Don is such a convincing phony , oh my , he could even get a job at YOUI !

I dont agree with your comment GBH.

most countries that slash corporate tax rates find tax revenue (overall) goes up. Expect the same to happen in the US with corporates repatriating huge sums back to the mainland, and re-establishing businesses onshore that were previously taking advantage of lower costs, and tax bases elsewhere.

Any distributions will presumably still be taxed at the individuals marginal rate.

Kane02 should rename to “EverHopeful “
Bet you still believe in trickle down E Con omics

nice one. two can play at that game

Northern Lights should be renamed "LightsOut" as in last person to leave the country switch out the light.

Which bit don't you understand:

That deficits create asset values to go up or that the rich have more assets than the poor?

Low interest rates cause asset prices to go up, not deficits. Geees. Basics.

Interest rates impact monetary supply and therefore inflation, which is why it is front and centre of the Reserve Bank Act. However, deficit (which is effectively printing money) results in price increases. What do you think happens when more demand chases similar supply? - As you say - Basics

Yet despite huge deficits and quantitative easing prices for goods are actually all but flat. Meanwhile what we have seen is assets rise which is not the same thing. Then the return on those assets is frankly terrible so this points at a huge ponzi scheme.

In terms of "basics" you seem to be ignoring the zero bound trap effect, which many non-Keynesians do it seems.

Of course there is "basics" and the real world. ie economics 101 is not how the reall world operates but is how many ppl seem to want to look at the world via.

@ ex socialist Actually printing money causes prices to rise based on how the money flows. If by inflation you mean CPI or similar then its demonstrably untrue that money printing necessitates a rise in general prices. If money printing flows to assets then it results in a rise in asset prices but not general prices. The transmission from assets to general consumption is rather limited, been confined largely to professional fees.

World debt is at record high however
NZ is doing extremely well
It’s aging population neatly addressed by huge increase in young migrants who are breeding
It could’ve been managed better but new blood was needed with skills
More than 50% of Auckland hospital staff were not born in NZ for example
NZ is seen by the wealthy up here as a safe haven muchlike Singapore or even Switzerland it’s location down under provides other benefits if there’s war. it’s govt & population stable with state welfare.
As for
The USA has the most productive ag land on the planet with a river system allowing cheap transportation to ports and markets. No deficits change that fact or that it is the most powerful country.
China has to manage just under 1.4Billion people a headache in itself
Of course there’s pain when towns can’t pay their retired firefighters pensions or the Teamsters must halve the pension to retired truckers because WallSt did a worse job than the Mafia did managing their pension fund but life does go on & we don’t live forever
U2 is playing MadisonSqGarden should I go ? I should I guess No more Tom Petty

@OnwardsUpwards I dont often agree with ex socialist but actually in this respect he is loosely correct. Generally inflationary politics and/or money printing lead to higher asset prices which does indeed fuel wealth inequality.

My gut feeling about the state of NZ Gubmint finances is that we are a lot better off than the dismal US scene. We do use GAAP, we do try to include future liabilities in at least some areas (ACC is a nice example), and accounting is on an accrual basis, unlike so many other countries.

It will be Interesting to review the upcoming May budget in this light, because this new, fearless, inexperienced Gubmint has already piled up a few such liabilities:

  • Tertiary ed liability for free fees, extra student allowances, and accompanying costs. (Aside: I see from the MSM that the Uni VC's have already had a sally at Hipkins, for the extra admin caused by an influx of poorly prepped entrants and the inevitable headaches they will cause. Having the VC's backs up is not a glorious start....)
  • 1800 new police staff need accommodating, vehicles, overheads such as payroll/HR, and training.
  • Major Education review: catnip for consultants, can be expected to chew up a few hundred million just in the process let alone the execution...
  • Auckland Transport Alignment Plan ()ATAP) - essentially unquantified but the funding gap is 5-6 billion
  • Gender pay gap in State Sector
  • Minimum Wage increases in state sector

That's just a sample (the fuller sorry list is here) but it's gonna be a Rilly Interesting Budget. I'll bet that there are quite a few late nights, strong coffees, frowns and pursed lips right across Gubmint CFO teams right now, as they assemble the bones of what will be aggregated and polished up into the May Budget. But I bet it won't be a pretty sight, no matter the soothing words which will have been schmoozed into the Preface.

Hide yer wallets....

The first year free ed policy is junk. Even students with no intention whatsoever of getting a degree will enroll themselves into uni for a year of booze and fun-filled parties.
Note to self: consider opening a liquor store in Hamilton or Otago to rake some of those lost tax dollars back into my wallet.


I like the principle, I would have done it differently though - focus on key areas for growth - science, tech, education, engineering, medicine, arts etc.. , I'm seeing ads for travel and tourism, and barrista courses with first year free, which is completely bonkers. I would have made the final year free instead of the first.

We actually train more than enough medical doctors its just that they leave to find higher wages. There are not enough placements in hospitals for all the trainee specialists. I agree with the final point though, it makes no sense to have the first year paid for when zero commitment has been shown.

I agree about the travel/tourism and barrista courses. The last thing NZ needs is taxpayer dollars spent on paying for useless degrees/qualifications that lead to low wage unskilled jobs. Using the funds to invest in STEMM subjects and postgraduate degrees instead would make more sense.

Pretty much, to my mind the useless "degrees" have passed the onus of training and development from the industry to the individual, and created a completely pointless middleman instead (pointless except to the middleman naturally).

We actually train too many in STEM fields and since there are not even a hundredth the amount of graduate or doctoral level jobs most leave the country still. In fact a junior engineer will often not be employed in NZ until they have 5-10years experience, suffice to say we can stand to have more companies employing graduates than more graduates who have to leave the country for a job.

Even students with no intention whatsoever of getting a degree will enroll themselves into uni for a year of booze and fun-filled parties

Evidence please or is that just your ill-informed opinion?

Ok so, Is a 20% first year dropout rate evidence? And that is based on our Universities only, I would hate to see what it looks like at adding Tech courses. Plus that was 2013, lets see what free rider behaviour does to this stat.

There is no element of accountability in this fee handout. A first-year student availing free tuition is under no obligation such as timely course completion or stream selection. What public benefit where the beneficiary is not held accountable will not be utterly abused?

3 fees-free years from 2024, oh stop this madness!

Just like to old days when Uni was all but free. However if you failed year one you then had to pay... 100%.

Government election promises will see a decrease in overseas students by no longer being guaranteed NZ citizenship. Policy is aimed at keeping tertiary entrance up/Uni teachers employed which as a special interest group for the left.

Your comment reminds me of the Auckland Council representative who stated at an Environment Court hearing that just because they had rezoned 3,600ha in West Auckland from mixed rural to Countryside (i.e. you can now subdivide a 10 acre block into 4x 1ha blocks), 'most people'' would be unlikely to subdivide. It's called common sense and a reasoned assumption based on probable human behaviour. There's no official govt 'evidence' on the amount of money that beneficiaries spend on drugs, so I suppose that means that zero is spent on drugs according to your genius logic.

Interesting, National introduced drug tests on beneficiaries, would you like to know how many were found to be using drugs of all kind? You probably don't, as it won't fit your narrative, but you know facts and stuff...

Here you go drum roll please - 466, out of tens of thousands tested those 466 included people who failed multiple times and those who refused to take the test. Radio NZ is no doubt not a credible source for you, probably all commies or something, here's Granny Herald for you

So either they're all very scrupulous around their testing times, or the evidence isn't there as it's not as large a problem as you think it is.

Critical thinking not your strong point, eh?

Before we post it benefits us all to remember the words of Eleanor Roosevelt:

"Great minds discuss ideas; average minds discuss events; small minds discuss (or criticise) people."

Italics are my addition.

A better policy would have been to make the third year free, rather than the first year.

Totally agree....

Me too.

Went to his recent lecture at AKL Uni

Nothing really new - Life will go on as humans will respond to their best interests. Debts will be partially inflated away - taxes will rise under various guises and we will simply continue on.

That does not mean that some will not suffer - they will - and some more than others.

Only need to go back to the 1930's depression in NZ where a farmers grandchild tells me his grandfathers farm mortgage debt was reputedly halved. Perhaps someone with more detail could expand on this.

The young in the US are upset know. When will it dawn on them that the Trump tax cuts give cash to the rich listers now in exchange for kicking the debt down the road to these future workers. Intergenerational theft.

As much as Trump is an idiot, the tax cuts are a common sense decision that will be positive for the working and middle classes, so judge the policy and not the man. Obama racked up USD$6T in debt and that wasn't an issue apparently. Even a cursory glance of this article would tell you that taxes are a root cause of all of our problems? Why? Govts keep increasing taxes and spending even more, which has left us with debt that cannot be paid off. I look around everywhere and people are stretched financially, with dwindling, if any disposable income. It is undeniable that govt taxes, regulation, etc, take more or less half a person's income, which is nuts. Socialism has never worked in history and yet we have many of our leaders and naïve young people calling for more of it. The trouble is that the hippocrites that are calling for it don't live by their own rules. Obama recently paid $11m for a new house and wears a $20k Rolex...amazing for a career public servant, but that's a vintage socialist for you, always on the take and peddling influence for personal gain. Hillary thinks nothing of spending $68k for renting a house in the Hamptons for a week...another amazing public servant who is now magically worth over $100m, having spent her life working for the "marginalised and downtrodden". Never mind, there will be no shortage of local fools paying $190-$500 per ticket to listen to her drivel when she comes to Auckland in May. As long as we have an uneducated and stupid population then we can all look forward to many Venezuelas in the future, but hey, at least our socialist overlords will live in nice palaces and keep telling us that they will "soak the rich".

Obama a socialist?? That crash sound is your credibility trying to make an emergency exit out of the window to distance itself from your statement.

Bernie Sanders is the closest the US has to a socialist and he's a social democrat at best, the Democrat party probably have more in common with National than they would with Labour.

Education is one of the key barometers of how people will vote FYI, the higher educated the more likely the person is to be liberal - so your statement also doesn't stack up there either.

Obama racked up $6 trillion getting the country out of the GFC and into good growth. This is the time to pay that back, not borrow more.

Why precisely (been the USA) would you ever repay a debt?

At this moment in time it does seem somewhat pointless - but "ever" is a very long time and history shows the costs of default are significant.

I agree, it is a point though, if China called in their debt and the US said yeah, nah. That would make for an "interesting" stand off

.. the value of USA assets ( private property and businesses ) is so vast , and still growing ... such that there's no need to ever pay back the debt ... foreigners can keep pouring their savings into the US ... as the greenback is the reserve currency of the world ... and regardless of a succession of boof-head presidents , there's still more faith in America and it's economy than any other country on the planet ..

Common sense you say? These 'cuts' are a let off to the current 1% ers with the resulting trillion dollar shortfall kicked down the road to be paid by the next generation. These are nothing but more debt to sustain the current mob, the bill to be paid by later generations.

Common sense is the least accurate description one could dream up.

Separate yet related note, I'm not sure how much you know of Venezuela's economy? It seems to be a poster child amongst certain sections of society as an example of a failed state. Their economy is primarily reliant on oil, 50% of their GDP, which is quite frankly ridiculous but that's how it is. When oil was over $100 a barrel, they were the poster child of how socialism can work, when it plunged their economy died with it - again completely their fault due to a ridiculous notion of having all your eggs in one basket so to speak and having no plan B, sanctions from a rather large economy to their North haven't helped much either....

Being socialist near to the US isn't particularly good for longevity or prosperity - El Salvador, Nicaragua, Cuba

Venezuela was bleed dry by a small elite living in Florida supported by Uncle Sam

Uh no.

a) The middle classes are being screwed over by the Trump tax cuts, plus his other cuts and changes.
b) Obama racked up huge debt due to the GFC, his choice was take on the debt or be labeled the President responsible for the Second Great Depression.
c) In terms of lost income due to govn tax try considering how the interest on debt is actually a private tax on ppl to give tot he rich.
d) Socialism isnt a black or white thing its a shade of grey. In fact I have little doubt pure capitalism would be any better. If you want to consider "grey" an equal degree of either "capitalist america" is also pretty much a basket case.

"Huang, 33, who earns 5,000 yuan a month working at a flooring company. That’s a daunting prospect in a city where property costs are 91 times the average after-tax salary .."

Shanghai showing NZ things can always get worse.

some interesting demographs there.

"Case in point: the US. Its official debt is US$20 trillion. But its fiscal gap is a staggering US$200 trillion, or 10% of the country's GDP."

Should that be ''10 times the country's GDP''?

Perhaps the most attractive solution to the US will be to use their current (but waning) ability to use more debt to buy assets and boost their military in preparation for a massive default/reset?

That is exactly what the US/China/Russia is doing and Europe is doing what it has always done squabbling.

This man treats the economy as if we were still on the old gold standard or fixed exchange rates. Has he never heard of what happened in 1971? Probably not because he was taught and is still teaching as if we were still on those old systems. Dear God.

This comment kind of says it all really.

""This gap is defined as the present value of all future outlays minus the present value of all future receipts. If it is positive, it means that the government has expenditures that in present values exceed its receipts."

Some confused commentators here.
Its about the limits to growth & resource limits, not how they are distributed (capitalism vs socialism, or anything to do with Trump, Obama ...).
Its about the energy - not the money. Money in whatever form just directs energy flows. The flailing economic indicators are just the symptom, the decline in net energy per capita is the underlying cause. We are borrowing against a future that doesn't exist. We are insolvent. The only way to keep the system imploding is bigger deficits ... but an energy crisis will inevitably stop this in its tracks .. The big boys are militarizing up for the scrap over scarce resources thats coming (it has the nice side effect of providing "jobs" ..)

see Tim Morgans series

""..The insight here is that we are deluding ourselves about economic output, using the proceeds of borrowing and pensions erosion to create a GDP number increasingly out of kilter with reality. This helps explain why typical wages aren’t keeping up with GDP, and why incomes are being eroded by the rising cost of household essentials, most of which are energy-intensive. ...

It should be added that the inflated values of assets (such as stocks, bonds and property) do not offset these trends – these values cannot be monetised by their owners selling assets to each other. Any significant attempt to monetise them – and a panic rush to do exactly that can’t be ruled out – would cause values to collapse.."
The only realistic conclusion which can be drawn ... is that a very serious crash is extremely likely to occur at some point well before 2030..."'

There are plenty of other valid conclusions. For example one can conclude that rates will remain perpetually low and asset prices wont crash. Standards of living decline but this dopes not in itself necessitate a fall in asset prices.
Other options include technological change and adaption. For example you can have a decline in energy per capita while having a gain in lifestyle if you become more efficient. A good example would be self drive. This could power a new era of services growth.

This isnt so much a conclusion as an opinion. Is it based on any evidence? For instance "that rates will remain perpetually low and asset prices wont crash." there are some big assumptions in there, ones that frankly dont seem justified.

Assets are really what they are worth based on a fair return. The thing is when oil goes away (output per day declines) the return on an asset will be even more un-realistic than it is today, will that just carry on you think? With over-priced assets what we are looking at is a classic case of greed so far winning over fear.

There certainly will be technological change the problem is not all energy is equal. Sure you can subsidise in more expensive alternatives to oil but the cost then of the final products rises as the cost to produce it rises. This then raises the Q can ppl pay the increase? if they are forced to there is less money somewhere else and that sector sees recession, deflation and might just fold. So "assets prices wont crash"? hard to see that as a justifiable opinion.

new era via "self drive" etc. For me this is the delusion I see in many others especially the "visionaries" where they assume the grow for ever model on a finite planet.

in short I think you are praying your opinion is right when in fact when you dig deeper it looks pretty unlikely IMHO.

We get to see in the next 2 decades I think.

Rates remaining perpetually low = a bust pension system = a bust capitalist system. No return on capital means there isnt capitalism.
More efficient in terms of OUTPUT is good. ie cheaper milk, bread... it means wages go further
More "efficient" in terms of lowering demand is bad (as far as growth & the economic system is concerned). eg if everyone uses the bus the car industry slowly goes broke...
Its all about burning MORE to produce JOBS to create ongoing viable demand. Thats what the financial system needs. And Diminishing returns across the board (oil, fisheries, ag, land, water) says we must not only make gains, but we must do so fast enough to create growth ...

spot on.

What happens if somebody invents some form of energy not yet discovered?

Like you know how we once thought the earth was flat, then were blown away when it was round, or that we thought that earth was the centre of the solar system only to realise it was actually the sun?

It might be possible that there are other forms of energy that we're yet to tap into that could change the whole scenario and drive a whole new level of 'energy per capita' as you put it..

The age of astounding discoveries is pretty much gone as all the low hanging fruit are gone. However it's not a new form of energy but one that's been worked on for many decades and will become a reality in the next 10 years or so and that's fusion.

ITER will be the first break even or net energy production test fusion reactor.

Once this demonstrates results and the data is collected expect fusion reactors for electricity generation to go into design and construction.

tough to invent an energy source ... but they have certainly been trying hard to come up with alternatives. Trouble is all our infrastructure is setup to run on fossil fuels basically... and the rules of (economic) growth say you must step up the energy surplus ladder, not down.

But think about the rate of discovery and development of technology - surely you're not suggesting that we have all the knowledge now (in this moment) that we're ever going to have? I.e. there will be no further scientific break throughs that further enable human evolution and increases in productivity?

There is some investigation going on into the use of microwave cavities driven by klystrons and it looks wacky , the brits propsed it and the yanks may have tested it in space.
So its not too late to learn something new.


its not peak OIl ... its actually peak DEMAND (lack of affordability for the outputs of energy).
The Oil will remain in the ground.


no its anything but semantics. Its peak ENERGY SURPLUS in whatever form - it just happens Oil is the most dense convenient source of usable energy surplus we have - hence all our infrastructure is build for it and because of it.

"the world is moving past its dependence on oil.."

The economic system doesn't care where you get your energy surplus from ... it just says get more of it indefinitely ...

What, large bureaucratic entities fiddling the books? I am shocked, shocked! Who would have thought?

Government accounting is partly nonsense, less so in NZ than elsewhere. Double entry bookkeeping is a wonderful thing but it will give misleading results if you leave things out or put in false data.

While I agree that government books are fiddled, I do rather distrust his argument, precisely because it is based on economic concepts not accounting (ie double entry bookkeeping) concepts. Business accounting is continually evolving, and while flawed, is miles ahead of government accounting. That is the main reason the banks have been able to game government regulations so effectively; they think more clearly.