While many view the global financial crisis as little more than an argument between “austerity” and government spending, the historian Niall Ferguson argues that there is a much bigger issue at hand, namely, that governments have allowed “the current generation of voters to live at the expense of those as yet too young to vote or as yet unborn.”
Indeed, many politicians and economists think of the growing debt in the U.S. and the E.U. as something of an inexplicable phenomenon rather than what it really is: the product of human choice. Ferguson argues that the system and the people in charge brought us here.
the austerity measures outside the Greek parliament in Athens on November 15.
So young voters need to become more proactive and engaged, right? After all, they're the ones who will have to pay for all of this. There are two problems with this: a) young voters are rarely engaged because they don't understand the stakes and b) young voters rarely understand the stakes because governments do a poor job of reporting the actual cost of their policies.
“[O]fficial debts in the form of bonds do not include the often far larger unfunded liabilities of welfare schemes like -- to give the biggest American schemes -- Medicare, Medicaid and Social Security,” Ferguson writes, referring to the fact that most “official” government figures regarding debt are terribly misleading.
The most recent estimate for the difference between the net present value of federal government liabilities and the net present value of future federal revenues is $200 trillion, nearly thirteen times the debt as stated by the U.S. Treasury.
Notice that these figures, too, are incomplete, since they omit the unfunded liabilities of state and local governments, which are estimated to be around $38 trillion.
The frightening thing about these figures is what they represent: retiring generations sticking younger (and yet-to-be-born) generations with massive bills. Because of the spending habits of today, the generations of tomorrow will have to find ways to pay for everything -- and it’ll either be through higher taxes or massive cuts in public spending.
Ferguson argues that the best way to approach the problem of unsustainable debt is to restore the “social contract,” as Edmund Burke referred to it, between generations. See, the contract is not just between citizens here and now but it’s also a contract with those who came before us and those who will come after us. What we see in these massive national debts is, as Ferguson writes, “a shocking and perhaps unparalleled breach of precisely that partnership.”
Clearly, this must change. One generation cannot rob from the next, otherwise the entire contract, the whole purpose of coming out of Hobbes' "jungle," falls to pieces. Strong leaders must attempt to reign in this "generational theft."
Niall Ferguson (image courtesy BBC)
There are different ways this can shake out. Obviously, the most desirable scenario would be one where "the proponents of reform succeed, through a heroic effort of leadership, in persuading not only the young but also a significant proportion of their parents and grandparents to vote for a more responsible fiscal policy,” he writes.
Of course, how do you do this when younger generations don’t fully grasp the long-term consequences of present-day spending policies?
Ferguson has two suggestions:
Public sector balance sheets can - and should be - drawn up so that the liabilities of governments can be compared with their assets.
That would help clarify the difference between deficits to finance investment and deficits to finance current consumption. Governments should also follow the lead of business and adopt the Generally Accepted Accounting Principles.
And, above all, generational accounts should be prepared on a regular basis to make absolutely clear the inter-generational implications of current policy.
Active engagement, strong leadership, and actual transparency on spending policies can help restore the contract between generations. But most importantly, it comes down to people. Individuals must make themselves responsible for the spending of their generations and reign in their own governments.
“We blame the politicians whose hard lot it is to bring public finances under control, but we also like to blame bankers and financial markets, as if their reckless lending was to blame for our reckless borrowing,” Ferguson writes.
“We bay for tougher regulation, though not of ourselves,” he adds.
Front page photo source: Washington Times