That’s a bit of an exaggeration. No serious person can deny the importance of the global financial crisis. We can only hope that the U.S. and Britain don’t get swept away by its urgency and agree to a lot of European and Russian proposals that would make it worse, and themselves poorer and less sovereign.
But as bad as the financial crisis is, it’s not nearly as bad as the coming entitlements one. That’s the message the IMF, in its latest paper on “The State of Public Finances: Outlook and Medium-Term Policies After the 2008 Crisis,” says that governments have not come to terms with. The IMF doesn’t have a lot to contribute to resolving the current crisis, but it’s on target about the looming one.
The measures the U.S. has taken so far to respond to the fiscal crisis are going to cost a lot of money. The IMF expects that, on net present value basis – that is, the deflated total of all future costs – they will amount to about 34% of the US’s GDP. Except for Spain, which is on the hook for 35%, the US’s package is the most burdensome. But it’s nothing compared to how much the entitlement systems will cost us as the population ages. The IMF sums up:
In spite of the large fiscal costs of the crisis, the major threat to long-term fiscal solvency is still represented, at least in advanced countries, by unfavorable demographic trends. Net present value calculations illustrate the differential impact of the crisis vis-à-vis aging: in particular, for advanced countries, the burden of the crisis is about 5 percent of the total burden
Yes: the costs of the entitlements crisis will be about nineteen times higher than the costs to date of dealing with the financial crisis. Of course, we could reduce that ratio by passing a few more stimulus bills, but that’s not what the IMF has in mind. It calls on governments to ensure that stimulus packages consist of temporary measures that do not raise deficits permanently, and to pursue a growth strategy by broadening the tax base and lowering tax rates. And it notes that the “fiscal impact of the crisis thus reinforces the urgency of entitlement reform.”
That’s not a message that’s very popular in London or Washington today, both of which, in the run-up to the G-20 summit, are gung-ho about winning its approval for more deficit spending. Bad idea. The IMF notes that, of the countries it examined, only Canada, Korea, and Spain face more crushing entitlement burdens than the U.S. And while Britain is better off than we are, it’s substantially behind France, Germany, and even Italy.
So here’s an agenda item for the G-20 summit: recognize that, especially after the expensive measures taken in response to the crisis so far, the time has come not only to stop simulating, but to take action to restore the long-term confidence of the market in the solvency of governments by addressing the entitlements crisis.