The Coming Generational Storm: What You Need to Know about America's Economic Future [Hardcover]

The really scary thing about this story is that, although Kotlikoff and Burns wax hopeful near the end of the book, and indeed present a possible way out of the crisis, one gets the sense that they believe that there will be no remedial action and certainly no cure until the pain sets in, and then it will be too late.

Personally I won't be around to experience any of this, but my grandsons will. According to the authors, my grandsons will be burdened with tax obligations of unprecedented weight and/or runaway inflation of the banana republic variety, or the collapse of the American economy as we know it. It's even possible that they'll have all three, probably in that order.

The main culprits are Social Security, Medicare and Medicaid. Quite simply we are incurring transfer payment obligations to our elderly so enormous that the working population will not be able to pay for them. And the terrible thing is that our government knows this--there have been many studies--but has neither the will nor the desire to do anything about it. Call it the crisis of representative democracy. No one in Congress or in the White House has the guts to tell the American people that we are going bankrupt. Everybody seems to think that the future will take care of itself, or, at any rate, that's THEIR problem. Maybe some fabulous invention or technology will confer upon my grandsons enormous wealth and all the financial obligations will disappear like wisps of clouds on a sunny day.

It is important to note that the present incumbent in the White House has greatly exacerbated the problem by recklessly cutting taxes while going on a wild spending spree so that his friends at Raytheon, Halliburton, Big Oil and Big Pharma will have full capitalization. As the authors note, politicians care almost exclusively about maintaining themselves in office. Consequently they are seldom able to address problems beyond the short horizon of the next election.

In a larger sense, the crisis so vividly and exhaustively described in this strangely readable book isn't about economics at all. It is about demographics. With increasingly aging populations, thanks to modern sanitation, cradle to grave health care, plenty of food and safe water, etc., the highly developed countries now have to figure out who is going to pay for keeping the old folks alive and well. The authors present some solutions: make them work longer, print money so that inflation will dilute the financial obligations, massively tax the working generations, etc. What they do NOT propose is that the elderly be left to fend for themselves, nor do they suggest a modest proposal of the Jonathan Swift variety, say massive euthanasia. Instead they propose a 12% national sales tax. This would be on top of all the other taxes. Imagine in my state (California), where we already have an eight and a quarter percent sales tax, what it would be like adding over twenty percent to the cost of products and services. Guess what? This would put a damper on spending and would greatly increase black market traffic, and probably wouldn't work--which is why Republican think-tankers are scheming to "privatize" Social Security, Medicare and Medicaid, a venture that the authors rightly call "eliminating" Social Security, Medicare and Medicaid.

Well, that's not going to happen. "I'm old and I vote," will say the AARP, and politicians will take notice. And no politician is going to vote for the authors' proposed 12% national sales tax. Read my lips. So what IS going to happen?

Nobody knows. The problem is unprecedented in human history, because never before has the ratio of the old and retired to the young and working been so high.

Historically when governments overspend, they reach for the printing press and flood the market with cheap money. This is what I predict will happened. The US, Japan, and Europe will all go massively under the flood of inflation and will, after horrendous suffering, reemerge to restructure their transfers so that all of the suggestions of the authors are put in place including later retirement, responsible taxation, controlled medical costs, and a more modest lifestyle for all. That is, if we don't have revolutions and a return to some sort of absolute state control.

Some examples of the engaging prose spun out by Kotlikoff (who is an economist) and Burns (who is a journalist):

(After documenting the progressive aging of our populations): "This will not be a phase. We will be older forever." (p. 36)

Perhaps the most important truth in the book is this from page 83:

[What is really happening is] a massive redistribution [of wealth] from young and future Americans to currently living adults. Our de facto generational policy has been to indulge the present at the expense of children living and unborn. This gives new meaning to "no taxation without representation."

They really rub it in a few paragraphs later:

[The AARP] has dropped the word "retired" to attract members in their 50s who aren't yet retired but have the same interest as current retirees: ripping off the next generation.

The book ends with tips on how to protect yourself from the meltdown. Interesting enough, the most important tips are on how to stay healthy, since health is the most important capital one can have. But here's a nice economic tip from page 134: "The government is going to need the budgetary resources that only high inflation can provide. Hence, high inflation is going to occur. Indeed, it's likely to occur sooner than later."

Gold mining stocks, anyone?

Their analysis, which is largely derived from drawing trend lines out to 2050, is not unbelievable, but omits some likely possiblities. As others have noted, immigration seems to be the x-factor in demographic trends, and the US is a prime target for increased inflow of younger citizens. I was also struck by the fact that they never entertained the idea that SS and Medicare would become means-tested, an answer with some political appeal.

I grew weary of their constant and incorrect reference to "printing money", as if the money supply is solely dependent on the amount of currency available. I mean, think about it. If the Treasury did just print more money, how do you put it into circulation - hand it out at street corners? The economic euphemism of printing money does not mean literally speeding up the presses, but thanks to authors like these, many people believe it does.

I do think their advice to pay income taxes now to be the soundest counsel they offer. As a friend of mine once said, "Once you pay the taxes, you get to keep everything that's left." Who knows how those 401's will be viewed by politicians in the future, or where the tax rates will be.

This class of literature - armageddonomics - may become increasingly popular. I can only hope the dismal scientist/authors can hook up with better editors.

However, they fall short in explaining the main reason why this nation (and many economically advanced nations)faces such a dire future. They do not explore the impact from legalized abortion. Certainly, we have too few young workers. That's because millions of them have been aborted in the past thirty years. The crisis has been predictable for decades.