Fiscal Cliff Deal Falls Way Short: Interview With Alan Auerbach

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http://www.bloomberg.com/news/2013-01-06/fiscal-cliff-deal-falls-way-short-interview-with-alan-auerbach.html

Alan Auerbach, an economist at the University of California, Berkeley, is one of the country's leading authorities on the state of the U.S. government's finances. For more than two decades, he has been warning about the mismatch between the government's income and obligations. I caught up with him at the annual meeting of the American Economic Association in San Diego to speak about Congress's latest efforts to fix the nation's finances.

Q: How big are the U.S. government's fiscal problems?

A: We're in pretty bad shape. If you compare the obligations the government has taken on -- including social security and old-age health care for future generations -- to the revenue it is likely to raise in the current tax system, it falls short by somewhere between 6 percent and 8 percent of all the country's future economic output. If you wanted to close that fiscal gap by raising taxes alone, you'd have to increase them by roughly 50 percent across the board.

Q: How far do the tax measures in the latest deal to avoid the fiscal cliff go toward closing the gap, compared to a simple extension of the Bush tax cuts?

A: We've achieved very little. The tax increases on the rich are supposed to generate $650 billion over 10 years. That's about four-tenths of a percent of gross domestic product, or about one twentieth of the required adjustment.