Larry Kotlikoff on Economics That Matters: From Academic Theory to Real-World Solutions
In this intellectually expansive conversation, Jonathan Treussard sits down with his former doctoral advisor Larry Kotlikoff—William Fairfield Warren Professor at Boston University and one of The Economist's 25 most influential economists—to explore a career defined by asking uncomfortable questions and getting fired for telling the truth. Larry traces his journey from risk-averse Penn undergrad (applying to 15 law schools and 15 economics PhD programs) to Harvard economics, where mentor Steve Ross convinced the admissions committee to accept all three Penn applicants despite the astronomical odds. He shares stories of getting pushed out from UCLA and Yale not for underperformance but for making colleagues feel insecure, and nearly being fired four times at Reagan's Council of Economic Advisers for contradicting supply-side economics with actual data.
The conversation dives deep into Larry's seminal contributions: developing generational accounting and fiscal gap accounting to expose that official deficit numbers are "complete garbage"—arbitrary linguistic choices rather than economic reality—and proving with Alan Auerbach that 40% of national income accounting is meaningless fiction. Larry also discusses taking BU's economics department from ranked 86th to 7th in 12 years, developing the Auerbach-Kotlikoff computational model that solved previously intractable dynamic fiscal policy problems, and creating MaxiFi Planner—comprehensive economics-based financial planning software that applies rigorous academic methodology to help individuals optimize their lifetime financial decisions.
This episode is for anyone who wants to understand how rigorous economic thinking can cut through political spin, reveal uncomfortable truths about intergenerational wealth transfers, and provide practical tools for individuals to optimize their own financial lives. Larry's message: economists shouldn't just describe problems—they should prescribe solutions, just like doctors who don't merely study cancer but actually operate and administer chemotherapy.
Listen or Watch
Choose your platform:
Apple Podcasts | Spotify | YouTube | Podbean
What We Cover in This Conversation
Larry's non-linear path: Penn to Harvard to getting fired from UCLA and Yale for "making people feel insecure"
Nearly getting fired 4 times at Reagan's Council of Economic Advisers for contradicting supply-side economics
How BU's economics department rose from 86th to 7th in 12 years under Larry's chairmanship
Why deficit and debt numbers are "complete garbage"—arbitrary linguistics, not economics
Generational and fiscal gap accounting: the US needs 27% higher taxes forever, starting today
The Auerbach-Kotlikoff model: solving previously intractable dynamic fiscal policy problems
Why deficits aren't free money: debunking Olivier Blanchard's "growth rate > safe rate" argument
Carbon taxation as Pareto improvement: making every generation in every region better off
From cocktail party questions to MaxiFi Planner: economics-based financial planning for everyone
Portfolio choice and lifetime utility maximization: integrating taxes, Social Security, and spending
Don't borrow for college, revealed preferences, and the distinction between job vs. career
Economics as prescriptive science: economists should prescribe solutions like doctors, not just describe problems
Key Takeaways
Official deficit and debt numbers are economically meaningless—they're just arbitrary language choices. The equations of economics don't tell you which government obligations to label "official" (on the books) versus "unofficial" (off the books). Social Security, Medicare, and Medicaid liabilities are just as real as Treasury bonds, but only one appears in official debt calculations. This is pure linguistics, not economics—like how Einstein showed absolute time and space aren't well-defined because physics equations don't define them. The US fiscal gap (present value of all outlays minus all receipts) requires either 27% higher taxes or equivalent spending cuts, forever, starting immediately—yet we talk about meaningless deficit numbers instead.
The "growth rate exceeds safe rate therefore deficits are free" argument is fundamentally flawed. Olivier Blanchard's 2019 AEA presidential address used a rigged two-period model with “crazy parameters” to argue that running deficits can make everyone better off. But his gains came entirely from fixing a separate risk-sharing problem, not from the growth-rate-safe-rate relationship. Once you properly share risk across generations (sometimes transferring from old to young, not just young to old), there's no scope for unilateral transfers. Government bonds have low rates partly because government creates its own risk—when Trump changes tariff policy daily or threatens Social Security, people flee to safety. Running deficits still helps current generations and hurts young/future generations, exactly as in a deterministic world.
Computational economics enabled answering transition questions that were previously impossible. Before computers and the Auerbach-Kotlikoff model, economists could only solve two-period models—they couldn't answer questions like "if we reform taxes or run Social Security deficits, how will that affect the economy's labor supply, saving, and growth over 80 years?" The curse of dimensionality (too many possible wealth distributions across age groups) made non-linear dynamic problems intractable. Using projection methods and specialized algorithms, Larry and colleagues enabled realistic lifecycle modeling with 80 periods, overlapping generations, and internally consistent expectations—making quantitative fiscal policy analysis possible.
Comprehensive financial planning requires solving the full lifetime optimization problem simultaneously. Traditional financial planning often addresses components separately—portfolio allocation here, Social Security timing there, tax planning elsewhere. Economics-based planning solves everything together: maximize expected utility while simultaneously accounting for taxes, Social Security optimization, Roth conversions, withdrawal timing, housing decisions, bequest motives, and portfolio choice. This integrated approach often reveals that anxious retirees could safely spend more if they reduced portfolio risk—they won't increase spending if markets rise (no upside) but must cut spending if markets crash (pure downside). Understanding this helps align investment strategy with actual consumption goals rather than abstract portfolio metrics.
Economists must move from descriptive to prescriptive—we can't just study problems without solving them. Imagine doctors who study cancer but never operate or administer chemotherapy—that's how economics currently functions. We have tools to help everyone with personal finances (MaxiFi Planner), climate policy (Pareto-improving carbon taxation), fiscal sustainability (generational accounting), yet we focus on describing mistakes rather than prescribing solutions. Economics matters when it improves real lives: helping people optimize Social Security benefits, showing governments how to achieve fiscal balance, enabling individuals to smooth consumption and maximize lifetime utility. The profession must embrace its role as prescriptive science.
Timestamps
00:00 - Welcome and Larry's journey: torn between law and economics at Penn
03:00 - Getting fired from UCLA and Yale for "making colleagues feel insecure"
04:00 - BU's meteoric rise: from ranked 86th to 7th in 12 years
06:00 - Fiscal and generational accounting: seminal contributions to public policy
13:00 - Why deficit/debt numbers are meaningless: the "deficit delusion"
16:00 - US fiscal gap: 7% of GDP forever = 27% tax increase needed immediately
21:00 - Auerbach-Kotlikoff model: solving intractable dynamic fiscal policy problems
28:00 - Carbon taxation as win-win: Pareto improvements for all generations globally
30:00 - Debunking "deficits are free": growth rate vs. safe rate fallacy
35:00 - From cocktail parties to MaxiFi: origin story of economics-based financial planning
39:00 - Integrated lifetime optimization: portfolio choice, taxes, and spending decisions
45:00 - Don't borrow for college, Money Magic book, revealed preferences
49:00 - Rapid-fire questions: love, hate, thinking as drug, guitar, Gorbachev on bank note
About Larry Kotlikoff
Laurence J. Kotlikoff is William Fairfield Warren Distinguished Professor of Economics at Boston University, where he has taught since 1984 and served as department chair during the program's meteoric rise from 86th to 7th in national rankings. Named by The Economist as one of the world's 25 most influential economists, Larry is a Fellow of the American Academy of Arts and Sciences, Fellow of the Econometric Society, Research Associate of the National Bureau of Economic Research, and President of Economic Security Planning, Inc.
Larry earned his BA in economics from the University of Pennsylvania (1973) and PhD in economics from Harvard University (1977), studying under mentors including Martin Feldstein. He taught at UCLA (1977-1980) and Yale (1980-1983) before joining BU, and served as Senior Economist at President Reagan's Council of Economic Advisers (1981-1982), where he nearly got fired four times for contradicting supply-side economics with actual data.
Larry is author or co-author of 21 books including New York Times bestseller Get What's Yours: The Secrets to Maxing Out Your Social Security (with Philip Moeller and Paul Solman), Money Magic: An Economist's Secrets to More Money, Less Risk, and a Better Life (2022 top personal finance book), and Generational Accounting. He created MaxiFi Planner (maxifi.com), ranked by Bankrate as one of the top three financial planning tools—comprehensive software that applies rigorous economic methodology to solve the full lifetime utility maximization problem, integrating portfolio choice, tax optimization, Social Security timing, and spending decisions in a unified framework. His columns appear regularly in major publications including The New York Times, Wall Street Journal, Financial Times, Bloomberg, and Forbes.
Learn more at kotlikoff.net
Stay Connected
Want insights like this delivered to your inbox?
Subscribe to Wealth, Empowered
Twice-monthly analysis on markets, behavioral finance, and wealth strategy. Join 1,000+ subscribers who receive sophisticated thinking without the superfluous complexity.
Share This Episode
Found this valuable? Share it with someone who'd benefit.
Disclaimer
The content of "Treussard Talks" is for informational and educational purposes only and should not be considered financial advice. The views expressed are those of the host and guests and do not necessarily reflect the opinions of Treussard Capital Management or its affiliates. Consult your own financial advisor before making any investment decisions. For full disclosures, visit treussard.com.