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Movement for
State Spending Caps Picks Up Momentum
Drifting to
future bankruptcy
The 2006 Budget Numbers Show Impact of Pro-Growth Tax Policy,
But Also Continued Spending Increases
U.S. Comptroller General Warns the Nation of Economic Calamity
What's the real
federal deficit?
U.S. Comptroller General Warns the Nation of Economic Calamity
Dave Eberhart, NewsMax.com
Thursday,
Aug. 3, 2006
The Comptroller General of the United States warns the nation
will go broke within a generation - unless it takes radical
steps now to rein in out-of-control federal spending.
In an exclusive interview with NewsMax, Comptroller David M.
Walker, explained his mission: Save America from the brink of
financial disaster.
Walker has revealed America's collision course in computer
simulations that show balancing the budget in 2040 (under the
status quo of spending like there's no tomorrow) could require
cutting total federal spending by an incredible 60 percent - or
raising federal taxes 200 percent over today's level.
Serving a 15-year appointed term that began when he took his
oath of office on Nov. 9, 1998, this no-nonsense certified
public accountant is the nation's chief accountability officer
and head of the U.S. Government Accountability Office (GAO).
Walker has won plaudits from both Republicans and Democrats
for his no-nonsense straight talk about the nation's current
economic crisis.
In his wide-ranging interview with NewsMax, Walker offered a
candid assessment of the problems and risks facing Americans
over the next several decades.
Among his key assessments:
· Prescription
Drugs:: Walker says that the prescription drug plan is the
"poster case for what is wrong with Washington."
He notes that when Congress first took up the matter of
Medicare prescription drugs, estimates placed the cost at $300
billion.
But he argues that both Congress and the administration
simply downplayed or ignored the true costs of the program.
Today, the nation will have to pay out for the program $8
trillion-plus in current dollar terms.
Walker also detailed that when the Medicare actuary of the
Center for Medicare/Medicaid Services calculated the true costs
of the program, he "was told he could not tell the Congress or
else he might lose his job."
"That not only was unethical but it was illegal, and nobody
has been held accountable for it," an angry Walker said.
·
Defense Budget: Walker argues that Defense Department
simply is out of control and that basic rules of accountability
don't apply.
He said that although it received a whopping $500 billion in
appropriations, the Defense Department "is the only agency in
the federal government that cannot adequately account for its
assets and its expenditures - and cannot withstand an outside
financial statement audit."
Walker grades the agency with a "D" on "economy, efficiency,
transparency, and accountability." He added, "And it has not
been held accountable."
·
The Nation's Debt: Walker says the United States risks
losing its pre-eminence around the globe because of its growing
status as a debtor nation.
He ominously notes that "last year was the first year since
1933 that Americans spent more money than they took home and, as
you probably recall, 1933 was not a good year for the United
States."
Because the United States has to rely on foreign central
banks to finance its deficits, it places itself in a high-risk
situation.
"It means that other players hold an increasing percentage of
our nation's mortgage; and it means the debt service is going to
go overseas rather than domestic; and it means that we will have
less leverage on them with regard to economic, foreign policy
and national security issues - and they will have more leverage
on us."
·
Entitlements: The United States must rein in entitlement
programs or face economic woes, he argues.
Walker says that today the United States is "about 3 percent
short of the GDP between what we are taking in and what we are
spending, and it is going to get worse when the [baby] boomers
start to retire - primarily because of entitlement programs.
"You can't solve the problem without fundamental reform of
the entitlement programs. Medicare is going to require much more
dramatic and fundamental reforms than Social Security because
the problem is six to seven times greater than Social Security.
"It is going to take entitlement reform; it is going to take
spend constraint; and it is going to take some revenue
enhancements."
Walker's Mission
Walker's frequent refrain is simply, "The status quo is not
an option!"
He's been telling his story to Congress, the media, and
anyone else who will listen.
His globetrotting has included speaking appearances at
Gresham College London, England; the London School of Economics;
the Atlanta Rotary Club; the National Press Foundation; and the
National Conference of State Legislatures - just to name a few.
Walker likes slide shows – to better facilitate the ominous
graphs and charts that highlight his message.
The long-term modeling that is at the heart of his warning is
adapted from work done at the Federal Reserve Bank of New York
and the various new estimates that become available from the
Congressional Budget Office and from the Social Security and
Medicare Trustees.
Walker is not overly impressed with the recently touted spurt
of economic growth and its accompanying windfall of unexpected
federal revenues.
"Faster economic growth can help, but it cannot solve the
problem," the straight-shooting former public trustee for Social
Security and Medicare emphasizes.
Here's where Walker typically clicks on one of his
attention-grabbing slides on the subject.
The audience digests as the GAO chief reads from the screen:
·
Closing the current long-term fiscal gap based on reasonable
assumptions would require real average annual economic growth in
the double-digit range every year for the next 75 years.
·
During the 1990s, the economy grew at an average 3.2 percent per
year.
"We cannot simply grow our way out of this problem," he
announces somberly.
When playing to a home crowd of working stiffs, Walker
follows with another body blow that penetrates the reality world
of mom and pop: It's called, benignly enough, "Our Total Fiscal
Burden." But when broken down as to show the impact on every
man, woman, and child in the country, it can knock the wind from
the collective lungs.
Up pops another eye-widening slide:
·
Total fiscal exposures: $46.4 trillion.
·
Total household net worth: $51.1 trillion.
·
Burden/net worth ratio: 91 percent.
Forget the accounting jargon; what's my personal bill for my
government's runaway spending?
As if to say "Glad you asked that," there follows the grim
tally:
·
Per person: $156,000.
·
Per full-time worker: $375,000.
·
Per household: $411,000.
Gee, that sounds a bit extreme. Can our pocketbooks handle
that tab?
Just how extreme is explained by the next slide:
·
Median U.S. household income: $44,389.
·
Disposable personal income per capita: $30,431.
After learning that we are a wee bit short on the greenbacks,
Walker switches back to the macro-picture, revealing yet another
disturbing picture:
"The United States may be the only superpower, but compared
to most other OECD countries [countries belonging to the
Organization for Economic Co-operation and Development] on
selected key economic, social, and environmental indicators, on
average, the U.S. ranks 16 out of 28," announces Walker to an
accompanying slide.
Included in those OECD indicators are such down-to-earth
items as quality of life, education, and prices.
Walker, the author of "Retirement Security: Understanding and
Planning Your Financial Future," is for sure no administration
spinner.
He will tell you that he is only following a grand tradition
of the bipartisan GAO, which for more than a decade has
published the results of its long-term budget simulations in
reports and testimonies.
Well, at least some of the states are doing well these days -
those increased property values and all . . .
Don't get too wound up on that front, warns Walker. States
are reeling under their own fiscal challenges, including
unsustainable Medicaid cost increases; unfunded liabilities of
state retirement systems; education funding squeezed by
competing demands; infrastructure maintenance and expansion
needs given unparalleled sprawl and congestion; and - lest we
forget - emergency preparedness response and recovery needs.
The bottom line, according to Walker: "We must make tough
choices, and the sooner the better."
The chief financial overseer advises that a multipronged
approach is needed:
·
Revise existing budget processes and financial reporting
requirements.
·
Restructure existing entitlement programs.
·
Re-examine the base of discretionary and other spending.
·
Review and revise tax policy and enforcement programs -
including tax expenditures.
"Everything must be on the table," says Walker.
While not an optimist, Walker does see some progress. He
happily points out that the White House now "readily acknowledge
now that we face a huge long-range structural deficit that has
to be addressed."
Meanwhile, beating the drum for fiscal reform is but one
facet of the immense GAO workload.
Walker's agency must advise not only Congress, but the heads
of executive agencies -- such as Homeland Security, the
Environmental Protection Agency, the Department of Defense, and
Health and Human Services -- about making government more
effective and responsive.
To do the job, Walker heads up some 3,200 employees and
manages a budget of $474.5 million.
At the end of fiscal 2005, 85 percent of the 1,752
recommendations the GAO made in fiscal year 2001 had been
implemented, notes the agency. But is the all-important keeper
of the federal purse strings, the Congress, reacting to Walker's
big-picture warnings of fiscal crisis ahead?
Back to Top |
|
What's the real
federal deficit?
How many billions (or trillions) of dollars depends on how
you do the accounting
By
Dennis Cauchon
USA TODAY
The federal
government keeps two sets of books.
The set the
government promotes to the public has a healthier bottom line: a
$318 billion deficit in 2005.
The set the
government doesn't talk about is the audited financial statement
produced by the government's accountants following standard
accounting rules. It reports a more ominous financial picture: a
$760 billion deficit for 2005. If Social Security and Medicare
were included — as the board that sets accounting rules is
considering — the federal deficit would have been $3.5 trillion.
Congress has
written its own accounting rules — which would be illegal for a
corporation to use because they ignore important costs such as
the growing expense of retirement benefits for civil servants
and military personnel.
Last year, the
audited statement produced by the accountants said the
government ran a deficit equal to $6,700 for every American
household. The number given to the public put the deficit at
$2,800 per household.
A growing number of
Congress members and accounting experts say it's time for
Congress to start using the audited financial statement when it
makes budget decisions. They say accurate accounting would force
Congress to show more restraint before approving popular
measures to boost spending or cut taxes.
“We're a
bottom-line culture, and we've been hiding the bottom line from
the American people,” says Rep. Jim Cooper, D-Tenn., a former
investment banker. “It's not fair to them, and it's delusional
on our part.”
The House of
Representatives supported Cooper's proposal this year to ask the
president to include the audited numbers in his budgets, but the
Senate did not consider the measure.
Good accounting is
crucial at a time when the government faces long-term challenges
in paying benefits to tens of millions of Americans for
Medicare, Social Security and government pensions, say advocates
of stricter accounting rules in federal budgeting.
“Accounting
matters,” says Harvard University law professor Howell Jackson,
who specializes in business law. “The deficit number affects how
politicians act. We need a good number so politicians can have a
target worth looking at.”
The audited
financial statement — prepared by the Treasury Department —
reveals a federal government in far worse financial shape than
official budget reports indicate, a USA TODAY analysis found.
The government has run a deficit of $2.9 trillion since 1997,
according to the audited number. The official deficit since then
is just $729 billion. The difference is equal to an entire
year's worth of federal spending.
Congress and the
president are able to report a lower deficit mostly because they
don't count the growing burden of future pensions and medical
care for federal retirees and military personnel. These
obligations are so large and are growing so fast that budget
surpluses of the late 1990s actually were deficits when the
costs are included.
The Clinton
administration reported a surplus of $559 billion in its final
four budget years. The audited numbers showed a deficit of $484
billion.
In addition,
neither of these figures counts the financial deterioration in
Social Security or Medicare. Including these retirement programs
in the bottom line, as proposed by a board that oversees
accounting methods used by the federal government, would show
the government running annual deficits of trillions of dollars.
The Bush
administration opposes including Social Security and Medicare in
the audited deficit. Its reason: Congress can cancel or cut the
retirement programs at any time, so they should not be
considered a government liability for accounting purposes.
The government's
record-keeping was in such disarray 15 years ago that both
parties agreed drastic steps were needed. Congress and two
presidents took a series of actions from 1990 to 1996 that:
•Created the
Federal Accounting Standards Advisory Board to establish
accounting rules, a role similar to what the powerful Financial
Accounting Standards Board does for corporations.
•Added chief
financial officers to all major government departments and
agencies.
•Required annual
audited financial reports of those departments and agencies.
•Ordered the
Treasury Department to publish, for the first time, a
comprehensive annual financial report for the federal government
— an audited report like those published every year by
corporations.
These laws have
dramatically improved federal financial reporting. Today, 18 of
24 departments and agencies produce annual reports certified by
auditors. (The others, including the Defense Department, still
have record-keeping troubles so severe that auditors refuse to
certify the reliability of their books, according to the
government's annual report.)
The culmination of
improved record-keeping is the “Financial Report of the U.S.
Government,” an annual report similar to a corporate annual
report. (The 158-page report for 2005 is available online at
fms.treas.gov/fr/index.html.)
The House Budget
Committee has tried to increase the prominence of the audited
financial results. When the House passed its version of a budget
this year, it included Cooper's proposal asking Bush to add the
audited numbers to the annual budget he submits to Congress. The
request died when the House and Senate couldn't agree on a
budget. Cooper has reintroduced the proposal.
The Federal
Accounting Standards Advisory Board, established under the first
President Bush in 1990 to set federal accounting rules, is
considering adding Social Security and Medicare to the
government's audited bottom line.
Adding those costs
would make federal accounting similar to that used by
corporations, state and local governments and large non-profit
entities such as universities and charities. It would show the
government recording enormous losses because the deficit would
reflect the growing shortfalls in Social Security and Medicare.
The government
would have reported nearly $40 trillion in losses since 1997 if
the deterioration of Social Security and Medicare had been
included, according to a USA TODAY analysis of the proposed
accounting change. That's because generally accepted accounting
principles require reporting financial burdens when they are
incurred, not when they come due.
For example: If
Microsoft announced today that it would add a drug benefit for
its retirees, the company would be required to count the future
cost of the program, in today's dollars, as a business expense.
If the benefit cost $1 billion in today's dollars and retirees
were expected to pay $200 million of the cost, Microsoft would
be required to report a reduction in net income of $800 million.
This accounting
rule is a major reason corporations have reduced and limited
retirement benefits over the last 15 years.
The federal
government's audited financial statement now accounts for the
retirement costs of civil servants and military personnel — but
not the cost of Social Security and Medicare.
The new Medicare
prescription-drug benefit alone would have added $8 trillion to
the government's audited deficit. That's the amount the
government would need today, set aside and earning interest, to
pay for the tens of trillions of dollars the benefit will cost
in future years.
Standard accounting
concepts say that $8 trillion should be reported as an expense.
Combined with other new liabilities and operating losses, the
government would have reported an $11 trillion deficit in 2004 —
about the size of the nation's entire economy.
The federal
government also would have had a $12.7 trillion deficit in 2000
because that was the first year that Social Security and
Medicare reported broader measures of the programs' unfunded
liabilities. That created a one-time expense.
The proposal to add
Social Security and Medicare to the bottom line has deeply
divided the federal accounting board, composed of government
officials and “public” members, who are accounting experts from
outside government.
The six public
members support the change. “Our job is to give people a clear
picture of the financial condition of the government,” board
Chairman David Mosso says. “Whether those numbers are good or
bad and what you do about them is up to Congress and the
administration.”
The four government
members, who represent the president, Congress and the
Government Accountability Office, oppose the change. The
retirement programs do “not represent a legal obligation because
Congress has the authority to increase or reduce social
insurance benefits at any time,” wrote Clay Johnson III, then
acting director of the president's Office of Management Budget,
in a letter to the board in May.
Why the big
difference between the official government deficit and the
audited one?
The official number
is based on “cash accounting,” similar to the way you track what
comes into your checking account and what goes out. That works
fine for paying today's bills, but it's a poor way to measure a
financial condition that could include credit card debt, car
loans, a mortgage and an overdue electric bill.
The audited number
is based on accrual accounting. This method doesn't care about
your checking account. It measures income and expenses when they
occur, or accrue. If you buy a velvet Elvis painting online, the
cost goes on the books immediately, regardless of when the check
clears or your eBay purchase arrives.
Cash accounting
lets income and expenses land in different reporting periods.
Accrual accounting links them. Under cash accounting, a $25,000
cash advance on a credit card to pay for a vacation makes the
books look great. You are $25,000 richer! Repaying the credit
card debt? No worries today. That will show up in the future.
Under accrual
accounting, the $25,000 cash from your credit card is offset
immediately by the $25,000 you now owe. Your bottom line hasn't
changed. An accountant might even make you report a loss on the
transaction because of the interest you're going to pay.
“The problem with
cash accounting is that there's a tremendous opportunity for
manipulation,” says University of Texas accounting professor
Michael Granof. “It's not just that you fool others. You end up
fooling yourself, too.”
Federal law
requires that companies and institutions that have revenue of $1
million or more use accrual accounting. Microsoft used accrual
accounting when it reported $12 billion in net income last year.
The American Red Cross used accrual accounting when it reported
a $445 million net gain.
Congress used cash
accounting when it reported the $318 billion deficit last year.
Social Security
chief actuary Stephen Goss says it would be a mistake to apply
accrual accounting to Social Security and Medicare. These
programs are not pensions or legally binding federal
obligations, although many people view them that way, he says.
Social Security and
Medicare are pay-as-you go programs and should be treated like
food stamps and fighter jets, not like a Treasury bond that must
be repaid in the future, he adds. “A country doesn't record a
liability every time a kid is born to reflect the cost of
providing that baby with a K-12 education one day,” Goss says.
Tom Allen, who will
become the chairman of the federal accounting board in December,
says sound accounting principles require that financial
statements reflect the economic value of an obligation.
“It's hard to argue
that there's no economic substance to the promises made for
Social Security and Medicare,” he says.
Social Security and
Medicare should be reflected in the bottom line because that's
the most important number in any financial report, Allen says.
“The point of the
number is to tell the public: Did the government's financial
condition improve or deteriorate over the last year?” he says.
If you count Social
Security and Medicare, the federal government's financial health
got $3.5 trillion worse last year.
Rep. Mike Conaway,
R-Texas, a certified public accountant, says the numbers
reported under accrual accounting give an accurate picture of
the government's condition. “An old photographer's adage says,
‘If you want a prettier picture, bring me a prettier face,' ” he
says.
Back to Top
by Daniel
J. Mitchell, Ph.D.
WebMemo #1237
|
The
Office of Management and
Budget recently released
final budget numbers for
the 2006 fiscal year
(FY2006), which began
October 1, 2005 and
ended September 30,
2006. These end-of-year
numbers are particularly
noteworthy because they
show pro-growth tax rate
reductions, such as
those made in 2003 tax
legislation, do boost
growth and thus expand
taxable income,
resulting in more tax
revenues than shown by
static estimates. But
the numbers also show
that federal spending is
still growing too fast,
a fact often
overshadowed by focus on
the budget deficit.
Moreover, the growing
burden of entitlement
programs will make
spending an even bigger
problem in the future.
The FY2006 numbers
demonstrate the benefits
of maintaining
pro-growth tax policies,
but also the need to
reduce spending and
reform entitlement
programs.
Key numbers from FY2006
-
Federal tax
collections
jumped by 11.8
percent,
climbing from
$2.15 trillion
in FY2005 to
$2.41 trillion
in FY2006. This
$254 billion
increase was
more than three
times faster
than needed to
keep pace with
inflation.
Federal tax
revenues reached
18.4 percent of
gross domestic
product (GDP),
above the
post-World War
II average of
18.3 percent.
-
Federal spending
jumped by 7.4
percent,
climbing from
$2.47 trillion
in FY2005 to
$2.65 trillion
in FY2006. This
$182 billion
increase was
about two times
faster than
needed to keep
pace with
inflation.
Entitlement
programs alone
grew by almost
$100 billion.
Federal
government
outlays now
consume about
20.3 percent of
GDP.
-
Because tax
revenues
increased by
more than
outlays, the
share of the
budget financed
by borrowing
fell from $319
billion in 2005
to $248 billion
in 2006.
Debt-financed
spending now
consumes 1.9
percent of GDP.
-
The national
debt fell as a
share of
national
economic output,
dropping from
37.4 percent of
GDP to 37.0
percent of GDP.
This is because
debt (the
numerator in the
debt/GDP ration)
did not rise as
quickly as
national
economic output
(the denominator
in the debt/GDP
ratio).
Many
are praising these
higher tax revenues as
proof that the 2003 tax
rate reductions have
been successful. Indeed,
lower tax rates on work,
capital gains, and
dividends have boosted
economic activity. This
expansion of economic
activity has created
more taxable income,
leading to more revenue
for government—what
economists call a Laffer
Curve effect. Tax
revenues in 2006 were
about $40 billion higher
than Congressional
Budget Office
projections in January
2003—before the tax cut
was enacted. This is
evidence that good tax
policy boosts economic
performance. But, this
additional revenue also
has the unfortunate
effect of masking the
problem of excessive
government spending.
Indeed, new revenue
exacerbates the problem
since it encourages even
more spending.
Lessons from the 2006
Budget Numbers
-
Good tax policy
generates a Laffer
Curve effect and can
lead to a net result
of more revenues.
The Bush
Administration has
demonstrated why
some tax cuts are
more desirable than
others. The 2003 tax
bill included
significant
reductions in
marginal tax rates
on work, saving, and
investment. The
subsequent economic
growth led to the
significant increase
in taxable income,
which resulted in
the boost in tax
revenues evident
today. The faster
economic growth
unambiguously is
desirable, and
America’s
competitive position
in the world has
improved. The 2001
tax cut, by
contrast, with its
short-term focus on
rebates and
credits—lower tax
rates were included,
but deferred until
the future—did very
little to improve
incentives for
productive behavior.
As a result, there
was little economic
benefit. The Laffer
Curve-induced
increase in tax
revenue from the
2003 bill, however,
is a mixed blessing.
On the plus side,
politicians likely
now have a better
understanding of the
benefits of lower
tax rates, but they
also have less
incentive to control
spending.
-
Spending is the
problem, not
deficits. America’s
economic health,
today and in the
future, relies in
part on keeping
government from
becoming an even
bigger burden. This
is a huge challenge
since the future
spending explosion
from entitlement
programs will make
recent spending
increases seem
paltry. Sole focus
on the deficit can
induce a sense of
complacency about
the threat of big
government. A good
example is Sweden.
That nation has a
budget surplus, but
since taxes and
spending consume
more than 50 percent
of GDP, the economy
is weak,
unemployment is
high, and the
average Swede has
less than 50 percent
as much disposable
income as the
average American.
Conclusion
The
FY2006 budget numbers
are mixed signs of good
fiscal policy. The huge
revenue gains of 11.8
percent on the tax side
of the ledger show the
pro-growth impact of
lower tax rates. The
spending side of the
ledger disappoints as
spending jumped by 7.4
percent. This increase
in spending does not
bode well given the need
to reform entitlement
spending to prevent a
deeply worrying burden
of government. With the
entitlement challenge on
the horizon, there is
all the more reason to
ensure that pro-growth
tax policies are kept in
place.
Daniel J. Mitchell,
Ph.D.,
is McKenna Senior
Research Fellow in the
Thomas A. Roe Institute
for Economic Policy
Studies at The Heritage
Foundation.
Back to Top
|
Posted
on Sun,
Oct. 22,
2006 |
 |
|
|
|
The
status
quo,
we're
led to
believe,
is the
safe
bet, the
conservative
option,
the
riskless
alternative.
But when
the
status
quo
involves
driving
off a
cliff,
maintaining
it is
the
risky,
radical,
indeed,
suicidal
choice.
The
United
States
is now
engaged
in such
"staticide"
- the
maintenance
of a
suicidal
status
quo. Its
policies
are
driving
the
country
to
fiscal,
financial
and
economic
ruin.
The only
question
is when
the
crash
will
occur
and
which
households
and
businesses
will be
in the
passenger
seats.
Financial
markets
have, it
seems,
no
inkling
of
what's
coming.
But
these
markets
often
need a
two-by-four
across
the
forehead
to come
to their
senses.
This is
one of
those
times.
Long-term
U.S.
Treasury
Bonds
are
yielding
5
percent
when, in
fact,
the
United
States
is
facing
bankruptcy.
Bankruptcy
may seem
a strong
word,
especially
when the
economy
is
booming,
the
deficit
shrinking,
and the
Dow
nuzzling
12,000.
But
economic
growth
and
rising
stock
markets
don't
preclude
economic
collapse.
Recall:
The
Great
Depression
followed
the
Roaring
Twenties.
Or
consider
Argentina's
decade
of
outstanding
growth
and
stock
market
appreciation
before
going
belly-up
in 2002.
As
for the
deficit,
it's a
figment
of
government
fiscal
labeling
with no
economic
content.
If you
want to
talk
turkey
with
respect
to our
nation's
finances,
consider
the U.S.
fiscal
gap,
which
measures
the
present
value
difference
between
Uncle
Sam's
projected
future
expenditures
and tax
receipts.
It
stands
at $63
trillion!
This
figure
captures
all
implicit
as well
as
explicit
U.S.
liabilities
and
comes by
way of a
highly
reliable
source -
the U.S.
Treasury.
Former
Fed and
Treasury
economists
Jagadeesh
Gokhale
and Kent
Smetters
initially
measured
the U.S.
fiscal
gap in a
highly
detailed
2002
U.S.
Treasury
study
commissioned
by
then-Treasury
Secretary
Paul
O'Neal
and
approved
by Fed
leader
Alan
Greenspan.
The
study,
which
showed a
$45
trillion
gap, was
censored
the day
O'Neal
was
fired
(actually
drop-kicked)
by the
White
House.
Four
years
later,
after
more tax
cuts,
huge
discretionary
spending
increases,
the
dramatic
expansion
of
Medicare
to cover
prescription
drugs,
and the
accrual
of
interest,
Gokhale
and
Smetters
put the
fiscal
gap at
$63
trillion.
This
figure
is
massive.
If
anything,
it's an
underestimate
since it
relies
on
highly
optimistic
longevity
and
health-care
spending
assumptions.
To
sense
why the
U.S.
fiscal
gap is
so big,
multiply
$30,264
by 77
million.
This
$30,264
figure
is 80
percent
of U.S.
per
capita
GDP.
It's
also
what
today's
seniors
are
receiving
each
year, on
average,
in
Social
Security,
Medicare
and
Medicaid
benefits.
The 77
million
is the
number
of
boomers
poised
to start
collecting
these
benefits.
The
product
of the
two
numbers
is $2.3
trillion.
This is
what the
United
States
would
spend
this
year
were
today's
elderly
as
numerous
as
tomorrow's.
If
$2.3
trillion
sounds
big, it
is. It's
18
percent
of our
$13
trillion
economy.
But were
today
tomorrow,
we'd be
paying
the
boomers
much
more
than
$30,264
per
head,
since
the
health-care
component
of this
figure
is set
to grow
much
more
rapidly
than
per-capita
GDP. An
optimistic
forecast
would
increase
the
$30,264
by 50
percent,
raising
our
today-is-tomorrow
senior
spending
from 18
to 26
percent
of GDP.
Today's
actual
senior
spending
is only
9
percent
of GDP.
Another
way to
assess
U.S.
insolvency
is to
consider
the
immediate
and
permanent
fiscal
adjustments
needed
to close
the
country's
fiscal
gap.
Here are
some
options:
a 70
percent
increase
in
personal
and
corporate
income
taxes;
a 109
percent
hike in
payroll
taxes;
a 91
percent
cut in
federal
discretionary
spending;
or
a 45
percent
cut in
Social
Security
and
Medicare
benefits.
Adopting
any of
these
policies
or some
combination
of them
would be
incredibly
painful.
Waiting
is no
alternative.
It just
makes
the
requisite
adjustments
larger
and more
painful.
What
about
economic
growth?
Can't
the
United
States
outgrow
its
obligations?
Theoretically
yes, but
practically
no. The
postwar
norm is
for
senior
benefits
to grow
roughly
twice as
fast as
the
economy.
Yes,
there
are ways
to
restructure
U.S.
entitlements
to limit
benefit
growth
and
still
save the
day. But
Washington
has no
appetite
for
anything
radical.
Indeed,
Washington's
concerted
approach
to our
nation's
demographic/fiscal
crisis
is to
ignore
it.
This
"What?
Me
Worry?"
attitude
is in
marked
contrast
to that
of
America's
trading
partners
in
Europe
and
Japan.
These
countries
face
much
worse
demographics.
But
Japan,
Italy,
Germany,
the
United
Kingdom,
and
other
countries
- even
France -
have
enacted
major
pension
changes.
And each
of these
countries
has
direct
control
of its
health-care
expenditures.
For
its
part,
the
United
States
has made
no
serious
changes
to
Social
Security
since
1983;
has a
unique
fee-for-service
system
in which
health-care
spending
is on
autopilot;
and has
just
taken
steps to
expand,
dramatically
and
permanently,
its
health-care
spending.
As a
result,
the
United
States
may well
be in
worse
fiscal
shape
than any
other
developed
country
and,
indeed,
most
developing
countries,
including
Turkey,
Brazil
and
Argentina.
Knowing
this for
sure is
difficult
since we
have no
systematic
cross-country
fiscal-gap
statistics.
Instead,
we have
inherently
meaningless
official
statistics
on
explicit
debts
and
deficits.
In the
United
States,
official
debt in
the
hands of
the
public
is
roughly
$5
trillion
- a
small
fraction
of the
country's
true $63
trillion
liability.
The
U.S.
fiscal
excesses
are
showing
up,
however,
in other
ways and
in other
statistics.
Take the
nation's
incredibly
low
national
savings
rate - 2
percent
now vs.
12
percent
in the
1960s.
This
long-term
consumption
spree
primarily
reflects
household,
not
government,
spending
patterns.
And
within
the
household
sector,
it's the
elderly
whose
consumption
has
risen.
Indeed,
average
consumption
of
70-year-olds
compared
with
that of
40-year-olds
has
roughly
doubled
since
the
early
1960s.
Low
U.S.
savings
means
low
investment
in the
United
States -
unless
foreigners
do the
investing.
This is
precisely
what is
happening
and why
the U.S.
current-account
deficit,
which
measures
net
investment
in the
United
States
by
foreigners,
is so
big.
Today,
foreigners
are
investing
four
dollars
in the
United
States
for
every
dollar
invested
by
Americans.
Much of
this
foreign
investment
comes as
purchases
of U.S.
financial
securities,
particularly
U.S.
government
bonds.
China
alone
holds
close to
$750
billion
in U.S.
Treasuries.
Overall,
40
percent
of U.S.
Treasuries
are held
outside
the
country.
Once
foreign
as well
as
American
bondholders
get a
real
whiff of
America's
true
fiscal
straits,
they
will
dump
their
bonds.
They
will do
so with
the
knowledge
that
countries
that
cannot
pay
their
bills
end up
defaulting
on their
debt
either
explicitly
or
implicitly
by
printing
money.
Resorting
to the
mint or
printing
press to
finance
spending
dates at
least to
Rome of
the
third
century.
But such
a
practice
means
one sure
thing -
inflation.
And
given
the
degree
to which
U.S.
spending
is
explicitly
and
implicitly
linked
to
inflation,
it will
mean
high
inflation
if not
hyperinflation.
This, in
turn,
will
mean
high
interest
rates,
plunging
bond and
stock
prices,
a
rapidly
declining
dollar,
and a
major
and
sustained
decline
in U.S.
economic
performance.
Is
fiscal
and
economic
collapse
inevitable?
No. Were
I made
Economic
Czar for
a day, I
would
implement
the New
New Deal
- four
simple,
transparent,
efficient,
equitable,
and
radical
changes
in
Social
Security,
health
care,
tax and
government
spending,
discussed
in an
article
I wrote
with
Niall
Ferguson
(see
Online
Extra).
Done
together,
the
changes
we
propose
could
restore
fiscal
sanity
and
avoid
our
nation's
coming
generational
storm.
Unfortunately,
the
politicians
have no
stomach
for
sensible,
but
radical
solutions.
I sent
the
article
to all
100 U.S.
senators.
Not one
replied.
(So much
for my
hopes of
Czardom!)
So be
forewarned.
Things
are
heading
south.
The real
question
is how
to stay
solvent
when
Uncle
Sam
crashes
and
burns.
Here's
how:
A
borrower,
not a
lender
be. Dump
your
dollar-denominated
long-term
bonds
and
borrow
on a
long-term
basis.
You'll
avoid a
capital
loss on
the
bonds
you sell
and get
to repay
your
borrowing
in
watered-down
dollars.
Invest
in
Canada,
New
Zealand,
the
United
Kingdom,
and
other
countries
whose
fiscal
gaps are
close to
zero.
Position
yourself
against
a drop
in the
dollar.
Consider
only
U.S.
investments
that are
relatively
inflation-proof,
such as
Treasury
Inflation
Indexed
bonds,
commodities,
and real
estate
(once it
tanks).
Put
yourself
and your
workers
into
Roth
401(k)s
so they
won't
get
clobbered
by
future
tax
increases.
Plan
for the
downside.
When the
U.S.
economy
tanks,
make
sure you
aren't
dependent
solely
on the
U.S.
market
to make
a buck.
Finally,
hire a
big-time
K Street
lobbyist
to get
Congress
to stop
pursuing
staticide
and
close
the U.S.
fiscal
gap.
For
"Benefits
Without
Bankruptcy
- The
New New
Deal,"
by
Laurence
J.
Kotlikoff
and
Niall
Ferguson,
in the
Aug. 15
New
Republic,
go to
Kotlikoff's
home
page at
http://people.bu.edu/kotlikoff
and
search
for
"Benefits."
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© 2006 Philadelphia Inquirer and wire service
sources. All Rights
Reserved.
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Movement for State Spending Caps Picks Up Momentum
Author: J.D.
Tuccille
Published by: The Heartland Institute
Published in: Budget & Tax News
Publication date: November 2006
Millions of Americans across the country this November will have
an opportunity to decide the course of their states' financial
future, opting for controlled government growth and financial
responsibility ... or business as usual.
That is the choice in a series of ballot initiatives known by a
variety of names but sharing the aim of limiting growth in taxes
and government spending.
While there are differences from state to state, all of the
spending cap initiatives seek to limit annual state spending
increases to the rate of inflation plus increases in state
population, a measure known as P+I.
Following a P+I formula, the caps would not force a budget cut
in real dollars in lean years. State governments would be able
to spend at least as much in any given year as they did the year
before. Excess revenue would fill reserve funds that would be
used only during budget crises. Remaining excess revenue would
be returned to taxpayers annually.
In
many states, government is growing at a rate much faster than
the economy. When aligned with the P+I index, government
spending as a percentage of gross domestic product (GDP) would
remain stable.
Initiatives Coast to Coast
The states where voters are considering spending caps are a
diverse bunch. They range from Maine in the Northeast to Oregon
in the Northwest and include Michigan, Missouri, Montana,
Nebraska, and Oklahoma in between.
At
press time, the Missouri measure was tied up in court, awaiting
a ruling from the state supreme court on whether to put the
measure on the ballot. In mid-September a tax and spending
limitation in Nevada was struck down by that state's supreme
court.
"We are shocked that these big government union front groups
were able to muscle their way past the will of the people," said
Bob Adney, executive director of the Tax and Spending Control
Initiative (TASC) for Nevada. "Nevadans want TASC, and it
shouldn't be taken away from the ballot just because government
unions and special interests will say and do anything to keep
people from voting on this issue."
While not everybody is a fan of imposing financial discipline on
state governments, the various initiative efforts have quickly
built momentum.
Petitions Well Received
"The measure has been received very well in Nevada," said Adney.
"We needed to collect 83,184 valid signatures to get on the
ballot and we turned in 156,254. I think this shows just how
popular the measure truly is."
Scott Tillman of Michigan's Stop Overspending Committee
reported, "We had people lining up to circulate [petitions] and
we had people lining up to sign." His organization ultimately
turned in 503,000 signatures when only 317,000 were required to
achieve ballot status.
Likewise, Matt Evans, spokesperson for Oregon's Rainy Day
Amendment Committee, said, "the rainy day amendment is being
very well received as we travel around the state discussing it.
Oregonians recognize the need for the state government to be
prudent, and set something aside for the inevitable 'economic
rainy day' in our state."
Oregon activists gathered 161,652 signatures--well beyond the
required 100,840.
Government Unions Upset
Another common denominator among the spending cap efforts is the
nature of the opposition. Evans characterized the main opponents
of the Rainy Day Amendment as "the big government employee
unions."
Adney identified "the AFL-CIO and other government employee
unions" as the major opponents in Nevada.
Tillman noted his main opposition was the Defend Michigan
Coalition, which he described as "a coalition of people who
spend tax dollars."
The Defend Michigan Web site lists dozens of member
organizations, prominently featuring both associations of
government agencies and government employee unions such as the
American Federation of State, County, and Municipal Employees
and American Federation of Teachers.
NEA Spending Millions
Spending cap opponents have not been shy about committing major
resources to the efforts to defeat the initiatives.
"The National Education Association recently pledged $2 million
to defeating the Rainy Day Amendment," said Evans.
"Our opponents have been brutal here in Nevada," said Adney.
"They've sued us every step of the way on everything they can
throw at us. Also, they used 'blockers' during the petition
gathering stage of the campaign. These were hired thugs that
used intimidation, threats, coercion, slander, and even physical
force to try to stop us. We finally had to ask a judge for a
temporary restraining order against the group."
Still, the campaigns report they believe they are winning the
battle for public opinion.
Polls Encouraging
Before the Nevada Supreme Court's decision to keep the TASC off
the November ballot, newspaper polls showed the measure with a
54 to 59 percent approval rating with only 20 percent opposed
and the rest undecided, Adney said.
"Our internal polling shows it in the 60 percent support range,"
Adney said.
Michigan's Tillman pointed to a recent newspaper poll that had
initiative supporters "up by 10 points."
Oregon's Evans echoed his colleagues elsewhere, saying the Rainy
Day Amendment enjoys a "substantial lead" in polling.
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