Nation Faces Enormous Long-Term Fiscal Challenge
By Nick Schwellenbach
The next President and Congress need to exercise serious political leadership as the nation faces an unprecedented fiscal and economic hurricane, according to experts at a discussion Wednesday.
How will the U.S., which has spent far beyond its means for decades, get its fiscal health in order is a conversation largely still at the margins as governments and financial institutions around the world scramble to mitigate an ever-expanding financial crisis.
At a discussion sponsored by the non-profit New America Foundation and the Committee for a Responsible Federal Budget, an urgent tone was apparent as panelists raised hackles over the nation’s dire fiscal circumstances.
The concern was that the nation’s debt, funded largely by foreign lending, is too large and unsustainable and that the flow of easy credit which fuels government spending, economic growth and our standard of living may not last forever, unless the country starts paying off its debt.
“Nobody’s going to bailout America,” said David Walker, the government’s former top auditor and head of the non-profit Peter G. Peterson Foundation. “The fiscal clock is ticking.”
The country is “$55 trillion in the hole,” according to Walker, citing a tally of all public and private debt that Americans owe.
The problems and the solutions are in the hands of the whole country, but Washington is at the helm.
“The American people are not stupid, they understand that ultimately they’re going to have to sacrifice to try to deal with what is a very serious situation,” said Leon Panetta, former director of the Office of Management and Budget under President Clinton.
“The real question is whether the leadership of this country, the President and the Congress, are going to have the honesty to tell them exactly what the situation is,” said Panetta.
All the panelists believed the U.S. is in a recession. Due to the need to get the economy’s wheels moving with an infusion of government spending and reduced taxes, deficits will be hard to cut and will likely grow. But this short-term stimulus needs to be balanced within a long-term strategy to get the U.S. fiscally solvent, panelists said
“In the short run, the deficit is likely to get worse,” said Panetta.
Panelists said the next president may soon run deficits in the range of $700 billion to $1 trillion a year.
Recently, the government has been racking up yearly record-size deficits that now approach $500 billion. It is unclear howthe recent $700 billion Wall Street bailout package will be treated by government accountants.
Each year of deficits adds to the nation’s total debt.
Some types of deficit spending are considered better investments in strengthening the nation’s overall economy. Alice Rivlin, the founding director of the Congressional Budget Office, had specific ideas on how to spur growth.
Since an economic downturn is likely to stay with us a while, a stimulus package should heavily invest in things we need anyways, like infrastructure, that also “improve productivity of the economy in the long run,” said Rivlin.
The biggest and fastest growing parts of the federal budget are entitlements, such as Social Security and Medicare.
“Ironically, I think Social Security may be easier to fix in the current climate,” said Rivlin. “What was holding it up was dedication of one party to private accounts.”
“That’s not going to fly in this atmosphere,” said Rivlin, “No one’s going to turn their accounts over to Wall Street.”
The problems with Medicare and rapidly increasing healthcare costs are much more serious and difficult problems, she said.
Healthcare for everyone is “rising at an unsustainable rate” and “we need to use Medicare to make the healthcare system more efficient,” Rivlin said.
Spending is only one side of the equation and the revenue side of fiscal solvency cannot be ignored, panelists said.
“We have to reform taxes or we can’t move forward,” Rivlin said.
Panetta cited numerous difficulties to moving towards fiscal solvency, but said “the biggest challenge of all is the political side of it.”
“I’m not sure if the will is there” to confront the problems, Pannetta said. And “partisanship is deep.”
Walker blamed a “dysfunctional democracy” – both Congress and the executive branch, but also on an uninformed public – for the fiscal storm the country faces.
The nut of the problem, is spending beyond means, from the personal to the government level. At a certain point, payments on debt have to be made. If minimum payments on debt outstrip the ability to pay, you get problems such as the subprime crisis, where at its root, many borrowers could not make their payments on their subprime mortgages.
The same principle can be applied crudely to the situation with government debt overall.
“We need to start taking steps to defuse what otherwise is a super subprime crisis” said Walker, “and that’s a meltdown of the federal government’s finances.”
“What’s going on right now is massive taxation without representation” said Walker, where “today’s taxpayers benefit from low-tax, high-spend policies.” He said that the country is expecting its children and grandchildren to pay the debt we are creating today, and that the foreign credit lines to America making this debt possible might not always last.
“We cannot expect to be able to borrow wherever we want, as long as we want, at low interest rates from foreign lenders,” said Walker.
He was not alone in this assessment.
“We’re trying to deal with one exploding bubble by creating another bubble, a debt bubble, that ultimately could explode on us as well,” said Pannetta.
“It’s time that Washington wakes up,” said Walker, “I’m very concerned about the future of this country and my kids and grandkids.”