Fiscal roadshow warns United States of trouble ahead

October 29, 2006

By Matt Crenson

AUSTIN, Tex. (AP) - David M. Walker sure sounds like he's running for office, talking about the future of the country and its children and how people have to rise up for change.

But as comptroller general of the United States, head of the Government Accountability Office, Walker doesn't want or need a vote. What he's looking for is attention for his message that the country is on the road to financial ruin.

Mid-term elections have politicians talking about Capitol Hill sex scandals, the war in Iraq and who's tougher on terrorism.

But they avoid talking about the country's long-term fiscal prospects, for several reasons: it's a complicated subject that doesn't lend itself to a sound bite. There are serious problems and no easy solutions - and the hard solutions include raising taxes and cutting benefits, the kind of talk that can doom a politician's career.

"There's no sexiness to it," laments Leita Hart-Fanta, an accountant who has just heard Walker's pitch. She suggests recruiting a trusted celebrity - maybe Oprah - to sell fiscal responsibility to the people.

The backbone of Walker's campaign has been the Fiscal Wake-up Tour, a travelling road show of economists and budget analysts who share his concerns. Walker has committed to touring the country through the 2008 elections, talking to anybody who will listen about the fiscal hole Washington has dug itself and the recklessness of borrowing money from foreign lenders to pay for the operation of the U.S. government.

"You can't solve a problem until the majority of the people believe you have a problem that needs to be solved," Walker says.

Polls suggest that Americans have only a vague sense of their government's long-term fiscal prospects, that they are more likely to identify the war in Iraq, terrorism, jobs and the economy as major problems facing the country. The deficit doesn't even crack the top 10 unless the respondents are directly asked about it, and then a majority says it's a serious problem.

The looming fiscal crisis is not a partisan issue, says Walker, who is accompanied on his tour by experts from across the political spectrum.

"We all agree on what the choices are and what the numbers are," Fraser says.

Their basic message is this: the U.S. national debt is currently US$8.5 trillion and it could reach $46 trillion or more over the next few decades, adjusted for inflation, if the status quo doesn't change. That's almost as much as the total net worth of every person in the U.S. - Bill Gates, Warren Buffett and those Google guys included.

And every year that nothing is done about it, Walker says, the problem grows by $2 trillion to $3 trillion.

The federal government actually produced a surplus for a few years during the 1990s, thanks to a booming economy and fiscal restraint imposed by laws that were passed early in the decade. And though the federal debt has grown in dollar terms since 2001, it hasn't grown dramatically relative to the size of the economy.

But that's about to change, thanks to the country's three big entitlement programs - Social Security, Medicaid and especially Medicare.

With the first baby boomers becoming eligible for Social Security in 2008 and for Medicare in 2011, the expenses of those two programs are about to increase dramatically. People are also living longer, which makes any program that provides benefits to retirees more expensive.

Medicare already costs four times as much as it did in 1970, measured as a percentage of the country's gross domestic product. It currently comprises 13 per cent of federal spending; by 2030, the Congressional Budget Office projects it will consume nearly a quarter of the budget.

Economists Jagadeesh Gokhale of the American Enterprise Institute and Kent Smetters of the University of Pennsylvania calculate that Medicare's fiscal shortfall - the annual difference between its dedicated revenues and costs - will have risen to $25 trillion by 2080.

"Obviously health care is a mess," says Dean Baker, a liberal economist at the Center for Economic and Policy Research, a Washington think tank. "No one's been willing to touch it, but that's what I see as front and centre."

Social Security is a much less serious problem. The program currently pays for itself with a 12.4 per cent payroll tax, and even produces a surplus that the government raids every year to pay other bills. But Social Security will begin to run deficits during the next century, and ultimately would need an infusion of $8 trillion if the government planned to keep its promises to every beneficiary.

Like many of its citizens, the United States has spent the last few years racking up debt instead of saving for the future. Foreign lenders - primarily the central banks of China, Japan and other big U.S. trading partners - have been eager to lend the government money at low interest rates, making the current $8.5-trillion deficit about as painful as a big balance on a zero-per cent credit card.

In her part of the fiscal wake-up tour presentation, economist Diane Lim Rogers tries to explain why that's a bad thing. For one thing, even when rates are low a bigger deficit means a greater portion of each tax dollar goes to interest payments rather than useful programs. And because foreigners now hold so much of the federal government's debt, those interest payments increasingly go overseas rather than to U.S. investors.

More serious is the possibility that foreign lenders might lose their enthusiasm for lending money to the United States. Because treasury bills are sold at auction, that would mean paying higher interest rates in the future. And it wouldn't just be the government's problem. All interest rates would rise, making mortgages, car payments and student loans costlier, too.

A modest rise in interest rates wouldn't necessarily be a bad thing, Rogers said. Higher rates could moderate overconsumption and encourage consumer saving. But a big jump in interest rates could cause economic catastrophe. Some economists even predict the government would resort to printing money to pay off its debt, a risky strategy that could lead to runaway inflation.

Washington tends to keep its fiscal house in better order when one party controls Congress and the other is in the White House, says Isabel V. Sawhill, a senior fellow in economic studies at the Brookings Institution.

"It's kind of a paradoxical result. Your common sense logic would tell you if one party is in control of everything they should be able to take action," Sawhill says.

But the last six years of Republican rule have produced tax cuts, record spending increases and a Medicare prescription drug plan that has been widely criticized as fiscally unsound. When former president Bill Clinton faced a Republican Congress during the 1990s, spending limits and other legislative tools they imposed helped produce a surplus.

So maybe a solution is at hand.

"We're likely to have at least partially divided government again," Sawhill said, referring to predictions that the Democrats will capture the House, and possibly the Senate, in next month's elections.

But Walker isn't optimistic that the government will be able to tackle its fiscal challenges so soon.

"Realistically what we hope to accomplish through the fiscal wake-up tour is ensure that any serious candidate for the presidency in 2008 will be forced to deal with the issue," he says. "The best we're going to get in the next couple of years is to slow the bleeding."