A 'fiscal hurricane' on the horizon
By Richard Wolf
Monday, November 14, 2005
Source: US Today
WASHINGTON — The comptroller general of the United States is explaining over eggs how the nation's finances are going to hell.
"We face a demographic tsunami" that "will never recede," David Walker tells a group of reporters. He runs through a long list of fiscal challenges, led by the imminent retirement of the baby boomers, whose promised Medicare and Social Security benefits will swamp the federal budget in coming decades.
The breakfast conversation remains somber for most of an hour. Then one reporter smiles and asks, "Aren't you depressed in the morning?"
Sadly, it's no laughing matter. To hear Walker, the nation's top auditor, tell it, the United States can be likened to Rome before the fall of the empire. Its financial condition is "worse than advertised," he says. It has a "broken business model." It faces deficits in its budget, its balance of payments, its savings — and its leadership.
Walker's not the only one saying it. As Congress and the White House struggle to trim up to $50 billion from the federal budget over five years — just 3% of the $1.6 trillion in deficits projected for that period — budget experts say the nation soon could face its worst fiscal crisis since at least 1983, when Social Security bordered on bankruptcy.
Without major spending cuts, tax increases or both, the national debt will grow more than $3 trillion through 2010, to $11.2 trillion — nearly $38,000 for every man, woman and child. The interest alone would cost $561 billion in 2010, the same as the Pentagon.
From the political left and right, budget watchdogs are warning of fiscal trouble:
•Douglas Holtz-Eakin, director of the non-partisan Congressional Budget Office, dispassionately arms 535 members of Congress with his agency's stark projections. Barring action, he admits to being "terrified" about the budget deficit in coming decades. That's when an aging population, health care inflation and advanced medical technology will create a perfect storm of spiraling costs.
•Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, sees a future of unfunded promises, trade imbalances, too few workers and too many retirees. She envisions a stock market dive, lost assets and a lower standard of living.
•Kent Conrad, a Democratic senator from North Dakota, points to the nation's $7.9 trillion debt, rising by about $600 billion a year. That, he notes, is before the baby boom retires. "We're not preparing for what we all know is to come," he says. "We're all sleepwalking through this period."
•Stuart Butler of the conservative Heritage Foundation projects a period from now until 2050 in which tax revenue stays stable as a share of the economy but Medicare, Medicaid and Social Security spending soars. To avoid big tax increases, he says the government has to "renegotiate" the social contracts it made with its citizens.
•Alice Rivlin and Isabel Sawhill of the centrist Brookings Institution put their pessimism into a book titled Restoring Fiscal Sanity. Rivlin, who became the first director of the Congressional Budget Office in 1974, says it will take an "economic scare" such as the 1987 stock market crash to spur action. Sawhill likens the growing gulf between what the government spends and takes in to a "Category 6 fiscal hurricane."
'The Fiscal Wake-Up Tour'
They are the preachers of doom and gloom. Liberals and conservatives, Democrats and Republicans, they are trying to be heard above the ka-ching of the cash register as it tallies the cost of government benefits and tax cuts, Iraq and Hurricane Katrina. To raise their profile in recent months, several have traveled together to places such as Richmond, Va., and Minneapolis for what they call a "Fiscal Wake-Up Tour."
Leon Panetta, former White House budget director and chief of staff to President Clinton, calls them "disciples of balanced budgets. ... And at some point, they'll be proven right."
The White House and Congress are trying to address the nation's short-term budget deficits, but their response pales against the size of the long-term problem. President Bush proposed nearly $90 billion in savings over five years in his 2006 budget. He also tried to trim future Social Security benefits for wealthier recipients. The Senate this month approved $35 billion in savings over five years. House Republicans tried to save more than $50 billion last week, but objections from moderates stalled action. Either way, the savings could be wiped out by $70 billion in proposed tax cuts.
The budget-cutting effort is being led by conservatives, who recoiled when Congress quickly voted to spend $62 billion after Hurricane Katrina struck New Orleans and the Gulf Coast. "Katrina served as a wake-up call," Walker says.
In prior years, facing a less imminent demographic explosion, Congress cut in politically agonizing increments of $500 billion over five years. Bush's father gave up his "no new taxes" campaign pledge in 1990. After Ross Perot focused attention on the deficit in his 1992 presidential campaign, Clinton and the Democratic-run Congress raised taxes even more in 1993. Clinton and the Republican-run Congress forced two government shutdowns before agreeing on a deficit-reduction package in 1997.
In each case, cutting the deficit backfired at the polls. The elder Bush lost re-election, the Democrats lost Congress, and Republicans' obstinacy helped Clinton win a second term. "The choices you have to make are almost exactly the opposite of what wins political elections," Panetta says.
The problem is also easy for Congress to postpone because the day of reckoning is years away. This year's deficit was $319 billion, down $94 billion from the year before. That's 2.6% of the nation's economy, an amount easily borrowed from foreign investors.
From 'Grenada' to 'Vietnam'
But there is every reason to act — and soon. Budget watchdogs cite these looming problems:
•Prescription-drug coverage under Medicare takes effect Jan. 1. Its projected cost, advertised at $400 billion over 10 years when it passed in 2003, has risen to at least $720 billion. "We couldn't afford" it, Walker says of the new law.
•The leading edge of the baby boom hits age 62 in 2008 and can take early retirement. The number of people covered by Social Security is expected to grow from 47 million today to 69 million in 2020. By 2030, the Congressional Budget Office projects, Social Security spending as a share of the U.S. economy will rise by 40%.
•The bulk of Bush's 10-year, $1.35 trillion tax-cut program is set to expire at the end of 2010. But Congress is moving to make the reductions permanent. That would keep tax revenue at roughly 18% of the economy, where it's been for the past half-century — too low to support even current spending levels. "We can't afford to make all the tax cuts permanent," Walker says.
•Baby boomers begin to reach age 65 in 2011 and go on Medicare. Of all the nation's fiscal problems, this is by far the biggest. If it grows 1% faster than the economy — a conservative estimate — Medicare would cost $2.6 trillion in 2050, after adjusting for inflation. That's the size of the entire federal budget today.
"Social Security is Grenada," Holtz-Eakin says. "Medicare is Vietnam."
Inaction could have these consequences, experts say: Higher interest rates. Lower wages. Shrinking pensions. Slower economic growth. A lesser standard of living. Higher taxes in the future for today's younger generation. Less savings. More consumption. Plunging stock and bond prices. Recession.
Some veterans of the deficit-cutting wars are pessimistic about avoiding disaster. "In the end, CBO and others are no more than speed bumps on the highway of fiscal irresponsibility," says Robert Reischauer, former Congressional Budget Office director and now president of the non-partisan Urban Institute.
'Where's Ross Perot?'
The gloom-and-doom crowd hopes to avoid that fate. Increasingly in recent months, they are traveling the country, writing and speaking out about the need to cut spending, raise taxes — or both.
The most outspoken is Walker, an impeccably dressed CPA whose 15-year term as head of the Government Accountability Office runs through 2013. He was a conservative Democrat, then a moderate Republican, and is now an independent. He's also a student of history, a Son of the American Revolution who lives on Virginia property once owned by George Washington.
Walker's agency churns out reports with titles such as "Human Capital: Selected Agencies Have Opportunities to Enhance Existing Succession Planning and Management Efforts." But he knows he must try to humanize the numbers, and his rhetoric on the nation's fiscal course has become more acerbic. "Anybody who says you're going to grow your way out of this problem," Walker says, "would probably not pass math."
Holtz-Eakin, a soft-spoken economist who said Monday he will leave CBO at the end of the year, takes a different approach. Less prone to giving speeches, he sees his role as a consultant and truth-sayer to Congress. "Numbers are the currency of the realm in Washington," he says, and most agree his agency has the best in town. But he concedes, "Sometimes it falls to the consultant to tell the client the bad news."
Holtz-Eakin's father was in steel, a cyclical business rocked by strikes and shutdowns. "I thought, 'This is nuts. No one should live like this,' " he says. That explains why he wants the government to prepare for new demands on its New Deal and Great Society benefit programs. "The baby boom has been getting older one year at a time with a striking regularity," he says.
MacGuineas is the outside agitator. An independent, she worked for Sen. John McCain's presidential campaign in 2000. She respects politicians who deliver bad news, as presidential candidate Walter Mondale did in 1984 when he said tax increases were inevitable — and then was defeated in 49 states.
"I want to see a presidential election where the candidates are talking about what taxes they'll raise and what spending they'll cut," she says. "It's not always a winning campaign slogan."
Conrad ran for the Senate in 1986 promising to reduce the budget deficit or quit after six years. By 1992, the deficit had hit an all-time high, and he said he would not seek re-election. Only the death of North Dakota's other senator kept him in Congress.
The former state tax commissioner has been doing this longer than other congressional budget officials — and he has the most charts. He's so numbers-oriented that at baseball games, he can instantly compute a hitter's average after each at-bat. "Numbers speak to me in a way that they don't speak to others," he says. "I guess it's the way my brain is wired."
Sawhill and Butler, from opposite ends of the political spectrum, lead a group of about 15 budget experts at Washington think tanks who gather periodically to discuss their dour crusade. Aided by Walker and the non-partisan Concord Coalition, a fiscal watchdog group, they have taken their show on the road.
Butler, a native of Britain, witnessed there in the 1960s and '70s the effects of slow growth and high unemployment, driven partly by generous government benefits. "We have a responsibility" to start the debate, he says, "because we don't have to get re-elected." But Sawhill says it's "an indictment of our political leadership that it is being left to outside groups such as ours to put these issues on the agenda."
After three decades in the business, Rivlin is frustrated by lawmakers' inaction and blames balanced-budget advocates for not better articulating the problem. "There may be better ways to talk about it," she says. "I sometimes think, 'Where's Ross Perot when we need him?' "