The Debt, The Deficit, And America’s Role In The World – OpEd


By David M. Walker

The United States is a great country-arguably the greatest in the history of mankind. Yet, we’re not as great as we think we are. We don’t learn from history, and we don’t do enough comparative benchmarking to understand where we stand relative to others. We’re managing based on today and the past, rather than looking at leading indicators, and seeing that there are a range of major warning signals that are going off, and we’re not reacting to them. We still have members of Congress who are proud that they don’t have a passport. We still have people who think that because we are the only super-power on earth-temporarily-with unparalleled economic, foreign policy, military, cultural influence, that that must mean that we must meddle in virtually everything. But the truth is, we’re below average in a lot of things, as compared to other industrialized nations, and some of these things are critical to our future prosperity and our future position in the world. Here are a few examples: We’re below average in savings rates, in public finance, and in the state of our critical infrastructure. And interestingly, we’re below average in K-12 educational system results and healthcare outcomes, despite the fact that we spend double per person what the average industrialized nation spends.

So it’s not the money. We’re spending plenty of money. The system is fundamentally broken. We don’t have the right incentives, transparency, and accountability mechanisms, and I’ll come back to that. We are resting on our past success. We’re resting on our current position. America is at a critical crossroads, and in my view, the decisions that are made or that fail to be made within the next five years will largely determine whether our collective future is better than our past. What I talk about in this book, Come Back America, has two meanings. First, we need to come back to the principles and values that this country was founded on, that we strayed from in recent decades-those principles and values that made us great and unique. We also need to recognize that we face a range of key sustainability challenges- fiscal, environmental, infrastructural, etc.-that threaten our future, and we need to address those challenges soon, before we face a crisis. Because to me, it’s about America’s position in the world, keeping America strong, and keeping the American dream alive.

What is the American dream? I would respectfully suggest that it is not about owning a house. What is it? I will argue there are two dimensions to the American dream. The first dimension is for each individual to have the opportunity to achieve their full God-given abilities based upon their individual efforts. And the second is for each generation having an obligation to leave the country better off and better positioned for the future. There’s a word for that. It’s called “stewardship.” It’s a word that we don’t hear much about any more, and it’s something that we need to come back to.

What are examples of some of the principles and values that we’ve strayed from? We were founded on opportunity, not entitlement. We were founded on thrift, not conspicuous consumption. We were founded on savings, not debt. We were founded on a limited role for the Federal government, with states having the power unless it was reserved expressly for the Federal government, and we recognize that the power ultimately belonged to the people, and that the first three words of the Constitution were the most important- “We, the people.” Ultimately, we, the people, are responsible and accountable for what does or does not happen. We also were founded on the principle of limited involvement in foreign conflicts. These are just a few examples of how we have strayed from in recent years. And last, we were founded on stewardship. Not just living for today, but also taking steps to help make sure that we’re creating a better tomorrow, such that our children, our grandchildren, and future generations would have as much or more opportunity than we have and as good or better a standard of living as we have. That is threatened. And a significant majority of Americans do not believe that their children and grandchildren will have as good a life as they had. That’s un-American to me, and we’re going to have to change that.
Deficit and Debt

I want to address the issue of deficits and debt and what it means to us and our role in the world. First, our long-standing tradition until recent decades was not to run deficits unless we were at war-a declared war-which only Congress can do, and hasn’t done since World War II, or unless we were in a recession or depression, or we faced some other national emergency. We traditionally sought to achieve budget balance over a business cycle so that we were not constantly adding debt. To the extent that we did add debt, we did everything we could to try to grow the economy, and to try to constrain fiscal policy. In other words, bring it under control, so that the economy grew faster than any deficits and that, in fact, we didn’t have deficits over a business cycle-over a full economic cycle. That worked pretty well over most of our nation’s history. However, we lost our way several decades ago. And then it got to the point where economists would argue, “Well, we can run deficits equal to the growth of the economy-2 percent, 3 percent, whatever it might be-and we don’t have to worry about it because our debt as a percentage of the economy, so-called ‘debt to GDP,’ wouldn’t get any bigger,” and therefore, then people would argue, “okay, it’s okay to run deficits equal to 2-3 percent of GDP,” but then they would argue, “it’s okay to do it when we’re at peace, when the economy is strong, when we don’t face any national emergencies.” Well, then what happens when you’re at war-declared or undeclared, the economy is weak, or you face national emergencies? What happens is what happened last year, and what’s happening this year- deficits of $1.4 trillion, 10 percent of the size of the economy. We have lost our way! We have lost our metrics.

Let me come to debt. At the beginning of this nation, 1789, the United States had debt to GDP of 40 percent. A big footnote: that was all federal and state public debt. Because part of the deal to get the Constitution ratified here in Philadelphia was not just to choose Washington as the capital-as you know, Philadelphia was the capital from 1790 to 1800-but, to get the states to ratify the Constitution, the U.S. government through the National Bank assumed responsibility for all the states’ debt. So, total federal and state debt-there wasn’t local debt then-40 percent of GDP. Well, I’d say we got something for that! We defeated the most powerful military on earth. We won our independence, and we gained ratification of the greatest political document in the history of mankind-the United States Constitution. That is a pretty good return on investment!

The highest debt as a percentage of GDP we’ve ever had in this country was at the end of World War II-total debt of 122 percent of GDP, public debt somewhat less than that. But I’d say we got something for that! We avoided attack on our homeland, we defeated the Axis powers, and we saved the Free World. And after World War II, the United States was over 50 percent of the global economy and the dollar was as good as gold. At the same time, we invested in infrastructure, we invested in the G.I. Bill, we took steps to constrain fiscal policy, we also invested to restore the defeated powers to provide demand for global trade over time, and to help heal the wounds. Then due to a number of policies, our economy grew very rapidly and our fiscal policy was constrained. Consequently, our debt to GDP plummeted to where it got down to a little over 30 percent of GDP back in the late 1970s.

There’s only one time in U.S. history that federal debt to GDP has been over 60 percent-World War II. Not during World War I, the Civil War, 1812, or at the beginning of the republic-World War II. Guess what? We’re there again. Public debt to GDP is 61 percent roughly. And that doesn’t count the debt owed to the so-called “trust funds”-Social Security and Medicare. And I say “so-called” because in Washington, they don’t use the same words as Webster’s Dictionary. I used to be Assistant Secretary of Labor for Pensions and Health. I oversaw the private sector of Pension and Health System and fiduciary responsibility provisions of the Employee Retirement Income Security Act. I was also a trustee of Social Security and Medicare from 1990-1995. If you treated a private sector trust fund like the government treats the Social Security/Medicare trust funds, you’d be in jail. Because you can’t trust them, they’re not funded. They are an accounting device. There are no prohibitive transaction, fiduciary responsibility, anti-self-dealing rules. The government takes in the money. It spends every dime! To the extent there’s a surplus, it spends it on whatever it wants! It puts back an I.O.U. evidence on a computer run in a locked file cabinet in West Virginia named after Harry Byrd, I can assure you. And these instruments are backed by the full faith and credit of the United States Government. They’re guaranteed as to principal and interest. They have legal, political and moral significance. Yet, they have no economic significance whatsoever. And the government, on one hand, wants to hold it out as an asset when you get your annual Social Security statement, or when they issue the annual Social Security and Medicare reports, which they did last week, and I’ll come back to that. On the other hand, they don’t want to count it as a liability of the general fund of the U. S. Government. They say the right hand owes the left. Poof, it’s gone! I argue that’s wrong! We took the people’s money, we spent the people’s money. It’s an obligation. We ought to count it as a liability. If we did, debt to GDP would be 91 percent, not 61 percent.

What about state and local governments? In 1789, our debt to GDP was 40 percent, and that included state and local. Lately, we’ve heard a lot about Greece and other sovereign nations. The interesting thing is if you want to compare the United States with those countries, you have to add federal, state and local public debt, because they do most of their financing at the national level while we do it at all three levels of government. Interestingly, if you do that, we’re already worse than Spain, Portugal, Ireland, and the United Kingdom. And we’re within ten years of being where Greece is today. But they don’t have this funny trust-fund debt. So if you added that, we’re within three years of Greece.

Now, we are in the situation where we’re running current deficits $1.4 trillion, roughly. But, you know, ironically, the problem is not the current deficit and the current debt. The current level of debt we can handle-61 percent of GDP. We can even handle the 91 percent. The problem is where we’re headed. And the current deficits are caused primarily, but not exclusively, by temporary factors-a weak economy, two undeclared and unfinanced wars, a range of stimulus and bail-out efforts, and tax cuts, some of which will be allowed to expire. (They are set to expire by the end of this year.) The problem is not the current deficit, although it’s a matter of concern. The problem is that after the economy recovers, after unemployment is down, after the wars are over, and long after the financial services and housing crises have past, we face large known and growing structural deficits driven primarily by known demographic trends, the retirement of the baby boom generation, and rising health-care costs. Demographics are destiny. The people are alive, they’re with us. We face a tsunami of spending that is headed towards our shores, and we are not prepared. We need to start getting our act together.

When you look at bond ratings for sovereign nations and even for state localities, you give about a 10 percent weighting to these structural obligations, many of which are off the balance sheet because of myopia. My profession, the Certified Public Accounting profession, has something called a “growing concern opinion.” If you have an enterprise that may not last beyond the next year, then you qualify your opinion to say there may be a problem with growing concern. In my view, that is way too late! If you wait to give some kind of signal when there’s maybe a year left, it’s a little bit late! The bond rating agencies are doing something similar. They’re looking at the possibility of default within a fairly short period of time. The United States is not going to default on its debt, and most state and local governments will not default on their debt. On the other hand, when you have large known and growing structural obligations that are going to come due-absent reforms-should you consider that in your ratings? And by the way, if those are not only going to affect your economic posture, but it’s going to affect the value of the dollar-which they will-shouldn’t you consider the value of the dollar you’re going to get repaid and doing a credit rating? They don’t. Myopia, tunnel vision, and self interest are rampant. They are rampant in all sectors of the economy- epidemic proportions in Washington, D.C. So we’ve got deficits and debt and debt to GDP set to skyrocket under our current status quo.

At the end of World War II, even though we had record debt to GDP, we had no foreign debt. Americans saved and invested in their country’s future. Today almost half of debt held by the public is debt held by foreign lenders-Japan, China, all exporting nations primarily. America has two dependencies-foreign oil and foreign capital. We were fortunate that other countries were willing to lend us their surplus at low rates because we don’t have savings ourselves. Our savings rates have plummeted, although recently individuals have started to save more. The government is dis-saving faster than individuals are saving. We’re fortunate, but it is not in our long-term economic, foreign policy, national security or domestic tranquility interest to rely on foreign lenders to the extent that we are. You have to pay attention to your foreign lenders. They have more leverage on you, you have less leverage on them. You don’t tell your bankers what to do. They tell you what to do, and they’ve already done it.

One of the primary reasons that we, the people, have guaranteed over $5 trillion in Fannie Mae and Freddie Mac debt is because Japan and China demanded it. They held significant stakes in those securities. They were not backed by the full faith and credit of the United States government. And so we need to recognize these realities. We need to reduce our dependency on foreign lenders. The American people are concerned about it. It is the number two issue that the American people are concerned about today, exceeded only by the economy and jobs.

Deficits, debt, and dependency create “the ditch.” The ditch is the total liabilities and unfunded promises for Medicare and Social Security for the U.S. government. In 2000, it was $20 trillion. At the end of fiscal 2009, it was $62 trillion, over triple, $38 trillion for Medicare, $7.7 trillion for Social Security. (Now it’s $7.9 trillion.) A bogus report was issued recently. It’s an outrage. How much is $62 trillion? It’s $200,000 per person. No wonder newborn babies cry. They come into the world with an implicit obligation of $200,000. It’s $500,000-plus per household. Median household income in the United States is $50,000 a year. So that means under our status quo, let it ride policy, the typical American household has an implicit second or third mortgage equal to ten times their annual household income and no house to back that mortgage. The Social Security/ Medicare trustees issued their annual report recently-it was months late. There was some news in the report, but not much. Social Security is now in negative cash flow. It’s paying out more than it’s taking in-this year and next year- primarily because of the weak economy. And it’s projected to be negative cash flow at an increasing rate forever starting in 2015, two years earlier than last year. Now let’s talk about the “trust fund.” While it doesn’t go dry until 2037, keep in mind what’s in the trust fund — a priority claim on future general revenues. Ain’t no money there! It’s a priority claim on future general revenues. And Social Security is not the biggest problem. The unfunded obligation with Social Security now, according to the latest trustee’s report, $7.9 trillion, up from $7.7 last year, and it will go up several hundred billion a year because of discounted present value analysis. The power of compounding is working against us, because we’re not solving a problem, and the problem is getting worse with the passage of time.

Social Security does not face an immediate crisis. Social Security will never run out of money, because even when the trust funds go dry, it will have 78 cents in revenue for every dollar of benefits. But it has a financing problem. It doesn’t represent our biggest challenge, it represents our biggest opportunity. We can reform Social Security to exceed the expectations of every generation of Americans, and we should do it in 2011. We should save Social Security first in reality.

I’m also concerned about Medicare numbers. For the first time this year, the Medicare trustee’s report valuation was not as of January 1. For the first time, the decision was made to delay the point at which they’re going to do the valuation, to consider the impact of the Healthcare Reform Bill on Medicare. That’s unprecedented. Secondly, because that bill wasn’t passed until the end of March, the trustees couldn’t meet the statutory deadline in the law to issue the report by April 1. It takes months for the actuaries to be able to calculate these numbers. Therefore, by definition, it meant that they were going to have to issue it late. In addition, there are supposed to be two public trustees that protect the public interest. (I spent five years in this role.) There weren’t. They were pending confirmation, and had yet to be confirmed. Consequently, the report was issued without public trustees. Why is that significant? It’s because the other trustees are all appointees of the current administration-whatever the administration might be. And the only reason you have public trustees is to have somebody who’s not beholden to the current administration, to try to make sure that there’s a full and fair accounting, and that the document is not politicized. And the last thing, that was most significant: the independent Chief Actuary for Medicare issued what is the equivalent of an adverse opinion. Basically, he said you cannot rely upon the projections that the trustees have just given you. It is an adverse opinion. It’s a shell game, and it is, in my view, a politicalization of a report that should never be politicized. Fortunately, the Senate Finance Committee has recommended two capable people to be public trustees, and hopefully they’ll be confirmed soon, and their being there may minimize the possibility of this happening.

Now, I’ve talked about the Federal government, but State and local governments have problems, too. State and local governments face large and growing structural deficits primarily due to Medicaid, unfunded retiree health-care, under-funded pension plans, deferred maintenance and other critical understructure needs in education costs. It varies by state, and by locality. They have structural deficits too. So, our national fiscal challenge is greater than our federal fiscal challenge, although federal is the greatest. We need to recognize that reality. The states are coming to “Uncle Sugar,” also known as “Uncle Sam,” to try to help bail them out. The government doesn’t have any money. We’ve got to go to China to get money! The states and localities need to deal with their structural deficits just as the Federal government must. The Government has grown too big, promised too much, and delivered too little. It’s got to re-baseline, re-engineer, to be future-focused and results oriented. And we need to have a conversation about what the proper division of responsibilities ought to be between federal, state and local government as well as appropriate funding sources for that. There’s very little inter-governmental coordination going on right now. It’s a huge problem, and we need to come to grips with it.

I will conclude with a question. I was asked, “Are we modern Greece?” Not yet because we are the largest economy in the world. We’re the sole superpower. We are a safe haven in a time of uncertainty, because we have the most stable political system, we have the rule of law, and we have 61 percent of the world’s global reserve currency. This gives us more rope, but not unlimited rope. We are not exempt from the laws of prudent finance. It’s a matter of timing.

We need to wake up and learn from history. We need to do benchmarking to see where we are on an absolute and a relative basis and how we’re trending. And we need to start making tough choices before we lose the confidence of our foreign lenders. Action plan? Yes, we can! No pun intended. Yes, we can solve this problem, but only if the first three words in the Constitution come alive and if we get leadership from the President, and some bi-partisan support from Congress. What we ought to do is we ought to reimpose tough statutory budget controls next year, pay-as-you-go rules on both the spending and the tax side of the ledger that don’t have trillions of dollars of loop-holes, which the current ones do. They are not effective. We ought to reimpose tough statutory discretionary spending caps that would take effect once unemployment gets to a certain level- e.g. 8 percent. Structural unemployment is going to be higher going forward, and long-term economic growth is going to be lower than it’s been for a number of reasons, based on leading indicators, not flagging indicators. We need to then have a discussion and debate with the American people about how much health care should be universally available that’s affordable and sustainable. Government has way over-promised. And how will we end up controlling health-care costs so it doesn’t bankrupt the country? We also need to have a discussion and debate, not just about which of the Bush tax cuts ought to end or not end but how are we going to reform our mind-numbingly complex tax system, to simplify it, to make it more equitable, to make it more competitive and to generate adequate revenues to pay our bills, and deliver on the promises that we intend to keep. We can do the budget controls and we need to reform Social Security next year to make it solvent, sustainable, secure and more savings oriented. It’s like a basketball layup. You can miss a layup, but it’s a pretty high-percentage shot. Health-care reform is a three-point play from underneath the opponent’s basket. You’ve got a way to go before you get there! We can make sure that our future is better than our past, but not unless we make dramatic and fundamental transformational reforms soon. I think we’ve got two years to do something concrete. But it’s taken us many years to get in the shape that we are in. It’s going to take us many years to get back to where we need to be, but we need to get started now. And hopefully, we will. The American people are very concerned about it. This is going to be an issue in this election. This issue, fiscal responsibility, needs to be the issue in 2012. That no matter who wins, whether President Obama gets re-elected or whether somebody else is elected, they have to make fiscal responsibility a priority. Because this is about the future of America, and this is about the future of our families. This is about whether or not we’re going to stay strong, whether we’re going to keep the American Dream alive, and whether or not the standard of living for our kids, grandkids and future generations will be better or worse.

In summary, we need policy reforms, operational reforms and political reforms, because we have a dysfunctional democracy. We need redistricting reform, campaign finance reform, we need term limits, but longer term limits in the states, we need a Constitutional credit card limit as to how much debt as a percentage to GDP can be taken on, how much you can mortgage the future of this country, the Balanced Budget Amendment has got too many holes in it, you need a credit card limit-a hard credit card limit. Germany has one. And you supplement that with the statutory budget controls that I’ve talked about before. Because, bottom line, we’re hurting our young people today in three ways. We’re mortgaging their future at record rates. We’re reducing a lot of investments in their future because less of the budget is for investment, less is for basic research, or critical infrastructure innovation. Finally, all this is happening at a time when our young people face increasing competition in a global market place. In the South, where I’m from, that’s called a “triple whammy.” That’s not a good thing, and we simply need to deal with this-and deal with it very soon.

The Hon. David M. Walker is the President and CEO of the Peter G. Peterson Foundation. He is the Former U.S. Comptroller General. This essay is a slightly revised version of a lecture he delivered at FPRI on August 12, 2010.

Published by the Foreign Policy Research Institute

Founded in 1955, FPRI ( is a 501(c)(3) non-profit organization devoted to bringing the insights of scholarship to bear on the development of policies that advance U.S. national interests and seeks to add perspective to events by fitting them into the larger historical and cultural context of international politics.

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