Get Your Latest News by Visiting News Links:

  Monday  Tuesday Wednesday Thursday Friday

Weekend Edition

 

 

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

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
October 13, 2006 |  
 

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."


 Laurence J. Kotlikoff
 
 

Back to Top


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.

Back to Top