Last month our readers were exposed to Richard Lamm’s front-page essay, "The Crime of the Century." The comptroller general of the United States has provided Prairie Fire with his outline of the financial issues and how he is going about building support for fiscal responsibility within the federal government. Next month we will continue this discussion with some specific analysis and recommendations for reform.
While federal deficits have been declining for three straight years, they are still imprudently high given our current economic growth and the impending retirement of the baby-boom generation. The costs of the global war on terrorism have served to increase the federal deficit; however, the federal deficit far exceeds the cost of the war. For example, in fiscal 2006 the unified federal budget deficit was approximately $248 billion, while the federal government’s gross operating deficit was approximately $434 billion (excluding consideration of the Social Security and other off-budget surpluses). Of these deficit amounts, approximately $100 billion related to the war.
While the federal government could theoretically run deficits the size of our current one (as a percent of the economy) for many years, a look into the future shows that, based on our current path, we are headed for large and growing structural deficits that are unprecedented in nature due primarily to the impending retirement of the baby boomers and rising health care costs. These deficits could serve to swamp our ship of state if we do not soon begin to enact much-needed and long-overdue reforms of our nation’s entitlement programs, spending priorities and tax system.
Beyond deficits, from the end of fiscal 2000 to the end of fiscal 2006, the federal government’s total liabilities and net commitments for future Social Security and Medicare benefits grew from approximately $20 trillion to $50 trillion. The Medicare program alone accounts for over $32 trillion in current dollar terms of this amount, of which approximately $8 trillion is related to the new prescription drug benefit. This $50 trillion accumulated burden is growing by at least $2–$3 trillion per year based on a status quo path.
From a financing perspective, the United States has become increasingly reliant on foreign investors to purchase new federal debt due to our low domestic savings rates. In the short term, we are fortunate to be able to borrow from these foreign investors at relatively low interest rates. However, over the longer term, excessive reliance on foreign investors to finance our deficits will serve, among other things, to increase the risk of a sudden interest rate hike should the appetite of one or more major foreign investors suddenly decline. Furthermore, increased holdings of U.S. debt by foreign central banks can serve to reduce the amount of influence we have with such countries, while increasing the amount of influence (and leverage) they have on the United States.
At the present time, not enough is being done in Washington to deal with our fiscal imbalance situation. What we do know about our fiscal imbalance is that it is large and growing over time. While elected officials will ultimately be required to make the difficult policy choices necessary to put us on a more prudent and sustainable longer-term fiscal path, they are unlikely to do so unless the public understands the need for such reforms, the consequences of inaction, and the prudence associated with acting sooner rather than later.
Given the above, senior officials from the Concord Coalition, Brookings Institution, and the Heritage Foundation have been traveling with me across the country as part of a “Fiscal Wake-up Tour” to state the facts and speak the truth regarding where we are financially, where we’re headed fiscally, the need for timely action, and possible ways forward. During these trips we conduct town hall meetings, meet with editorial boards, speak with business and community leaders, and are frequently interviewed for various television and radio programs. So far we have traveled to 21 states, and many more states will be visited before the 2008 election. This coalition effort is receiving increased attention both inside and outside of Washington, including a featured story on 60 Minutes and a commercial documentary that is currently in production.
It’s important to keep in mind that our nation’s fiscal challenge is not just a matter of numbers and economics, it’s also a matter of values with significant inter-generational implications. For example, the baby boomers are on track to be the first generation in the history of America to fail their stewardship responsibility by not leaving the country better positioned for the future. Furthermore, we are mortgaging the future of our country, children and grandchildren, and the pace of debt financing is set to increase dramatically in future years. As George Washington said, we should avoid "ungenerously throwing upon posterity the burdens that we ourselves ought to bear." These are timeless words of wisdom that more policymakers need to hear and heed.
In my opinion, the three most powerful words in the Constitution are "We the People." I encourage every American to ask him- or herself, what relationship do you have individually to those three words? At a minimum, Americans who care about the future of their country, children and grandchildren should become informed and involved in helping to increase the visibility of our nation’s fiscal and other key sustainability challenges. We all need to do our part to help ensure that the next president of the United States will make the theme of fiscal responsibility and inter-generational equity one of his or her top three priorities. This theme serves as an umbrella for budget, Social Security, health care, discretionary spending, tax and other reform efforts.
If the next president makes this theme a priority, has the courage to lead, the ability to effectively communicate with the American people, and the willingness to work on a bipartisan basis, we can change our course and help ensure that our future is better than our past. If he or she doesn’t, it may only be a matter of time before we face a crisis. Unfortunately, the clock is ticking and time is currently working against us. The time for action is now!