Comeback America: Turning the Country Around and Restoring Fiscal Responsibility

By: Hon. David M. Walker, President and CEO of the Peter G. Peterson Foundation and Former Comptroller General of the United States (1998-2008)

I'm pleased to be here to discuss my book and some of the issues that the Peter G. Peterson Foundation is addressing to help promote federal financial responsibility and fight for America's future.

In my view, America is at a critical crossroads and the decisions we make in the near future will largely determine whether our best years are ahead of us or behind us.

As a nation and a people, we need to come back to some of the basic principles and values that made America great and we have strayed from. For example, we need to focus more on opportunity rather than entitlement, thrift and value rather than throwing money at problems, savings rather than debt, personal responsibility rather than collective irresponsibility, and stewardship rather than selfishness. This includes making sure that this nation has a sound, secure and sustainable safety net rather than expanded social insurance arrangements for everyone, including the wealthy. It also includes making sure that we have enough revenues to pay our bills and deliver on the promises that we intend to keep.

And what about stewardship? It's a word that we don't hear that often anymore. To me if means leaving things not just better off but better positioned for the future. We clearly need to do a better job in this regard, especially from a fiscal, education and environmental perspective.

We also need to comply with the Constitution's current provisions, especially in connection with declaring war, while also considering additional Constitutional amendments.

Given where we are and the direction we are headed, it is clear this country needs to engage in a range of transformational policy, operational and political reforms in order to put our nation on a more prudent and sustainable path.

Importantly, my book, "Comeback America", outlines a number of suggested solutions in all three of these areas and notes that in order to make them a reality, we will likely need to employ extraordinary processes to engage the people and get the Congress to act.

Before I go further let me note that the opinions expressed in the book represent my personal views which may, or may not, be the same as the official views of the Peterson Foundation. For example, the Peterson's Foundation's mission does not include political reforms or possible Constitutional amendments.

Let me be clear at the outset, we face a range of serious challenges, especially in connection with our nation's finances. In my view the American Dream is in jeopardy and our Republic could be "at risk" over time if we don't start to face facts and change course soon.

And what do I mean by the American Dream. In my view, it involves both individual and generational dimensions.

Specifically, in America, every individual should have the opportunity to achieve their full potential based on their personal efforts and God-given abilities. In addition, to help make this a reality, every generation of Americans has a stewardship responsibility to leave the country both better off and better positioned for future generations. Unfortunately, the Baby Boom generation, my generation, is not properly discharging it's stewardship responsibilities in a variety of ways which the book addresses. I along with others am trying to help change that.

Time doesn't allow me to cover all of the issues addressed in the book, so I'll mention a few and I will be glad to answer any questions you may have afterward.

First and foremost, our nation's financial condition is worse than advertised and it's deteriorating with each passing day. We face a $60 plus trillion dollar financial sinkhole that is growing rapidly.

Washington's spending appetite has grown dramatically in recent years, even during times of low inflation. President George W Bush (43) was the biggest spending President since Lyndon Johnson. He cut taxes, engaged in two "undeclared wars" and also expanded entitlements to include the new Medicare prescription drug bill without adequately considering the fiscal implications of all these actions.

More recently, the two annual appropriations bills signed by President Obama for fiscal 2009 and fiscal 2010 provide for an over 20 percent increase in the base level of discretionary spending as compared to fiscal 2008. And that percentage excludes any non-recurring stimulus and "bailout" funding.

This ravenous spending appetite has been coupled with a range of creative accounting and "self-dealing" practices over the years. Such practices have been the case in connection with Social Security and various federal "trust funds" for many years. However, these practices have expanded recently and I will provide a couple of major examples later.

From a cultural perspective, it's pretty clear that beginning within the past 2-3 decades, America and many Americans became addicted to current consumption and debt. In addition, many public officials have come to accept deficits as a normal and acceptable thing. Fortunately, Americans are waking up and changing their ways but Washington hasn't seen the light yet.

At the same time, our nation has become overly reliant on foreign lenders, in large part because of our low savings rate. Yes, America is being mortgaged and an increasing percentage of that mortgage in recent years is held by foreign lenders.

From a federal fiscal perspective, there are two separate and distinct dimensions to our challenge. The short-term and our structural challenge.

Our short-term deficits and debt challenges are fueled largely by the recession, two undeclared "wars", the bursting of the housing bubble and related fallout, and selected tax, spending and entitlement actions from the prior administration.

Very importantly, our real challenge is not today's deficits and debt levels. In fairness, it's clear that some level of sizable short-term deficits are understandable and even necessary.

It’s our large, known and growing structural imbalance, fueled in large part, but by no means solely, by tens of trillions in unfunded social insurance obligations and rising health care costs. These factors along with a base-line gap between expected revenues and expenditures, will lead to escalating deficits and unsustainable debt burdens in the future and serve to threaten our "ship of state" unless we take action and change course. These trends also serve to constrain our nation’s ability to make investments that will help create a better future for all of us. Things like investments in our children, basic research, critical infrastructure, and alternative energy sources, among other things.

Our structural deficits are large and growing at all levels of government and the so-called "long-term" problem is no longer a distant or theoretical concern. It is in sight, approaching our shores and we are not prepared!

Furthermore, as a mentioned earlier, unlike at the end of World War II when we financed our own national debt, America's mortgage is increasingly being held by foreign lenders. This dangerous dependency is not in our longer-term economic, foreign policy, national security or domestic tranquility interests.

This dependency may represent our single largest financial risk in the near term. It has been mitigated by recent and unprecedented levels of investment in Treasury debt by the Federal Reserve. This form of "self dealing" may help in the short-term, but it won't change the underlying market forces that will come into play at some point. The most likely effects would be much higher interest rates over time.

Believe it or not, based on the GAO's latest long-range budget simulation, this country's single largest federal expense within 12 years will be interest of the federal debt. And that assumes at interest rates won't rise which is totally unrealistic given expected borrowing levels.

And what do we get for the additional interest expense? The answer is NOTHING, NADA, SHINOLA! In actuality, interest represents paying for the past sins and excess consumption.

The truth is the four factors that led to the mortgage-related subprime crisis also exist in connection with the federal government's own deteriorating finances. There are, however, two big differences. First, the size and related risks are much larger in connection with the federal government's finances. In addition, no one will "bailout America", we must solve our own problems, and we need to get started soon.

Let me dispel a few false assertions regarding how to address our financial challenge right up front. We can NOT grow or inflate our way out of our structural deficits. The numbers just don't come close to working. In fact, our fiscal gap and financial hole is so great that we can't solve the problem just with entitlement reforms, tax increases or spending cuts individually. We will need to take steps on multiple fronts to put our federal financial house in order. And we need to do so before our foreign lenders lose confidence in our ability to get our act together.

To put our nation of a more prudent and sustainable path, we must take a number of policy related actions. For example, we need to re-impose tough statutory budget controls, tougher than the ones that existed from 1990-2002. These budget controls should take effect after we turn the corner on the economy and make progress on unemployment. We should also seek to stabilize the amount of the nation's debt as a percentage of the economy.

We need to take steps to make Social Security more solvent, sustainable, secure and more savings oriented. This includes taking such steps as strengthening the benefit levels for the near poor, making the benefit structure more progressive (e.g., progressive wage indexing), encouraging people to work longer, raising the taxable wage base cap, and implementing a supplemental, automatic and payroll deduction based savings account.

With regard to Medicare, we need to separate the issue of eligibility for participation from the amount of taxpayer subsidies one might be eligible for under Medicare’s voluntary programs (i.e., Parts B and D). The truth is, the federal government has over promised in many areas, including Medicare.

For example, individuals making well into six figure annual incomes should not receive taxpayer subsidies for their decision to voluntarily enrolls in Medicare's Part B (i.e., physician and outpatient) and D (i.e., prescription drugs) programs. They do under current law.

From a broader perspective, we must take steps to achieve real and comprehensive health care reform in installments and over time. These health care reform efforts should focus on four key dimensions: cost, coverage, quality, and personal responsibility. While, in my view, we need to achieve some level of universal coverage, that level of coverage must be appropriate, affordable and sustainable. However, in my view, we should focus on reducing and controlling costs first and foremost. After all, if there is one thing that could bankrupt America, it's out of control health care costs.

To do so, we must, among other things, pursue setting a budget for federal health care costs, move away from fee-for-service payment systems, and better target health care tax preferences for employer paid health care and taxpayer subsidies applicable Medicare's voluntary programs.

With regard to the current health care reform effort, in order for any health care reform legislation to be considered fiscally responsible, it should meet four key tests based on reasonable and realistic assumptions. First, it should pay for itself over 10 years. Second, it should not add to deficits beyond 10 years. Third, it should result in a significant reduction in the tens of trillions of unfunded health care promises that we already have. Finally, it should result in total health care costs as a percentage of the economy that are lower than the status quo.

The current health reform bills in the Congress do not meet all four of these tests. In fact, the ones that it does meet are based on questionable assumptions and the CBO has noted a number of related concerns and qualifications in connection with its cost estimates that the proponents of reform conveniently fail to note. Furthermore, some of the proposed Medicare revenues and cost reductions will be used to fund additional health care coverage rather than to enhance the government’s capacity to deliver on the Medicare promises that it has already made.

Very importantly, there is no "fail safe" mechanism in place to guarantee that the asserted deficit reduction from the current effort will actually occur. At a minimum, such a failsafe mechanism should be added as part of the conference to create a combined bill reform bill.

With regard to taxes, given our current fiscal posture and path, there are two types of taxes- current and deferred. In reality, absent meaningful entitlement reforms and re-engineering of the base of the federal government, deficits represent deferred taxes that ultimately will result in more interest payments and higher taxes. This represents taxation without representation on a massive scale. After all, it's easy to spend someone else's money. It's even easier when they are too young to vote or haven't been born yet.

We need to do much more than just deciding which of the Bush 43 tax cuts should be extended in whole or in part and which ones should be allowed to expire. We also need to come up with a longer-term fix for the AMT and take steps to dramatically streamline and simplify the current income tax system. We also need to consider a carbon tax and a progressive consumption tax.

One thing is for sure, taxes are going up over time on a lot more people than those who make $250,000 or more. Why? Because of a very simple and yet increasingly troubling four letter word in Washington. And that word is - MATH!

As you know, the U.S. doesn't rank among the top 25 nations in math at the high school level. That is very evident based on assertions made and actions taken by many elected officials. In addition, the longer we wait to tackle our structural imbalance, the higher taxes be.

The truth is the numbers just don't come close to working at historical tax levels. For example, based on our current path, federal taxes alone would have to more than double by 2030 just to stop the bleeding of red ink.

While our federal fiscal challenge is the biggest, most states face their own structural deficit problems driven largely by Medicaid costs, unfunded retiree health plans, underfunded pension plans, critical infrastructure needs and increasing higher education costs. And many city and country governments face their own fiscal challenges. Therefore, our combined national challenge is even greater.

Given the above, there is no question that taxes will ultimately go up the only real question is when, in what form and how much. And the longer we wait to put our financial house in order the higher taxes will likely go up.

Furthermore, it just doesn't make sense for over 50 percent of Americans to pay no income taxes, which taxes fund all the express Constitutional roles and functions for the federal government, including national defense and homeland security. That's where we are headed based on the Administration's stated policies.

And what about defense spending? The truth is that while to relative percentage of the federal budget that is allocated to defense has declined dramatically during the past 40 years, we spend as much or more on defense than all other countries combined. In addition, there is a huge amount of waste in defense.

We must take a more forward looking, threat, risk and integrated approach to defense related planning and resource allocation. We also need to assume less of a responsibility for global security issues and get other major countries to assume more of such responsibilities.

We must address a range of systemic acquisition and contracting challenges that costs us tens of billions each year. We must also fix the broken National Guard and Reserve business model and determine whether the all volunteer force concept is appropriate, affordable and sustainable.

Other than defense, we must also recognize the reality that a significant majority of current federal spending programs and tax preferences are based on conditions that existed decades ago. We must take steps to re-baseline the federal government to make it more future focused and results oriented. This includes the need to develop a an overall strategic plan for the Executive Branch and to design and implement a set of key national and outcome-based indicators for the federal government.

In addition to policy and operational reforms, we need to pursue a number of political reforms in order to address our dysfunctional democracy. For example, we should pursue needed redistricting, campaign finance and term limit reforms. Any federal terms limits need to be longer than most that have been imposed by the states. Some of these reforms will require Constitutional amendments in order to make them a reality.

Finally, we need to consider certain other Constitutional amendments, including setting a limit as to how much debt the nation can take on as a percentage of the economy. And in doing so, we should consider all of our debt, including the trillions of dollars in debt held by the federal government's so-called "trust funds". Or as I call them, the "Trust the Government Funds".

In summary, we need to engage in a range of transformational reforms. To make them a reality sooner rather than later, we will likely need to pursue extraordinary processes. This includes the need for a Fiscal Future Commission or Task Force in 2010, a Re-Baselining Review thereafter, and a possible Constitutional Convention over time if the Congress fails pursue needed constitutional amendments. And for those processes to become a reality and be successful, the first three words in the Constitution must come alive - "We The People".

There is no question that America is a great country - probably the greatest in the history of mankind. However, we aren't as great as we think we are. In fact, the United States is below average as compared to other major industrialized nations in connection with a number of key leading outcome-based indicators in areas like public finance, savings rates, educational performance, health care outcomes, basic research, critical infrastructure, and energy consumption.

Recent public opinion surveys show that eighty percent of Americans are concerned about our nation's escalating deficits and debt levels and increased reliance on foreign lenders, and seventy percent think that we need a special purpose commission to help be sure we act sooner and before we face a “super sub-prime crisis.” The time has come for elected officials to wake-up and start making a range of tough choices so America's best years will be ahead of us. It also time to bring "tough love" principles to Washington in connection with what the government does and how it does business.

The year 2009 was about addressing the current recession and several major non-business cycle related challenges. In 2010, we must begin to focus on the future, seek to explore sensible solutions and put a process in place to help make them a reality. We must take steps to ensure that the United States stays strong economically, militarily, diplomatically and from a societal perspective while also being the first republic to stand the test of time.

Please do not misunderstand my message. While we face serious challenges, America has faced major challenges in the past and we have always eventually risen to the meet them. It's not too late.

Yes, we can make sure that our best years are ahead of us. But we must start to make tough choices soon and before we pass a "tipping point". To do so, the President must take the lead in making the case to do so, and he should do so as part of his State of the Union Address.

While our elected representatives must do their part. However, all of us must do our part as well. This starts with each of us being more informed and involved while also assuming more personal responsibility and "leading by example".

Please join Pete Peterson, me and others at the Peterson Foundation in our fight for more responsibility and accountability today in order to create more opportunity tomorrow. Check our web site at The Peterson Foundation and sign up in the Citizen Action section. Check out the book web site as well at Comeback America.