Dave Walker's Speech at NACO
July 13, 2008
Kansas City, Missouri
By: Hon. David M. Walker
President and CEO, Peter G. Peterson Foundation
This morning, I will address the need for both America and Americans to stop just living for today and to start focusing on the future. But first, I'd like to speak to you about how we need to learn from the past in an effort to create a better future for our country, communities and families.
Let me start by stating the obvious. The United States is a great nation, possibly the greatest in the history of mankind. We have gone from a fledgling nation to the world's only superpower and a beacon of liberty and freedom for people around the globe. Clearly, we have much to be proud of and much to be thankful for.
At the same time, while the United States is number one in many things it is not number one in all things. In fact, we are ranked below average in connection with a number of key outcome-based statistics when compared with other industrialized nations. For example, we are below average in the areas of public finance, savings, K-12 education results, energy conservation and health care outcomes.
In my view, we have strayed from a number of key principles on which our republic was founded. For example, we have gone from:
· A belief in a limited role for the federal government to a large and expanding role. Believe it or not, in 1789 the federal government represented 2 percent of the economy. Now it represents over 20 percent and this percentage is set to grow dramatically when "baby boomers" retire in big numbers;
· An initial focus on several express and enumerated roles for the federal government to a point where only 38 percent of the federal government relates to the key roles envisioned by our Founders. Roles like national defense, homeland security, the federal judiciary, foreign policy, our treasury functions, the postal service, Congress and the Executive Office of the President. What happened to the Founders' intent that all roles not expressly reserved for the federal government belong to the states and subdivisions, including counties, and ultimately the people? Candidly, as you'll hear in a few minutes, the federal government has overpromised and underperformed in a range of areas beginning in the 20th century and continuing into the 21st;
· A time when George Washington and the other Founders cautioned us not to involve ourselves in foreign conflicts to the first "preemptive war" in the history of the U.S., and, contrary to the Constitution's terms, the related "war" was never declared by the Congress;
· A culture that valued thrift and had "debtors prisons" to one where both America and too many Americans are "addicted to debt";
· A political system where parties were viewed as factions and with skepticism, and politicians left their normal jobs for a short to medium term period to serve the public interest, to an era where partisan politics often trump the public interest, and too many elected officials want to make a career out of their offices; and,
· A society that believed in individual opportunity and public morality to one with a large number of broad-based "entitlement programs" and where the moral indiscretions and escapades of celebrities are frequently in the news.
Even more seriously, we've gone from a nation of hope and optimism to where, for the first time in our nation's history, a majority of Americans believe that life for their children will not be better than their own. Why? Because in some ways we have lost our way. For example, America and too many Americans have become captive to conspicuous consumption and a desire to have everything they want today, even though they may not be able to afford it. As a result of our myopia, tunnel vision and self-centeredness, America now faces a range of large and growing sustainability challenges that Washington policymakers are not taking seriously enough. These sustainability challenges include our current fiscal policy, savings rates, entitlement programs, health care, tax and education systems, as well as our current energy, environmental, foreign policy, immigration, infrastructure and Iraq strategies just to name a few.
Time does not allow me to address all of our sustainability challenges so I will address a few of particular interest to us at the Peterson Foundation, which I have the honor and pleasure to lead. Specifically, I'll touch on our fiscal, savings, entitlement, health care, tax and education challenges.
As the most recent Comptroller General of the United States and our nation's top auditor, I know firsthand that our country's financial condition and fiscal outlook are worse than advertised. Considering all current "off-balance-sheet obligations," the federal government is in a $53 trillion plus financial hole which is growing by $2-$3 trillion a year on auto-pilot. The federal government is also running large and growing deficits that, absent reforms, will get much worse when "boomers" retire in big numbers. Clearly, Washington has not learned the first rule of holes - "When you're in a hole, stop digging!"
We are on an imprudent and unsustainable fiscal path and our financial position is deteriorating with the passage of time. We must take a number of steps soon to defuse our "fiscal time bomb," which is driven largely by out of control health care costs and known demographic trends. These steps include re-imposing tough statutory budget controls and reforming the Social Security system, as well as engaging in comprehensive reform of our tax and health care systems in installments and over time.
A look at the current housing and mortgage related current sub-prime crisis portends a much larger and more disruptive outcome from what I'll call our potential super sub-prime crisis. Namely, the very real risks imposed by our nation's poor financial condition and irresponsible fiscal practices. In fact, the current sub-prime crisis and our nation's fiscal situation share at least four key characteristics. First, both involve a disconnect between those who benefit from current policies and practices and those who will bear the risk and pay the price in the future. Second, both involve inadequate transparency relating to off-balance sheet and other risks. Third, both serve to demonstrate the importance of maintaining lender confidence and adequate cash flow, as well as the limitations of credit rating agencies. Bear Stearns and investors in certain mortgage-backed securities recently found this out the hard way. Finally, both involve a lack of adequate ongoing oversight, risk management and timely action to prevent a crisis.
It's important to remember that what happens at the Federal level matters at the State level, and it matters at the County and City level as well. Although American government is layered, it's also interconnected and interdependent. Presidents, governors, representatives, and county officials are united by a common obligation to the people of this country. Remember what James Madison wrote in the Federalist Papers: "The federal and State governments are in fact but different agents and trustees of the people." We're all in the same boat and as Ben Franklin said in a different context, "We must all hang together or else we'll surely hang separately."
When the fiscal crunch comes in earnest-and absent meaningful action it will come-the federal government will need to expedite separating the wheat from the chaff in connection with all major spending programs and tax policies. And don't forget, bad news flows downhill. Clearly, states and localities will feel the ripple effect of the crunch. In addition, based on a 2007 U.S. Government Accountability Office (GAO) study, states and localities face their own fiscal sustainability challenges based primarily on four factors. Namely, growing Medicaid costs, unfunded retiree health care plans, underfunded pension plans, and deferred maintenance and other critical infrastructure needs. As a result, all levels of government will need to re-focus on their core responsibilities, reassess their priorities and re-engineer their practices. States and localities will also need to focus more on needs versus wants, results, affordability and sustainability considerations.
In my view, we should be taking aggressive steps now to design and implement a comprehensive set of federal, state and local key national indicators that could help us make more informed and outcome based decisions in this regard. The GAO, which I led for almost ten years, and the National Academies launched such an effort several years ago and it is gaining steam through a new not-for-profit entity called "The State of the U.S.A." I would encourage you to become familiar with this effort and to support it. It will not only help government become more results oriented, it can help to enhance overall civic engagement and strengthen our democracy. The Foundation recently provided a grant to support this effort.
While the big crunch associated with our $53 trillion federal fiscal hole has not yet arrived in full force, the fiscal pressures and related ripple effects are already starting to be felt. For example, consider what has happened in just the last year: Faced with the possibility of passing the $10 trillion debt milestone in his last year in office, President Bush's 2009 Budget proposed an $18.9 billion, or 7.4 percent, decline in federal grants to state and local governments for all programs besides Medicaid. Furthermore, if we look at the proposed cuts this year, they include a 30 percent nominal reduction in the Social Services Block Grant, which pays for services to protect children from neglect and abuse, and cuts in energy assistance, community development, and funds for Drug Free School programs.
The truth is, the federal government's large and growing fiscal challenge will affect states and localities in at least three important ways in the future:
First, the same problems we see on the national level - rising healthcare costs, an aging workforce, and the slowing of revenues - will adversely, and even disproportionately, impact local and state governments. Although the federal government is able to forestall some of these consequences by piling up debt, local governments do not always have that option. Hence, the immediate hardships incurred by poor fiscal policies may be felt the most at the local level. These consequences will be all the worse because of the housing crisis, which has crippled local property tax revenues.
Second, as the federal government comes to terms with its ballooning obligations, it may look to cut state and local grants even more. These discretionary grants, which today total over $400 billion, could be among the first to go when the federal government becomes strapped for cash.
Third, as the federal government becomes more desperate for funding, it may turn to a consumption tax - a program that has already been discussed at the national level - which could theoretically usurp the states' sales tax. Here in Kansas, the state government relies on its sales tax to generate over 35 percent of its total tax revenue. In states like Florida and Tennessee, the sales tax is responsible for over half of all state tax revenue.
All of us at the Foundation are focused on a range of public education and engagement as well as other efforts to prevent a local, statewide and federal fiscal crisis. In that regard, stay tuned for a critically-acclaimed documentary that the Peterson Foundation has purchased and will distribute. The film, I.O.U.S.A., scheduled for release this August, addresses four key deficits facing America (our budget, savings, balance of payments, and leadership deficits). The film, which is intended to be a "Wake-up Call for America," will be our opening salvo in what is likely to be a long fight for America's future. With your permission, I'll show the two minute trailer at the end of my remarks.
What about our nation's savings practices? The sad but simple truth is that most Americans are great at spending but poor at saving. Worse yet, too many Americans are following the bad example of their federal government. Namely, they are spending more money that they take in, while building up debt and mortgaging their future. The government also adds fuel to the fire by encouraging conspicuous consumption and a "live for today" attitude. These types of behavior cannot be sustained over the long-run.
In fact, America has about the lowest savings rate of any industrialized nation. Why should we care? Because with savings comes investment, which results in additional research and development (or R&D). R&D results in new and innovative products and practices, quality enhancements and productivity improvements - and all of these serve to increase our nation's overall economic growth and competitive posture. They will also serve to improve our average standard of living over time. I think most people would rather have our average standard of living continue to improve over time, as has been our American tradition since the inception of our republic! That longstanding tradition is now at risk.
At the same time, one has to be careful with averages. For example, on average, both Pete Peterson and I are billionaires! I can assure you that my net worth is missing several zeros to the left of the decimal point!
The failure to save domestically also results in us having to rely on foreign investors to an increasing extent in order to finance our nation's excess consumption. This may be OK in the short-term; however, it is not in our nation's economic, foreign relations or national security interest over the long-run.
All you need to do is look back to 1956 to see how the United States used its financial leverage against the United Kingdom during the Suez Crisis. When England and France challenged Eqypt President Nassar's attempt to take over the Suez Canal, the President of the United States called the Prime Minister of the United Kingdom and advised him to rethink his position. He reminded him how much they relied upon us to support the pound, and within two weeks they were G-O-N-E, and England was an ally! What was our leverage? Loans.
Entitlement reform must be an essential and major part of our overall reform initiative. Why? Because entitlement programs involve unfunded promises in excess of $41 trillion and rising. Specifically, Social Security is in the hole about $7 trillion and Medicare is in the hole about $34 trillion, both calculated on a discounted present value basis. As a result, fundamental reform of our major entitlement programs, especially Social Security, Medicare and Medicaid must be an essential element to putting us on a prudent and sustainable fiscal path.
Social Security reform will be much easier than reforming federal health care programs. Why? Because the funding gap for Social Security is less than 20 percent of the Medicare gap. In addition, Social Security basically involves money, which while important, does not raise some of the more ethical and emotional issues associated with health care reform like "end of life care." In reforming Social Security, we must take steps to make it strong, secure, sustainable and more savings oriented.
In the case of Medicare, much more dramatic reforms will be required. They will include better targeting of taxpayer subsidies for the Part B (physician) and Part D (drugs) portions of the Medicare programs. These will need to be combined with a range of other cost savings actions, including requiring competitive bidding in appropriate circumstances and possibly banning or limiting the advertising of prescription drugs. However, in the end, Medicare will need to be addressed as part of a much more comprehensive health care reform effort.
Comprehensive health care reform is essential because if there is one thing that could bankrupt America, it is uncontrollable health care costs! Believe it or not, we are the only major nation on earth that writes a "blank check" for health care costs. That's essentially what we do for Medicare, Medicaid and other entitlement programs and it cannot be sustained.
There is little question that health care costs are out of control and yet many of our nation's health care outcomes do not stack up well against other industrialized nations. Specifically, our ranking is low in areas like our percentage of uninsured population, infant mortality rate, life expectancy at birth, medical error rates, and obesity levels. At the same time, health care reform will likely be the most challenging of all of our needed reform efforts. Why? While it involves huge sums of money, it's about more than money. It can be about life and death! In the final analysis, we must take steps now to constrain the rate of increase in health care costs and seek to reach a national consensus on the essential elements of comprehensive health care reform.
What will comprehensive health care reform look like? First, we need to recognize that due to its size, scope and importance, it cannot be addressed in one major reform effort. At the same time, we need to have several clear cut goals in mind as we move towards the finish line.
In my view, there should be four key pillars to comprehensive health care reform. First, we must achieve universal coverage for "basic and essential" health care. Second, we must impose a budget on what the federal government can spend on health care each year. Third, we should design and adopt a comprehensive set of national, evidence-based practice standards for the practice of medicine and the dispensing of prescription drugs. Finally, we must do more to enhance individual responsibility and accountability for one's own health and wellness.
With regard to tax reform, we must streamline and simplify our tax system in order to improve compliance, credibility and equity. While we need to raise additional revenues, how you do so matters a lot. We should seek to constrain overall tax burdens in order to maximize economic growth, maximize disposable income and maintain a competitive posture. In the final analysis, we must also generate enough revenue to pay our bills and deliver on the future promises we intend to keep. We are way short now and it's set to get much worse absent meaningful action.
Finally, with regard to education, while the United States has one of the best university systems in the world, we lag in our K-12 performance. In fact, we aren't even in the top 20 nations on math and science achievement at that level. We also face an extremely elevated and increasing high school drop out rate which is especially high among people of color. This does not portend well for their individual lives or for our overall competitive posture and domestic tranquility.
While much needs to be done in the area of education, we at the Peterson Foundation plan to focus our efforts on enhancing the teaching of financial literacy and civic responsibility at the middle/high school and college levels. We believe that by doing so, we can overtime help to reduce the drop-out rate, help more Americans become more responsible in their own financial affairs, as well as help all Americans to understand their role as citizens in helping to ensure the strength of our democracy and the accountability of elected representatives to the people.
Before closing, I'd like to address our last, and probably most serious deficit of all: our "leadership deficit". While public opinion polls of the Congress and the President are at or near all-time lows, it's clear that Americans are tired of partisan rhetoric, and want to start seeing some positive results-we the people deserve no less.
Despite the low rankings of the Congress, the Administration and the federal government in current public opinion polls, special interest and "status quo" forces have started their "pledge season" which happens every two years in Washington. I'm not talking about the kind that relates to college fraternities and sororities. I'm referring to the well-organized efforts by a number of special interest groups to have members of Congress sign pledges that they will or will not do certain things in advance of the general election campaign.
While such pledges have existed for many years and are not all bad, several have become a major obstacle to fiscal sanity. For example, this year's federal crop includes pledges being circulated by various organizations to "not raise taxes" and by others to "preserve Social Security and Medicare". Still others call for maintaining support for a variety of current federal spending programs and tax preferences with varying degrees of merit, cost and impact.
Don't get me wrong, most Americans, including me, prefer to keep taxes low while also keeping social insurance programs solvent, sustainable and secure. At the same time, our current tax policies and levels as well as our current entitlement programs are unsustainable in their present form. This fact is based on basic math, not personal opinion. Furthermore, from a stewardship and moral perspective, I'd rather that we leave our kids and grandkids with a bequest rather than a burden to bear.
It's fine for Senators and House members to show that they believe in low taxes, the importance of social insurance programs as well as the importance of selected other programs and tax preferences. It's quite another to say that the "status quo" is fine or they will "never do something".
Today's "no tax increases" and "no entitlement reforms" pledges are part of a "status quo" mentality that serves to exacerbate our federal fiscal challenge. Such pledges ignore the fact, as I mentioned before, that our nation is in a $53 trillion hole that grows by $2-3 trillion a year by doing nothing. Gridlock in Washington can sometimes be good when things are going well; however, gridlock is totally unacceptable when our nation faces large and growing fiscal, health care, education, energy, environmental, immigration, infrastructure, tax and other challenges that serve to threaten the future of our country and families.
Given the above, we should thank and salute the members of the Senate and the House who have the wisdom, the vision, and yes, the courage, to resist the pressure to sign this year's various "status quo pledges". Such pledges only serve to delay much needed and long overdue reform actions. They also serve to further mortgage the future of our country, children and grandchildren.
The individuals who refuse to sign such pledges are our true leaders who recognize that "everything must be on the table" if we expect to reach a reasoned, reasonable and politically feasible agreement on a package of reforms to help save our future. It's time they were recognized as such.
The time has come for truth and real leadership in Washington. Candidates should reject "status quo pledges" while taking steps to help ensure that our collective future is better than our past. After all, the "Do Nothing Plan" is not good for the future of America or for American families.
What about the Presidential candidates? They should resist all such "status quo" pledges as well. At the same time, if they want to make a positive pledge, they should consider the following. I pledge to: 1) make fiscal responsibility and inter-generational equity a priority if I am elected president; 2) keep all major reform options on the table in order to help facilitate a bi-partisan agreement; 3) use the "bully pulpit" of the Presidency to state the facts and speak the truth to the American people about the need for action and the consequences of inaction; 4) work on a bi-partisan basis to achieve sensible solutions for America's future; and 5) support the need for a capable, credible and bi-partisan fiscal future commission that would make a range of budget, entitlement, other spending and tax reform recommendations to the next president and the next Congress for an up or down vote like the Base Realignment and Closure (BRAC) process.
Meeting this broader fiscal challenge will require courage and leadership from our next President. He must have the courage to state the facts, to speak the truth and to address several tough issues that most politicians would rather just ignore. It will also require several leaders from the Senate and House on both sides of the political aisle to work with the new President to help restore American and keep the American dream alive.
I'm proud to be an American and I'm proud of what America has accomplished in its 200-year plus history. At the same time, I am very concerned about the future of my country and about the burdens my children and grandchildren will have to bear if we do not wake up and start making tough and more intelligent choices as a nation.
We must heed the lessons from the fall of Rome. The Roman Republic lasted over twice as long as our republic has thus far, but Rome fell for several key reasons, several of which seem to be particularly relevant today. First, a decline in moral values and political civility at home. Second, an over-confident and over-extended military around the world. Third, fiscal irresponsibility by the central government. Finally, failure to control its borders. If these factors sound familiar, we must wake up and do what it takes to make sure that we keep America great and avoid Rome's fate.
In closing, I believe that we can, we must, and ultimately we will rise to meet our challenges. After all, we are Americans and we have a track record or rising to meet any challenge once we set our minds to it. The real question is, when will we? And who will lead us out of our hole and into the future? In my view, the only way we can assure that our collective future will be better than our past is if "We the People" become more involved in these and other key issues. We must demand change and hold our elected representatives accountable for their actions or their failure to act. Stated differently, we must take steps to make the political cost associated with doing nothing greater than the political cost of making tough choices sooner rather than later. I can assure you that I and others at The Peterson Foundation will do our part, all that I ask is that you do yours. If we all do, we can keep America great, create a better future, and help to make sure that the United States will be the first republic to stand the test of time.
Thank you. And now it's time for the trailer.
