How to Restore Fiscal Sanity to the USA (+2K Views)

Our government has grown too big, promised too much and waited too long to restructure. Our fiscal clock is ticking and time is not working in our favor. The Moment of Truth is rapidly approaching. We’ll soon know whether Washington policymakers are up to the challenge and whether they will start focusing more of doing their job rather than just keeping their job and on focusing first on their country rather than their party. [To accomplished what is needed] the President and Congressional leaders from both political parties need to be at the table and everything must be on the table in order to achieve sustainable success.  [Here’s an outline of our country’s predicament and how it might  be resolved.] Words: 3110

So says David M. Walker (http://tcaii.org) in an article* which Lorimer Wilson, editor of www.munKNEE.com,  has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Walker goes on to say:

Our nation’s founders understood the difference between opportunity and entitlement. They believed in certain key values including the prudence of thrift, savings and limited debt. They took seriously their stewardship obligation to the country and future generations of Americans but the truth is, we have strayed from these key, time-tested principles and values in recent decades. We must return to them if we want to keep America great and help to ensure that our future is better than our past.

The Federal Debt is 95% of GDP and Growing Rapidly

The total federal debt alone is almost 100 percent of the economy and growing rapidly. Add in state and local debt, and the total number is about three times as much as the total debt we held at the beginning of our Republic – and it is headed up rapidly. As the below graphic shows, our total federal debt has more than doubled in just the past ten and a half years.

Fiscal Fitness Index Ranks America 28th

In March 2011 the Comeback America Initiative (CAI) and Stanford University released a new Sovereign Fiscal Responsibility Index (SFRI) – a Fiscal Fitness Index. We calculated each country’s SFRI based on three factors:

1. fiscal space (the amount of additional debt a country could theoretically issue before a fiscal crisis is imminent),
2. fiscal path (the number of years before a country will hit its theoretical maximum debt capacity),
3. fiscal governance (a value based on the strength of a government’s institutions, as well as its transparency and accountability to its citizens).

The overall SFRI index shows that the U.S. ranks 28 out of 34 nations in the area of fiscal responsibility and sustainability. On average the U.S. ranks far below all three of the above mentioned categories and, in particular, the fiscal governance category – and will hit its theoretical maximum debt capacity within16 years, and will enter a “fiscal danger zone” within 2-3 years . When you see which countries rank around us, it’s clear that we’re in a bad neighborhood. We’re only a few notches above countries like Greece, Ireland, and Portugal, all of which have recently suffered severe debt crises.  Below is the full list of rankings.

On the positive side, the CAI and Stanford report showed that if Congress and the President were able to work together to pass fiscal reforms that were the “bottom line” fiscal equivalent of those recommended by the National Fiscal Responsibility and Reform Commission last year, our nation’s ranking would improve dramatically, to number 8 out of 34 nations. In addition, we would achieve fiscal sustainability for over 40 years!

So what are our elected officials waiting for? If they do not want a debt crisis to force them to make very sudden and possibly draconian changes they need to wake up and work together to make tough choices. That’s what New Zealand did in the early 1990s when that country faced a currency crisis. Due to tough choices then and persistence over time, New Zealand now ranks number 2 in the SFRI – second only to Australia. If New Zealand can do it, America can too!

The Recent Budget Policy Proposals Don’t Go Far Enough

In order for us to begin to restore fiscal sanity to this country [recent budget policy proposals as mentioned  below need to be implemented]. President Obama has…

• largely embraced the work of his National Fiscal Responsibility and Reform Commission, although with a longer timeframe for implementation and less specifics on entitlement reforms;
• endorsed the debt/GDP trigger and automatic enforcement concept that CAI had been advocating under [which] Congress could agree on a set of statutory budget controls that would come into effect in fiscal 2013…

House Budget Committee Chairman Paul Ryan recently demonstrated the political courage to lead in connection with our nation’s huge deficit and debt challenges. His budget proposal recognizes that restoring fiscal sustainability will require tough transformational changes in many areas, including spending programs and tax policies. Chairman Ryan’s proposal includes several major reform proposals, especially in the area of health care. For example, he proposes:

• to convert Medicare to a premium support model that will provide more individual choice, limit the government’s long-term financial commitment and focus government support more on those who truly need it
• to employ a block grant approach to Medicaid in order to provide more flexibility to the states and limit the governments’ financial exposure.

[Ryan’s proposals] have varying degrees of merit, however, how they are designed and implemented involve key questions of social equity that need to be carefully explored. [Furthermore,] contrary to Chairman Ryan’s proposal, the following concepts also need to be on the table in order to help ensure bipartisan support for any comprehensive fiscal reform proposal:

• additional defense and other security cuts that do not compromise national security and
• comprehensive tax reform that raises more revenue as compared to historical levels of GDP.

Unfunded Liabilities Could Sink our “Ship of State”

Washington policymakers took about 88 percent of federal spending, along with much-needed federal tax reforms, “off the table” during the recent debate over the 2011 budget. In essence, they have been arguing over the bar tab on the Titanic when we can see the huge iceberg that lies ahead. The ice that is below the surface is comprised of tens of trillions of dollars in unfunded Medicare, Social Security and other off-balance sheet obligations along with other commitments and contingencies that could sink our “Ship of State”. It is, therefore, critically important that we change course before we experience a collision that could have catastrophic consequences. As you can see in the series of pie charts below, mandatory programs like Social Security and Medicare already take up the largest share of the federal budget and, absent a change in course, will continue to do so in increasing amounts in the next several decades.

Reaching Federal Debt Ceiling Limit Would Result in Draconian Actions

Now that the level of federal funding for the 2011 fiscal year has been resolved, there has been an increasing amount of attention on Congress’ upcoming vote to increase the federal debt ceiling limit. As is evident by the chart below detailing the debt ceiling limit per capita adjusted for inflation since 1940, the U.S. started losing its way in the early 1980s. Fiscal responsibility was temporarily restored during the 1990s, when statutory budget controls were in place, but things went out of control again in 2003, the year after those budget controls expired.

In essence, raising the debt ceiling is simply recognizing the federal government’s past fiscally irresponsible practices. While federal law provides for the continuation of essential government operations even if the government has not decided on a budget or funding levels for a fiscal year, such a provision does not exist in connection with the debt ceiling. Therefore, if the federal government hits the debt ceiling during a time of large deficits, which is the case today, dramatic and draconian actions will have to be taken to ensure that additional debt is not incurred. This would likely include a suspension of payments to government contractors, delays in tax refunds, and massive furloughs of government employees. In addition, since Social Security is now paying out more in benefits than it receives in taxes, the monthly payments may not go out on time if we hit the debt ceiling limit. That would clearly get the attention of tens of millions of Americans, including elected officials.

[Since] failure to raise the debt ceiling is not a viable option given our current fiscal state, we must take concrete steps to address the government’s lack of fiscal responsibility. We must also do so in a manner that avoids triggering a massive disruption and a possible loss of confidence by investors in the ability of the federal government to manage its own finances. Such a loss of confidence could spur a dramatic rise in interest rates that would further increase our nation’s fiscal, economic, unemployment and other challenges.

In order to begin to restore fiscal sanity, Congress could increase the debt ceiling limit in exchange for one or more specific steps designed to send a signal to the markets, and the American people, that a new day in federal finance is dawning. To be credible, any such action must go beyond short-term spending cuts for the 2012 fiscal year. The debt/GDP trigger and automatic enforcement concepts I advocate above are one specific step Congress could take.

Sovereign Debt Rating Suggests U. S. on Unsustainable Fiscal Path

The S&P’s revised outlook on the long-term rating for U.S. sovereign debt should be yet another wake-up call for elected officials and other policymakers in Washington. S&P’s action serves as a market-based signal that independent ratings agencies believe the U.S. is on an imprudent and unsustainable fiscal path and that action is needed in order to maintain investor confidence. In my view, this action should have been taken place some time ago; however, it is now likely that other rating agencies will reconsider their ratings positions on U.S. Sovereign debt.

We Must Move Past Partisan Politics

The American people need to understand that doing nothing to address our deteriorating financial condition and huge structural deficits is simply not an option. Failure to act will serve to threaten America’s future position in the world and our standard of living at home. Therefore, both major political parties must come to the table and put aside their sacred cows and unrealistic expectations. As John F. Kennedy said,

“The great enemy of the truth is very often not the lie — deliberate, contrived and dishonest — but the myth — persistent, persuasive, and unrealistic.”

Liberals need to acknowledge that we need to renegotiate the current social insurance contract. For example, contrary to assertions by some, Social Security is now adding to the federal deficit and is underfunded by about $8 trillion. As you can see below, it will face escalating annual deficits beginning in 2015.

There is no debate that last year’s health care reform legislation will result in higher federal health care costs as a percentage of the economy. (See the chart below). In addition, according to Medicare’s independent Chief Actuary, based on reasonable and sustainable assumptions, last year’s health care reform legislation will end up exacerbating our deficit and debt challenges rather than helping to lessen them. He estimated that the cost of the health care law to the Medicare program could be over $12 trillion in current dollars more than advertised.

Conservatives need to acknowledge that we can’t just grow our way out of our fiscal hole. They need to admit that all tax cuts are not equal and there is plenty of room to cut defense and other security spending without compromising our national security. While conservatives are correct to say that our nation’s fiscal challenge is primarily a spending problem, they must recognize that some additional revenues will be needed to restore fiscal sanity. The math just doesn’t work otherwise.

All parties must acknowledge that we can’t inflate our way out of our problem and that we must take steps to improve our nation’s competitive posture. This means that some properly targeted and effectively implemented critical infrastructure and other investments may be both needed and appropriate even if they exacerbate our short-term fiscal challenge.

Washington policymakers need to understand that the same four factors that caused the recent financial crisis exist for the federal government’s own finances, [namely:]

1. a disconnect between those who benefit from prevailing policies and practices and those who will pay the price and bear the burden if and when the bubble bursts.
2. a lack of adequate transparency and accountability in connection with the true financial risks that we face.
3. too much debt, not enough focus on cash flow, and an over-reliance on narrow and myopic credit ratings.
4. a failure of responsible parties to act until a crisis was at the doorstep.

There is growing agreement that the greatest threat to our nation’s future is our own fiscal irresponsibility. In fact, as I noted in 2007 and Joint Chiefs Chairman Admiral Mullin stated last year, our fiscal irresponsibility and resulting debt is a national security issue. After all, if you don’t keep your economy strong for both today and tomorrow, America’s standing in the world and standard of living at home will both suffer over time – and waiting for a crisis before we act could also undermine our domestic tranquility.

What Should be Done to Remedy the Current Fiscal Insanity?

Congress and the President should:

1. reach a compromise agreement on an appropriate level of spending cuts in 2012 while also providing for some additional properly designed and effectively implemented critical infrastructure investments.
2. agree to re-impose tough statutory budget controls that will force much tougher choices on both the spending and tax side of the ledger beginning no later than 2013.
3. authorize and fund a national citizen education and engagement effort to help prepare the American people for the needed actions and to facilitate elected officials taking them without losing their jobs.
4. create a credible and independent process that will provide for a baseline review of major federal organizational structures, operational practices, policies and programs in order to make a range a transformational recommendations that will make the federal government more future focused, results oriented, successful and sustainable.
5. cut spending levels. Base levels of federal discretionary spending increased by over 30 percent between 2007 and 2010 during a time of low inflation.
6. all parties must be realistic regarding how much should be cut and how quickly it can be achieved. In my view, we should be targeting cuts of $125-$150 billion over several years. If we did so, the related savings would be significant and would compound over time.

As the National Fiscal Responsibility and Reform Commission,  the CAI, The No Labels political movement (of which I am a co-founder), and others have noted, everything must be on the table – and all political leaders need to be at the table – in order to put our nation on a more prudent and sustainable fiscal path. This includes a range of social insurance program reforms, defense and other spending cuts, and comprehensive tax reform that generates additional revenues, including both individual and corporate tax reform. We must keep in mind that the private sector is the engine of innovation, growth, and jobs. In addition, many businesses are taxed at the individual, rather than the corporate, level.

Realistically, it will take us a number of years to get back into fiscal shape [and, as such,]what is a reasonable order of battle to win the war for our fiscal future?

• First and foremost we need to enact budget process reforms, re-impose the type of budget controls and engage in the fact-based citizen education and engagement effort referred to previously.
• The next order of battle items should be corporate tax reform and Social Security reform.

Why corporate tax reform? Because it can help to improve our competitiveness, enhance economic growth and generate jobs. Why Social Security reform? Because we have a chance to make this important social insurance program solvent, sustainable and secure for both current and future generations. We can also exceed the expectations of all generations and demonstrate to both the markets and the American people that Washington can act before a crisis forces it too.

The above efforts should be followed by:

• broader tax reform and Medicare/Medicaid reforms.
• rationalize our health care promises and focus more on reducing health care costs in another round of health care legislation.
• begin a multi-year effort to re-baseline the federal government’s organizations, operations, programs and policies to make them more future focused, results oriented, affordable and sustainable.

Conclusion

In summary, the truth is that the government has grown too big, promised too much and waited too long to restructure. Our fiscal clock is ticking and time is not working in our favor. The Moment of Truth is rapidly approaching. As it does, let us hope that our elected officials keep the words of Theodore Roosevelt in mind:

“In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”

“We the People” must do our part by:

• insisting on action and by making the price of doing nothing greater than the price of doing something.
• insisting that our legislators offer specific solutions to defuse our ticking debt bomb in a manner that is economically sensible, socially equitable, culturally acceptable, and politically feasible.
• recognizing that improving our fiscal health, just like our physical health, will require some short-term pain for greater long-term gain…

We’ll soon know whether Washington policymakers are up to the challenge and whether they will start focusing more of doing their job rather than just keeping their job. They need to focus first on their country rather than their party.

The President and Congressional leaders from both political parties need to be at the table and everything must be on the table in order to achieve sustainable success. Let’s hope they make the right choice this time!

*http://beforeitsnews.com/story/610/219/Restoring_Fiscal_Sanity_in_the_United_States:_A_Way_Forward.html (Hon. David M. Walker, Founder and CEO of the Comeback America Initiative and Former Comptroller General of the United States (1998-2008)