GWEN IFILL: When Barack Obama is sworn into office in two weeks, he’ll also inherit another less pleasant piece of history: the largest deficit ever, $1.2 trillion. And he said today he expects things to get worse before they get better.
BARACK OBAMA, President-elect of the United States: If we do nothing, then we will continue to see red ink as far as the eye can see. And at the same time, we have an economic situation that is dire.
And we’re going to have to jump-start this economy with my economic recovery plan, creating 3 million jobs. That’s going to cost some money. And in the short term, we will actually see, potentially, additions to the deficit.
GWEN IFILL: A big part of the problem: a stubborn recession, now entering its second year.
As consumer spending has continued to slide, the Congressional Budget Office reported today that lost tax revenue will cost the government $160 billion, while federal spending continues to climb.
Today’s deficit estimate does not include the cost of a potential stimulus package. And it includes just over half of the total cost of the $700 billion bailout package, the money set aside to rescue mortgage giants and many other financial institutions.
The projected deficit represents about 8 percent of the economy’s gross domestic product, the highest since World War II, once adjusted for inflation.
Today, the president-elect said his recovery plan will try to curb the deficit in the long run.
BARACK OBAMA: We’re also laying the groundwork for long-term economic growth, which is why a lot of the stimulative — a lot of the investments are going to be around things like energy, health care, education, things that we need to be doing anyway.
GWEN IFILL: Mr. Obama also said he would counter the new spending with a pledge to reduce unnecessary expenditures. To help make that happen, he created a new White House position and picked Nancy Killefer to head it.
So what might these record deficits mean for the long term? We’re joined by two people who watch these matters closely.
Maya MacGuineas is president of the Committee for a Responsible Federal Budget at the New America Foundation.
And David Walker is president and CEO of the Peter G. Peterson Foundation. He’s also the former comptroller general of the United States.
David Walker, we heard the president-elect say today that the problem is not just a deficit of dollars, but also of accountability and also of trust. He also used the word “dire.” Exactly how dire is this?
DAVID WALKER, Former Comptroller General of the United States: We have a serious problem. We’re in a recession. We face some unprecedented challenges with regard to the financial services industry, the automotive industry, and a variety of others.
Clearly, some type of stimulus program is called for. We’re going to have to deal with some of the immediate crises. Deficit and debt levels are going to go up.
But we also have to recognize the federal government is living beyond its means. It needs to get its own house in order, as well.
Many factors boosted deficit
GWEN IFILL: Maya MacGuineas, when we talk about the fixes for the problem, this stimulus package, which the president-elect is going to talk about in greater detail tomorrow, it raises the question of, how did we get there? And how did we get here so deeply and so fast?
MAYA MACGUINEAS, Center for a Responsible Federal Budget: Well, that's right. I mean, a $1.2 trillion deficit; the number is absolutely staggering. And we really have sort of the deck stacked against us.
So, to begin with, we have the economy, which is turning down. And that's helping contribute to these large deficit numbers. But beyond that, we're going have a dramatically large stimulus, which is going to make these deficit numbers worse, not better, certainly at least in the short run.
But beyond that, we entered this in already a weakened budgetary position. We should have been running budget surpluses when the economy was strong in order to allow us to run deficits when it's weak. We weren't doing that, so we already started with a weak balance sheet.
And then, thirdly, we have the retirement of the baby boom, which began last year. The first baby boomer retired in 2008, and more to come, and quickly, and they will be collecting major benefits from Social Security and Medicare, adding even more pressure on the budget.
So they in Congress and the new president have an incredibly fine line to walk, where they need to take many actions to stimulate the economy in the short run, without destabilizing in the long run from all the debt that we're going to be accumulating.
GWEN IFILL: David Walker, is this a recessionary problem or is it a structural problem, these deficits? When they talk about this being something we're going to be hearing about for a long time, is this something which the economy can just work its way out of without outside help?
DAVID WALKER: Gwen, we've got a structural problem. You know, since the 1980s, but for the period of time that we ended up having the statutory budget controls, we were addicted to deficit and debt. We were running deficits in good times and bad, whether we were at war or not. You know, we had a problem before we came into this recession, before these bailouts.
We need to do two things. We need to make sure that we do the stimulus, learn the lessons from the recent failures so that we don't repeat them.
But we also need to put a process in place so that we can start making tough choices on budget controls, Social Security, health care, and tax reform, so we can avoid a much bigger crisis down the road.
We can't just focus on today's economy; we want to also be able to make sure we have a strong economy for the future.
U.S. borrowing at record high
GWEN IFILL: Maya MacGuineas, one of the startling numbers in these reports is the percentage of GDP, the percentage of the gross domestic product that is now involved. Explain what the significance of that is.
MAYA MACGUINEAS: Well, the important thing is how much money we're actually taking out of the economy and borrowing, and particularly right now we're borrowing a lot of what we're spending from overseas. So we're dependent on foreign borrowers.
And as our deficit as a share of GDP peaks to kind of record levels, record since decades now, that means that we have a whole lot of pressure on our macroeconomy, which might destabilize the economy as we're borrowing so much.
So if we need to attract all this capital because we don't have the revenues to pay for all of our spending, that means someone needs to be willing to give it to us. If we're borrowing more and more, upwards of a trillion dollars, people are going to start demanding more in return for what they're lending us. That means our interest rates go up.
Higher interest rates are exactly the opposite of what we want to see when we're trying to strengthen the economy, so we really have this dangerous situation where the very actions that we're taking in order to strengthen and stabilize the economy now will destabilize it over time if we don't take the types of actions to bring the budget deficits back down once the economy is strong again.
So that means Congress can't walk away from passing a trillion-dollar stimulus, you know, sort of wipe their hands, and say, "OK, we've done the hard work here." The hard work is going to be how we offset all the costs once we have an economy that's strong enough to accommodate that.
Tough choices, global impact
GWEN IFILL: Let's talk about that, David Walker, that is, the tough choices. We're talking about entitlement reform here. We're talking about defense spending, perhaps?
DAVID WALKER: There's no question that we're going to have to reform Social Security and make it solvent, sustainable, secure, and more savings-oriented. We're going to have to get control of health care costs, because they'll bankrupt us if we don't, Medicare, Medicaid, about the overall health care system.
We're going to have to reform our tax system. We're going to have to understand which spending programs and tax policies are working, which ones aren't. This is major heavy lifting.
And, in my view, what needs to happen is not only do we pass a stimulus program, but we put some type of process in place, whether it be a fiscal future commission or something, that can put us on a path to be able to make tough budget controls -- Social Security, health care and tax reforms -- in the future, because if we don't -- look, America is being mortgaged. And that mortgage is increasingly held by foreign lenders. That is not in our economic, foreign policy, national security, or domestic tranquility interest.
GWEN IFILL: What about the defense spending part of this?
DAVID WALKER: Absolutely. There's a lot of waste in defense spending. There's no question that we're going to have to end up cutting back on defense spending and focusing more on true threat-based needs rather than unlimited individual wants.
There's lots of ideas as to how we can save money there, but we're going to have to recognize the government has over-promised and under-delivered. We're going to have to restructure those promises.
GWEN IFILL: Tough choice with two wars underway. Let's try to broaden this out a little bit, Maya MacGuineas, to the broader global impact. There's a domino effect here going on around the world when the United States finds itself in such straits.
MAYA MACGUINEAS: Yes, there are -- our problems ripple through the entire economy. I just got back from Europe, and the entire discussion while I was there was not what was going on in Europe. It was what was going on here in the U.S.
We have a lot of imbalances in the global economy that have been going on for quite some time. One of the major ones was that the U.S. was spending too much and saving too little.
At the same time, some of our trading partners are actually saving too much and the way that our currencies are working are affecting each other. And so if we go down, everybody else goes down, because we're all so interdependent. We saw that in the financial crisis, and we'll see that in the fiscal crisis, as well.
But we also realize that we all need to sort of come back to sensible equilibriums. The irony here is that one of the biggest problems in the U.S. is that we've been saving too little, both the government and household. But now, with the recession, we're actually focusing on how to spend more. That's a short-term solution.
The longer-term solution is going to be, how does the U.S. save more and make the kinds of changes that David Walker was just talking about to our entitlements and tax programs?
But our other -- the other countries in the global economy are also going to have to make some changes, in fact, opening their markets and purchasing more to help boost the global economy, because we're not the only part of the world that's going in a recession.
This is rippling through the world. And we have many of our trading partners, global allies that are feeling the same things. And so it's going to be an interesting, coordinated effort, as well as what we're talking about with stimulus here. We need to be thinking globally about each country, kind of rebalancing the out-of-whack economies we've been dealing with.
GWEN IFILL: Do you agree with that, David Walker?
DAVID WALKER: Well, I do. I mean, no country is an island anymore, including the United States. There's increasing interdependency. You know, without savings, there is no future. With savings comes investment, comes R&D, productivity improvements, improvement in the economy, our standard of living, and we're not saving enough.
The irony is -- the silver lining is, people have been woken up. They know what a rainy day is now. And now they're starting to save. But the question is, will they continue?
The government has got to get its act together, because nobody is going to bail out America. We need to start solving our own problems.
Obama names 'performance officer'
GWEN IFILL: Well, the president-elect said today he was -- the most important decision he would make is the person he was going to appoint as what he called the chief performance officer. How is that different -- since you used to be kind of the chief performance officer for the government, David Walker -- how is that different from what you used to do?
DAVID WALKER: Well, I wasn't. I was the chief accountability officer. I was basically the auditor general of the United States. The GAO is in the legislative branch. We're independent. We audit. We don't make policy decisions.
The chief performance officer is in the executive branch. It's a policymaking position.
This must be a new job. And I'm wondering how it's going to fit into the deputy director of management and the director of OMB, because historically they're the ones that are supposed to have the responsibility for doing this.
I know Nancy Killefer. She's a very bright and capable professional. She's a personal friend. I'm sure she'll do a good job. But it's unclear to me as to what this role is and how it fits into other parts of government.
GWEN IFILL: What do you think about that, Maya MacGuineas? Is it a role that's needed?
MAYA MACGUINEAS: Yes, I think it's great, in fact, because I think that what President-elect Obama is doing over and over is when he's talking about stimulus, he's also responding -- he's also reminding us of the fiscal realities. And there will be a lot of tough choices after that.
This new position that he's created is kind of elevating the whole focus on accountability for government spending.
The government right now -- there are so many parts of the budget process that need to be reformed desperately. And one of the problems is they spent so much time working on the budget and much too much little time overseeing it.
How is it working? Are these programs well targeted? Are they effective? Are there returns to them? Are the economic returns high? Could we be spending the dollar better?
Here is an office that is created solely for the purpose of going through the budget and focusing on how to generate savings and make government work better.
Now, that's not to say it's going to work perfectly. We've tried this before. The low hanging fruit has already been taken. So she's not going to come up with any silver bullets. It's going to be tough choices. But it's great to have a position that will focus on generating more efficient means of saving for the government.
GWEN IFILL: Maya MacGuineas of the New America Foundation and David Walker, especially thank you for sitting through that fire alarm up there.
DAVID WALKER: Good to be with you. That's all right.
GWEN IFILL: Thank you for not fleeing.
DAVID WALKER: Well, Washington is burning, too, you know, after the news today.
GWEN IFILL: Well, there you go. Thank you very much.