Ten Trillion and Counting

David Walker


Comptroller general of the United States from 1998 to 2008, he's president and CEO of the Peter G. Peterson Foundation, a nonprofit that advocates action on the national debt. This is an edited transcript of an interview conducted on Nov. 13, 2008.

“What we're going through right now is a recession. We'll get through it. It's not the big one. The big one would be a meltdown in the federal government's finances.”

Let's start with public debt. ... Give me a sense of just how bad this is.

The national debt, as we speak, is about $10.5 trillion. But the real problem is not that number. ... The number that we need to be focusing on is the total federal financial hole; that's the total liabilities and unfunded promises for Social Security and Medicare. As of the end of 2007, which is the latest set of financials that we have right now, it was $53 trillion. That's $455,000 per household. Median household income in America is less than $50,000 a year.

What's clear is that, while the numbers aren't final yet for the year ended Sept. 30, 2008, for the first time in the history of the United States, the federal financial hole exceeded the total net worth of all Americans. ... So we could confiscate every dime of the net worth of every American household -- including Warren Buffett, Bill Gates and every other billionaire -- and we wouldn't fill the hole.

And guess what? The hole is getting deeper more rapidly than our net worth is going up. In fact, net worth has been going down because of decline in home values and because of decline in the markets. So we're in a deep hole, and we'd better start figuring out a way that we're going to climb out.

Let's say we just keep going along exactly as we have been. What does it look like 10, 20, 30 years out?

The question is, how long will our foreign lenders allow us to behave in a fundamentally imprudent manner? We rely upon foreign lenders to finance 75 percent plus of our new debt, because we don't save in this country. We're great at spending but poor at saving.

Once they lose confidence, or if they lose confidence, then where are we going to get the money? We're going to end up having to pay a lot higher interest rates in order to be able to attract capital. That's going to have an adverse effect on the budget, an adverse effect on the economy, an adverse effect on Americans.

What we're going through right now is a recession. We'll get through it. It's not the big one. The big one would be a meltdown in the federal government's finances. We need to start taking steps to defuse the ticking time bomb associated with our deteriorating financial condition, because there is nobody who is going to bail out America. We have to solve our own problem.

When you say a meltdown of the federal government's finances, what does that actually look like? ...

If the federal government's finances melt down, that means that our future standard of living will not be improving, as we have had a long-standing tradition of. It means our standing internationally will decline. And it means that, for the first time in the history of this country, life for our children and grandchildren may not be as good as ours. We are not discharging our stewardship responsibility to our children and grandchildren and, frankly, to this earth. And that's got to change.

President Obama has to assure the American people that he will do what it takes to turn the economy around. But he also needs to speak directly to the American people and let them understand that, while we will get through the current recession, we need to avoid a much bigger problem that would be associated with a meltdown of the federal government's finances. He needs to do both, and he needs to do it early in his administration.

You were comptroller general of the United Sates. It's a big, big job, and you could go from there to any large corporation. You could have pretty sizable revenue, big staff. You chose not to do that. Why?

I decided a number of years ago that I wasn't going to maximize my net worth, that I was going to maximize my self-worth, and that what I cared about the most was making a difference for the country and for others. ... I think we're at a critical crossroads. I think the decisions that are made or fail to be made within the next five years will have a profound effect on our future. I felt that I needed to be able to do things that I couldn't do as comptroller general of the United States. ...

... You have a lot of faith in the American people.

I have a lot of faith in the American people. We're a great country comprised of a great people.

And if they hear the message, you believe they'll get the message.

I believe they will. I have evidence of that fact. One of the things that we've done at the [Peterson] Foundation is that we have commissioned Peter Hart, who is probably one of the most prominent, if not most prominent, Democratic pollsters and researchers, and Bill McInturff, who is one of the most prominent Republican pollsters and researchers, to do some research for us. And one of the things that we found on election night is ... that 95 percent are concerned about the deteriorating financial condition of the U.S. government and that 89 percent are concerned about our increased reliance on foreign lenders. ...

Do you have as much faith in America's politicians as you do in America's people?

I do not have as much faith in America's politicians as I do in America's people. I think we have a dysfunctional democracy right now. I think we have a republic that's not representative of the American people, primarily because of the gerrymandering of congressional districts. There is not much of a sensible center in the House anymore.

I think that's a problem, but I do know that elected officials listen to their constituents. Therefore, a lot of our effort is going to be focused on trying to educate and activate the American people to try to help allow elected officials to make tough choices. ...

Look at this last election. Obama simply wanted to let the tax cuts that the Bush administration put in lapse, and he was called a socialist, he was called a Marxist. He was demonized just for that. And you want something much stronger than that.

The reality is everybody likes tax cuts, and everybody likes spending increases. But you can't spend more money than you make indefinitely without paying a big price. For the year ended Sept. 30, 2008, we already spent over $600 billion more than we took in on an operating basis, and it's set to get worse on our current path.

The simple truth is we're going to have to reform entitlement programs; that means Medicare, Medicaid and Social Security. We're going to have to reprioritize and restrain spending growth. We're going to have to engage in comprehensive tax reform, and we're going to need more revenues.

The American people should demand that they don't send any more money to Washington until there are tough, statutory budget controls in place, because when we had those tough, statutory budget controls in place, we went from large and growing deficits to large and growing surpluses. They expired at the end of 2002; Washington has been totally out of control.

The American people don't trust Washington, and there is good reason for them not to trust Washington. But we've solved this problem before. We can solve it again, with leadership.

Let's drill [down] a little bit on some stuff. In the near term, we have a fiscal and economic crisis of some considerable size. You don't propose reining spending in now, do you?

No. There is no question that our deficits and debt levels are going to get worse in the short term.

And that's a good thing.

And that's acceptable; it's not a good thing. It's acceptable, provided several things happen; first, that any economic stimulus needs to be timely, targeted, temporary, of reasonable size and appropriate structure. It's important that it meet all those conditions.

In addition to that, ... the president needs to reassure the American people about what needs to be done and will be done in the short term, but also [to] establish a Fiscal Future Commission that will go outside the Beltway, engage the American people and make recommendations in about a year, so we can help starting to defuse the ticking time bomb associated with the federal government's finances. He must do both. ...

There's a whole army of people lined up with their hands out for some of this federal money.

Here's what amazes me: People haven't come to the realization yet that the government doesn't have any money. Where do you think this money is coming from? If the government doesn't want to raise taxes, which nobody wants to but eventually they're going to have to, then we're going to have to borrow the money. And where is that money coming from? China, Japan, Korea and oil-exporting nations. The United States Treasury has become the middleman. They are a broker; that's all they are.

Sooner or later people are going to start asking the question, why not just go to China direct? Because we don't have the money. People need to wake up and get real. We're talking about a meltdown here. The too-big-to-fail concept has been disproven over history, and we're no exception to that.

Now, here's the good news: We can, we must, and I believe we will turn things around. We've had two presidents -- George Herbert Walker Bush, 41; William Jefferson Clinton -- both of them demonstrated leadership. They made tough choices. They paid a political price, but they did the right thing for America. And I sure hope that President Obama will do the same thing, because frankly, we're in a lot worse shape than we were in 1990 and 1993, respectively.

You can say we're all going to be in big trouble, but if I stick my hand out and get some of that money that's coming out of the federal government, what do I care whether it comes from China or it comes from the taxpayers? I've got some of mine. There are a whole lot of people who feel that way.

We have three maladies that we suffer from in this country right now: myopia, or shortsightedness; tunnel vision -- one issue at a time, narrow perspective; and self-centeredness. It's rampant in government; it's rampant in the private sector. It's a disease, and we need to start treating the disease.

In order to be effective in conveying the message about our fiscal challenges, you have to do three things. One, you have to provide numbers in terms that people can understand. They can understand $175,000 per person. They can understand $455,000 per family. They can't understand $53 trillion.

Second, you have to talk about values. I'll give you a word: "stewardship." It's not even in Webster's dictionary. That tells you how far we've gone in the wrong direction. Stewardship is not just leaving things better off when you leave than when you came, but leaving them better positioned for the future.

And thirdly, you have to put a face on it. I'll tell you the face for me: It's my three grandkids. We are mortgaging their future, at the same point in time reducing our relative investments in their future. That's fiscally irresponsible, it's morally reprehensible, it's wrong, and I'm going to fight to change that wrong. ...

What we have going on now is massive taxation without representation. Why? Because today's taxpayers benefit from low-tax, high-spend policies, and we're passing the check on to our kids, our grandkids and generations unborn, and in many cases they're too young to vote. That's taxation without representation. It's wrong.

Let's draw down even further. Social Security: That's one of our big bugbears.

It's easy.

It's easy?

We could reform Social Security next year and exceed the expectation of every generation of Americans if you have a process with integrity and an approach that recognizes the reality of today's workforce and the recent changes in the market.

And what is that?

You take people who are retired or close to retirement, and you make little to no changes to their Social Security benefits. Why? Number one, they don't have time to make changes. Number two, it's not politically feasible anyway.

You take people who are younger, ... and you do several things. First, increase the normal retirement age and the early retirement age in phases over time, and index it to life expectancy. Secondly, strengthen the benefit for people at or near the poverty level to make sure that they get an adequate replacement income.

Thirdly, reduce the replacement rate for middle- and upper-income Americans so they get something, but not as much as they get now. You also raise the taxable wage cap such that people pay payroll taxes on not just about $102,000 but $125,000 or so. Don't raise the rate, raise the cap, because the tax rate is the most regressive tax we have.

In addition, ... you add on top -- as a supplement, an add-on, not a carve-out -- an automatic savings account, for example, 2 percent of payroll, that goes into a real trust fund with real investments, with real fiduciary responsibilities and liabilities, that provides a preretirement death benefit, and a supplemental postretirement benefit.

That program would exceed the expectation of every generation of Americans. It would make the program solvent, sustainable, secure and more savings-oriented. I call that a win-win. All we need is leadership.

In 1983, there was much discussion about the Social Security program being [insolvent]. ... The taxpayers were told, "You're going to take a hit in your payroll taxes, but your Social Security benefits are safe." You're saying it's not true.

Here's the deal: What they did in 1983 is they solved the problem for 75 years; they did not solve it indefinitely. We don't want to make that mistake again. What they didn't consider is that at the end of the 75-year period of time, because of demographics and a variety of other factors, we were facing large and growing deficits.

So therefore, in the new Social Security reform plan, we need to not just look at the 75-year period. We need to look at the end of the 75-year period and make sure that the changes that have been made are sustainable over time. That can be done. It wasn't done in 1983. It needs to be done this time.

What wasn't done in 1983, what has never been done, is the Social Security program has not been kept safe and on its own.

Let's talk about that. This is very important. One of the things that I've found is that there are certain words used in Washington that don't mean the same thing as in Webster's dictionary. Let me give you a good example: "trust funds." They should be called "trust-the-government funds." Or, as [billionaire philanthropist and founder of the Peterson Foundation] Pete Peterson says, "You can't trust them, and they're not funded." The simple fact is the trust funds are an accounting entry ... kept in a locked file cabinet in West Virginia. There [are] no tangible assets in them.

There is government debt. The debt is backed by the full faith and credit of the United States government. It's guaranteed as to principal and interest; it will be honored. But, [while] it has legal, political and moral significance, it has no economic significance at all. And we have to convert those bonds into cash to be able to pay. We are either going to have to raise taxes, cut spending, or go out and borrow more from the Chinese and OPEC nations. That's what we're going to have to do.

People that say, "Gee, we don't have to worry because of these trust funds," get real. There is no trust fund. That is a big fantasy.

The idea of a lockbox --

It got picked a long time ago. ...

... So you're saying you can't trust the government. It's simple as that.

I'm telling you that there is delay, denial and deceit going on in Washington, and we're blowing the whistle. We're going to tell the truth to the American people.

Cash flow is key. We're already [in] negative cash flow on Medicare; started in 2008. The surplus in Social Security starts to decline in 2009; we go negative cash flow in 2017. Cash flow is key, and that's what people need to focus on. Companies go bankrupt when they don't have adequate cash flow. The United States is not going to go bankrupt, but we could face catastrophic consequences if we don't get our own financial house in order.

Why can't the United States go bankrupt?

It could, but I don't think we will.

Why not?

Because I think we'll eventually wake up. ... The question is, will Washington act before we have a crisis? And if it doesn't act until we have a crisis, what consequence will that have to tens of millions of Americans? What consequence will that have to America's international standing? What consequence will that have to the future standard of living that our children and grandchildren will have? ...

... Medicare, Medicaid: How bad is it?

Medicare is by far our biggest challenge. Of the $53 trillion federal financial hole, Medicare was $34 trillion; Social Security was $7 [trillion]. So that gives you a sense. Health care costs have been growing 2.6 percent a year faster than the economy. We spend more than double per person what any other industrialized nation does on health care, and yet we have the largest uninsured population of any industrialized nation, and we have below-average health care outcomes. If there is one thing that could bankrupt America, it's health care costs.

There are a lot of people who ... say: "This is really a health care crisis writ large. ... Unless you reform the health care system, you really can't deal with Medicare and Medicaid effectively."

We need to make changes to Medicare and Medicaid separate and distinct from whether or not we engage in comprehensive health care reform. At the same point in time, we do need to engage in comprehensive health care reform. The idea that you don't do anything with Medicare and Medicaid until you have engaged in comprehensive health care reform I think is wrongheaded. ...

A lot of people don't realize we have a lot of middle- and upper-class welfare going on in Medicare and in our tax system for health care. So one of the places we could start is eliminating middle- and upper-class welfare.

You have said that older Americans are staying healthy longer, and they are getting health care treatments without much control in spending. If you're a senior citizen, you get health care under Medicare and Medicaid, and there are no controls.

... We are the only country on the face of the earth that is dumb enough to write a blank check for health care. Even countries that have socialized medicine cradle to grave, like Sweden, they don't write blank checks for health care, because they know it would bankrupt the country.

Ultimately, we're going to have to achieve four things in comprehensive health care reform: universal coverage for basic and essential health care; a budget for what the federal government will spend on health care; national, evidence-based practice standards for the practice of medicine and issuance of prescription drugs; and increased personal responsibility and accountability for our own health and wellness.

There's a lot of details below that, but those are the four pillars of comprehensive health care reform. If we apply them, we not only will spend a lot less money than we otherwise would spend, we can keep from bankrupting America.

Universal care for basic --

Basic and essential means coverage that is based on broad-based societal needs, not unlimited individual wants; that's affordable and sustainable over time; and avoids the use of taxpayer-funded heroic measures no matter what your age is.

I'm talking about things like inoculations against infectious diseases; certain wellness and preventative care services; protection against financial ruin due to unexpected catastrophic accident or illness; the option to be able to obtain additional coverage in between that at group rates if you want, but it's not guaranteed. ...

Are you advocating what critics might call socialized medicine and, frankly, triage?

No, I'm not advocating socialized medicine, because socialized medicine generally comes with the idea that government is going to be the provider or the decider with regard to all key decisions on health care. That's not what I'm advocating. I do, however, believe that there is a certain level of coverage that every American ought to have, because it is [in] our broad-based societal interest for them to have it. ...

Does that increase the cost?

No, I believe that we could provide basic and essential health care coverage to every American at less cost than otherwise we will end up providing under our current system. ...

... For any system to be successful and sustainable over time -- the tax system, the health care system, a governance system; you fill in the blank -- you have to have three things: incentives for people to behave properly; transparency to provide reasonable assurance they will because somebody is looking; and accountability if they don't. Guess what? In health care, we're zero for three. That's a strikeout. ... The last thing we ought to do is put more people in the system. That's unaffordable, unsuccessful, unsustainable. And guess what? That's what a lot of politicians want to do. ...

... Have I got this right: You are telling the American people we have got to change, we have got to put our house in order, and, friends, it's going to be painful?

We have to change as a country, and many Americans have to change as well. Too many Americans have been following the bad example of the federal government: spending more money than they make, charging their credit cards and taking out home equity loans, mortgaging the future, and seeing the time in the not-too-distant future where they may not be able to make the minimum payments.

We need to do a better job, both at the federal level and households. And yes, there will need to be some shared sacrifice once we turn the economy around, some shared sacrifice in the short term in order to create much greater gain in the long term. But that's what America is all about. America is about leaving the country in a better position for our children and grandchildren. And the baby-boom generation is the first generation in the history of this country that is currently failing on its stewardship responsibilities. That's not acceptable to me, and I hope it's not acceptable to President Obama and to many other people around the country. ...

... There are at least some people, and notably [an economist] named James Galbraith ... [who] will argue that you've got it all wrong. You've got it backwards. What we don't need to do is cut government spending. What we need to do is increase government spending, and that will get us out of this hole, and not just in the short run. We need to do it in the long run, over time.

Well, I respectfully disagree with Jamie Galbraith. The fact of the matter is no one, including the United States government, can spend more money than it makes at increasing rates forever without paying a price. ...

... When Clinton left office there was a budget surplus, a rather good one, and the Bush administration promptly slashed taxes, and the spending spree went on. That's been going on ever since. What happened to all that fiscal responsibility?

First, people relied upon projected surpluses. Projected surpluses may or may not happen. Some of those projected surpluses assumed that economic growth was going to continue at the level that it had been in the '90s, which was not the case. Some of it assumed that some of the additional revenues that we had achieved through the tech bubble would continue.

But the biggest problem is what helped us get from a period of large and growing deficits to large and growing surpluses, was statutory budget controls, and when they expired at the end of 2002, everything got out of control. ...

What do you say to those people who will argue that this deficit is a pretty good thing because it puts the United States in a position where it has to shrink government, where we starve the beast, and that's what we want anyway?

They've gorged the beast. I don't know what their strategy was, but it failed. Government is bigger. It's bloated; it's inefficient; it's ineffective. The government has overpromised and underdelivered. It's time to re-engineer government. We need government, and we need government to be successful, but we need to get back to the basic principles and values that made this country great. ...

Here's a phrase you've heard a lot: "the good faith and credit of the United States government." Is it still strong? In the short term, our credit is good. And in fact, we have seen recently a flight to U.S. Treasury securities and to the dollar, because we have a very sound political system. Look at the smooth transition of power that we just had between one administration and the next, with fundamentally different philosophies. ... Over time the United States government had better start getting its act together, because our credit rating is at risk if we don't.

Could you see the United States lose its AAA credit rating?

I absolutely can see the United States losing its AAA credit rating in the future if it doesn't get its own financial house in order. In fact, both Standard & Poor's and Moody's have already issued a shot across the bow, saying that that AAA credit rating is at risk.

There are four key factors that led to the current subprime crisis that exist for the federal government's finances: a disconnect between who benefited from policies and practices and who paid the price and suffered the losses; inadequate transparency as to the nature and extent of the real risk; overleverage, over-reliance on credit ratings, and not enough attention on cash flow; and a failure ... of both private-sector and government risk-management and oversight mechanisms to act until there was a crisis.

So those are four common denominators. There are three big differences. Number one, the American government's financial problem is not as immediate, which is good news; we have time to act. Secondly, it's much bigger. And thirdly, nobody is going to bail out America. We need to solve our own problems, and the time to start is now.

Do you believe in markets?

I do, but I don't believe in the efficient market theory. I also believe in greed, and I think we've seen excessive greed. ... There have been a lot of types of investments and transactions going on that, frankly, people didn't understand, and so a lot of people ended up not being able to effectively monitor and evaluate what they were doing, and a lot of people had big and bad surprises. So I think we've seen recently that there are limits as to how much you can allow the private sector to do on its own. ...

If the United States were overleveraged, wouldn't its creditors be raising the alarm and thereby raising interest rates? They're not.

No, because myopia is a global phenomenon, but sooner or later, a shortsightedness --

So everybody is shortsighted except you?

No, not everybody -- most everybody. It's human nature. Let's face it: Most politicians look to the next election; most CEOs look to the next quarterly earnings; most teenagers look to the next weekend. That's America.

We have to start looking longer range because our problems today are real, and we can deal with them, and we must deal with them. But they're not our biggest challenges. Our biggest challenges are on the horizon, and we're not doing anything about them. We need to if we want our future to be better than our past. ...

posted march 24, 2009

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