The Cutting Edge

David Walker served as Comptroller General of the United States from 1998 through 2008. Walker has been the lone voice in the wilderness for the last decade regarding our looming fiscal disaster. He is now the CEO of the Peter G. Peterson Foundation and leader of the Fiscal Wake Up Tour. Walker warns: "The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon”.

Years ago, as head of the General Accounting Office he would go before Congress and explain that the country needed to change course before we floundered in a “Perfect Storm” of debt. They listened to him respectfully and then proceeded to add $5 trillion to the National Debt in the next eight years. The borrowing binge is now entering a hyper-speed phase.

The $787 billion 1,074 page stimulus bill has been passed. President Obama signed it. It will have virtually no impact on the economy in 2009. The bill will stimulate nothing but the National Debt. Within months, plans for another stimulus plan will be pushed by the Democratic-led Congress because speed and the appearance of action are how politicians get reelected. 

Examine the numbers. The median value of a U.S. home in 2000 was $119,600. It peaked at $221,900 in 2006. Historically, home prices have risen annually in line with the CPI. If they had followed the long-term average, they would have increased by 17 percent to $140,000. Instead, they skyrocketed by 86 percent due to Alan Greenspan’s irrational lowering of interest rates to 1 percent, the criminal pushing of loans by mortgage brokers, the greed of investment bankers and the foolishness and stupidity of home buyers. It is now 2009 and the median value should be $150,000 based on historical precedent. The median value at the end of 2008 was $180,100. Therefore, home prices are still 20 percent overvalued. Long-term averages are created by periods of overvaluation followed by periods of undervaluation. Prices need to fall 20 percent and could fall 30 percent. You will know we are at the bottom when the top shows on cable are Foreclose That House and Homeless Housewives of Orange County.

The debt service as a percent of disposable income for consumers is above Great Depression levels as we enter the Next Great Depression. These levels are unsustainable. Consumers normally have a limited number of choices. They can declare bankruptcy to wipe out the debt or reduce spending dramatically while paying down their debt. This is what is required to purge our capitalist system of its excesses. Instead, our Government “leaders” are coming to the rescue with your tax dollars. You have already given $7 billion to Capital One and American Express so they can continue to give credit cards with $20,000 limits to pizza delivery boys.

When you see someone carting a 52-inch HDTV out the door of Best Buy, you may be helping him to make the payment. Congress has also provided $9 billion of your hard earned tax dollars to GMAC Financial and Chrysler Financial. GMAC Financial used the name Di-tech to lure in millions of gullible poor people into negative amortization “no doc” mortgage loans at the peak of the housing bubble. When you see a BMW 525i parked in front of a boarded up house in a depressed neighborhood, know that you are making their car payment.

Politicians have not taken into account the damaged psychology of the American public. They have been hit over the head with a baseball bat and will not be stepping up to the feeding trough of debt financed spending for a long time. If we do not let people and companies fail, we will encourage the same behavior that caused the problem. It will make sense for every upstanding American to stop paying their mortgage and to run their credit cards up to the limit. The current “stimulus” package of $787 billion is more than the entire National Debt in 1978 ($771 billion). By 2012, the National Debt will easily exceed $15 trillion. The annual deficit for 2009 is now estimated at between $2 trillion and $3 trillion—give or take a few hundred billion.

These figures seem incomprehensible to the average person on the street. Some perspective is in order. If we use $2.5 trillion as the estimated deficit that means:

• We’re adding $6.85 billion per day to the National Debt
• We’re adding $285 million per hour to the National Debt
• We’re adding $4.8 million per minute to the National Debt

In the time it takes to say “Audacity of Hope,” we’ve added $25,000 to the National Debt. There are many pundits who say that the National Debt doesn’t matter. We are only paying 3.7 percent on our 30 Year Treasuries and there is always enough demand. The dollar continues to be steady versus the Euro. Government debt as a percentage of GDP was 122 percent during World War II, versus only 78 percent today. All of these statements are true, today. But on March 1, 2008 we thought that the American banking system was sound. We would have appeared to be right. Two weeks later Bear Stearns collapsed and the downward spiral of our worldwide financial system accelerated out of control.

The U.S. is depending on the goodwill of foreigners when it comes to the future.

How long will foreign countries fund our rapidly accelerating deficits for a 3.7 percent return which will be wiped out by a slight decline in the USD? Will foreign countries with their own economies contracting and pouring billions into domestic stimulus even have the funds to invest in U.S. Treasuries? Is there a tipping point when Fed chairman Ben Bernanke has simply printed one too many dollars? If there is, you can be sure he will not see it coming.

When government debt reaches 110 percent of GDP next year, will we be in better or worse position as a nation than we were in 1945 as the only power in the world? How do you solve a $53 trillion unfunded liability problem while tripling your National Debt in the space of 10 years?

The answers to these questions will determine if or when the great American Economic Ponzi Scheme collapses.

Healthcare Underfunding

The American people have not been given the truth by our politicial leaders since the Eisenhower administration. By hiding the truth and not addressing the unsustainable trend of our social programs, our leaders have insured a painful resolution of this trend. In 1965, 27 percent of Federal spending was mandatory on automatic pilot. Today, 53 percent of Federal spending is on auto-pilot. The entire Social Security, Medicare, and Medicaid system will need to be overhauled or scrapped. Benefits will be reduced and taxes will be raised. There are no other choices. Medicare costs will explode over the next 40 years. The increasing debt will result in interest payments on the debt becoming the largest expenditure in the federal budget. The longer we wait to address this unavoidable train wreck, the more likely it will result in generational warfare between baby boomers and younger generations.

As entitlements and net interest grow, discretionary spending gets squeezed. Non-defense programs, which include, activities related to children, transportation infrastructure, education, training and research that should promote future economic growth and prosperity, come under increasing funding pressure. We are forced to ignore investments in the future to pay for commitments made decades ago. The short term focus of our Washington politicians has ruined our fiscal future. Children don’t vote, and younger people are less involved in the political process. As a result, the potential political gain from immediate increases in spending or reductions in taxes outweighs the eventual economic benefits of more politically costly but fiscally responsible choices. This is a criminal and immoral act upon our future generations.

We cannot possibly grow our way out of this problem. On average, more than 10,000 baby boomers will become eligible for Social Security benefits each day for the next two decades. As they do, there will be fewer workers supporting a growing number of retirees. This eventually will place an unfair burden on younger workers, who will end up bearing the brunt of future taxes. A difficult decision deferred today is a tax increase on future generations. The United States spends 16.5 percent of GDP on healthcare every year. This is far more than any country on earth. This amounts to $2.3 trillion per year. Even with this immense spending, there are 47 million Americans without health coverage. Canada, Australia, and Sweden only spend 9 percent of GDP and cover all of their citizens. The waste, fraud and bureaucracy of our system are out of control.

Immigration

As our country sinks deeper into this recession and more people lose their jobs, anger at illegal immigrants will continue to grow. This is not an unexpected reaction as anger has to be directed somewhere. According to a Pew Institute report, there are 11 million illegal immigrants in the United States, with almost 50 percent of the total in California, Texas and Florida. Approximately 57 percent of the illegal immigrants are from Mexico and another 24 percent from other Latin American countries. The cost to the American taxpayer is huge. Estimates of the annual cost are in the range of $300 billion per year.

The U.S. needs a major increase in immigration in order to have any chance at maintaining a decent standard of living in the future. The number of Americans over 65 years old will increase by 75 percent between 2010 and 2030. These 70 million people will all be collecting Social Security. There aren’t enough young people to replace them in the work force. With only 28 percent of Americans achieving a college degree, we need to undertake a concerted effort to bring in as many smart immigrants as possible and convince them to stay here after graduation. Our only realistic chance to solve many of our fiscal problems is through discoveries in science and medicine that can only happen with highly educated people whether they are born in the U.S. or elsewhere.

If we could increase the expected 2030 population from 351 million to 380 million, those added taxpayers would greatly help the national fiscal situation. Regarding the 11 million illegal aliens already in the country, it is not feasible to round them up and send them back. Mexico is already on the brink of implosion, with drug lords controlling much of the country.

Overseas Military Commitments

The United States, the only superpower remaining on earth, currently spends more on military than the next 45 highest spending countries in the world combined. The U.S. accounts for 48 percent of the world’s total military spending. The Cold War has been over for 20 years, but we are spending like World War III is on the near term horizon. There is no country on earth that can challenge the U.S. militarily. The impression on the rest of the world is that we have aggressive intentions. Defense spending had peaked at just under $500 billion in 1988. The fall of communist Russia did result in a decline to the $350 billion range from 1995 through 2000, and an economic boom ensued. Since 9/11 we have doubled our spending on defense.

The Iraq war has cost the American taxpayer $800 billion so far. If as a country we continue to allow our politicians and their military industrial complex corporate sponsors to spend $700+ billion per year on weapons, to the detriment of higher education, alternative energy projects, and national infrastructure needs, we will be paying an extremely high price. According to the Defense Department’s latest "Personnel Strengths" report, the United States now has troops stationed in 147 countries and 10 territories.

We have some of the brightest engineers in the country developing weapons to kill human beings more efficiently. There is an opportunity cost that is being paid. These engineers could be concentrating their brilliance on developing alternative energy solutions which could free us from our Middle East oil dependence. Which effort would benefit our country more, weapons development or energy independence?

Putting Out the Fire With Painful Fixes

Congress shows no courage to make necessary unpopular decisions because they won’t be re-elected. The founding fathers envisioned representatives who did their civic duty for a short time and then went back to their real profession. Term limits would inject our leaders with a dose of courage. Outlawing lobbyists and PACs would remove the buying and selling of votes in Congress. We must remove the corruption from Washington D.C.

The PAYGO rules that were allowed to expire in 2002 must be reinstituted. These rules would not allow new spending initiatives without an equal cut in other spending. As such, Congressmen would be required to say “no” to their constituents. Without PAYGO, the smolder will become a wildfire.

Some painful fixes must be adopted. The banks that are insolvent will need to be nationalized, investors wiped out, and good assets sold off to good banks. Economic guru John Hussman has a solution for the foreclosure disaster that would not stick the U.S. taxpayer with the bill. Banks could write down the mortgage balance but receive a PAR (property appreciation right) back from the homeowner. The U.S. carmakers need to be restructured within a pre-packaged bankruptcy. No more taxpayer funds can be wasted on these poorly-run corporations, most of which have helped kill this country.

A truly non-partisan commission appointed by the President with the power to put forth a comprehensive plan to restructure Medicare, Medicaid, and Social Security for an up or down vote by Congress is the only way to create a viable future. John McCain’s moderate approach of allowing a path to citizenship seems like the best immigration plan. Most came here to try and live a better life. If they have committed crimes or don’t follow the prescribed path to citizenship, then they need to be expelled from our country. We need to encourage foreign professionals to immigrate to America with incentives, if necessary.

If 50 percent of the $1.4 trillion annual military related budget was redirected to debt reduction, energy independence, and infrastructure rebuilding, we would actually get a positive return on our tax contribution. A “Manhattan Project” to develop new energy sources which would eliminate the $400 billion per year that we send overseas for foreign oil. The number of high paying jobs that could be created by building nuclear power plants, wind farms, and converting vehicles to natural gas would be in the hundreds of thousands.

A tax system that eliminated all the preferences and loopholes for corporations while lowering rates would be fairer. Congress and lobbyists use the tax system to push their agendas. A flat tax or replacing the income tax with a national sales tax are other options. The Federal Reserve needs to be abolished. A currency backed by gold or basket of precious metals would restrict what Congress could spend. This would save us from ourselves. Politicians spend your money if they are given the chance. Let’s not give them the chance.

Cutting Edge Economic Crisis Analyst James Quinn is a senior director of strategic planning for a major university. This article reflects the personal views of James Quinn. It does not necessarily represent the views of his employer, and is not sponsored or endorsed by them.