The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
Kevin: David, you have talked about legacy, stewardship, leaving the right foundation for the next generation, and yet we are watching in Washington right now as they just continue to kick the can down the road.
David: Not only Washington, but I think, popularly, we are focused on the here and now so much that thinking intergenerationally is very foreign to us anymore, so to be able to think intergenerationally and to see the weight of your decisions today weighed in the light of history, future history, if you will, is very important.
And I think that notion of stewardship, of looking forward, of putting the next generation in a better position, is something that our guest today has focused on for many years. David Walker was Comptroller General of the United States, head of the Government Accountability Office from 1998 to 2008. He was appointed by President Bill Clinton.
It is very interesting, if you looked at an accounting background, the best CV you could possibly imagine, prior to his appointment to the GAO, he was a partner and managing director for Arthur Anderson, he worked as the public trustee for Social Security and Medicare from 1990 to 1995, and then prior to that, Assistant Secretary of Labor for Pension and Welfare Benefit Programs during the Reagan Administration, spent time with Arthur Anderson, as I mentioned, Coopers & Lybrand, kind of a Who’s Who in the world of accounting.
Kevin: What is nice about the Who’s Who in the world of accounting, especially when we are talking about politics, is that this is very bipartisan, if you look at it. You have Reagan represented, you have Bush, Clinton, the next Bush represented. He seems to have a constancy in Washington. But the thing is, what he is saying, they don’t like to hear. It is amazing that he has been able to keep his job as long as he has.
David: He has spent quite a bit of time with the Peterson Foundation, Pete Peterson’s group, and they put together an amazing film a number of years ago, IOUSA. If people haven’t watched it, they must. Great documentary, looking at, fiscally, where we are, where we are going, how we got here, and some of the practical things that need to be done.
Kevin: With stewardship, you can have the best intentions you want, but you have to check the math, you have to know the math, and this is a man who knows the math.
David McAlvany: David Walker, stewardship, putting the next generation in a better position, is something that we should all be focused on, and quite the opposite appears to be happening today. It is young people who have quite a bit at stake as we look at what we are leaving as a fiscal legacy.
Let’s just briefly review where we have been, where we are going. You are a CPA. You ran the Government Accountability Office for many years, and before that, were eminently acquainted with Social Security. By analogy, we could describe you as a doctor of numbers, of balance sheets. That would be the focus of your practice.
In a nutshell, why don’t you diagnose for us and prescribe the way forward, from a policy-oriented perspective, and for we the people, what we individually could strive for.
David Walker: Well, the federal government has grown too big, promised too much, and needs to fundamentally restructure. A hundred years ago, the government was only about 2% of the U.S. economy, meaning the federal government. Last year it was 23%. 100 years ago, the Congress controlled 97% of spending. Last year it controlled 34% of spending, and going down.
Most people know about our national debt clock. Ten years ago it was 5.6 trillion. Now it is about 16.6 trillion. But that low-balls our problem, because the national debt clock doesn’t count unfunded civilian and military pensions, retiree health care. It doesn’t count unfunded Social Security and Medicare promises, a range of other commitment contingencies, and a total of over 71 trillion dollars, over 500,000 dollars per household, increasing by about 8.2 million a minute, 350 billion a month, and people in Washington continue to do nothing. And that 71 trillion is up from only about 20 trillion in 2000.
Washington has become out of touch and out of control, and we are going to have to address our structural deficits, but to do it in a way that doesn’t undercut the tenuous economic recovery, that doesn’t exacerbate our unemployment and underemployment problems, that doesn’t shred the social safety net.
What has to happen is to come up with a comprehensive grand bargain that will recapture control of the budget, reform social insurance programs, rationalize health care promises and control health-related costs, reduce defense and other nondiscretionary spending in an intelligent fashion and without compromising national security, and engaging in comprehensive tax reforms that will make it simpler, fairer, and generate more revenues.
And for that to happen, quite frankly, we the people have to start putting a lot more pressure on elected officials to start making tough choices in order to create a better future, and if they fail to do so, we ought to throw them out, and I don’t care what their party affiliation is.
We also need to put more pressure on the president to lead, because the president has not been leading. He is already almost six weeks late on presenting his budget, not expected to come until after it is two months late. That is just not acceptable, given our current financial condition, and our projected fiscal outlook.
David McAlvany: Recently you said that it is time for more leadership, rather than continued laggardship, in reference to the political dysfunction and the partisanship in Washington. At the heart of our financial crisis is a political crisis, and we wonder what it will take for ideological differences to be set aside, and a sustainable course to be set. Is it we the people putting on that pressure, or is it something else?
David Walker: There is no question that the more pressure we the people put on our elected officials the quicker we are going to get action, because Washington has become a lag indicator. It tends not to make tough choices until there is a crisis that gives it cover to act.
But it is incredibly important that we not have a debt crisis in the U.S., because if we do it will be a global depression, and nobody will be able to hide. We can avoid that, but the clock is ticking, time is not working in our favor. These deals don’t get done in even-numbered years, because they are election years, so we need to really try to make something happen this year.
Frankly, we now have a republic, which, as you know, is a representative democracy, that is not representative of, or responsive to, the public. So we are going to need political reforms. We are going to need redistricting reform to make the districts more competitive and to not entrench incumbents. We are going to need to have integrated and open primaries, rather than having the Democratic and Republican parties have a stranglehold on who has access to the ballot, and having the wingnuts decide who a vast majority of our elected representatives are, maybe the far right or the far left.
We are going to need campaign finance reform, and frankly, we are going to need term limits, and some of those things can be done at the state level, like the first two, and California and other states have already done it, and some are going to take constitutional amendments. But we have to have a game plan, we have to execute on it, and it is going to take all of us working together to make it happen.
David McAlvany: You mentioned that government has grown significantly, quintuple, over quintuple, over the last 100 years. Your group, the Come Back America Initiative, ranks the U.S. behind Spain, Italy, and Portugal, in terms of fiscal sustainability. Is this something that you think must happen, these reforms, in 2013? In even-numbered years, you said nothing happens. Really, 2013 is a now or never moment, is it not?
David Walker: We really need to do everything that we can to maximize the chance that it will happen in 2013 because it won’t happen in 2014, and quite frankly, President Obama is probably going to enter lame duck status in 2015, and people are going to be focused on the next presidential election. We may be able to wait until 2015, but again, I’m not sure that the political stars will be aligned then. So we need to do everything we can to try to make it happen this year. We don’t want to risk having a debt crisis here.
David McAlvany: The debt crisis, to be really specific, there are some issues here. You have mentioned Medicare, Social Security, and Defense. Those are three big budget items. A fourth would be the interest component. This is something that today, at 224 billion, is big, but we are looking at historically low financing rates, and it doesn’t take much in terms of creditor concerns for the U.S. to see that interest component click up to half a trillion dollars. What are we looking at in terms of a reasonable prognosis for further downgrades in 2013, 2014, by an S&P, a Fitch, an Egan-Jones, or a Moody’s?
David Walker: We have huge interest rate risk in the United States. We have the lowest interest rates in history. We are self-dealing in our own debt. The Federal Reserve is the only player that has an appetite for our long-term debt. We don’t really know what risk-free interest rates are.
What we do know is that both our fiscal policy, which is tax and spending, and monetary policy, which is money supply, are unsustainable over time. It is not a matter of if interest rates are going to go up, it is a matter of when and how much. For every 1%, or 100 basis point, increase in interest rates, it is another 165 billion dollars in interest, for which we will get nothing. The most recent CBO projection is that in ten years we are going to be paying over 800 billion dollars a year in interest, for which we will get nothing.
And so, while health care costs represent the fastest-growing program expense, the fastest-growing expense is interest, and that is paying for past excess consumption, and will serve to just further complicate our challenges, if we don’t diffuse this ticking debt bomb.
David McAlvany: This circles back around to the issue of stewardship, and the notion that if we don’t do anything, we are leaving future generations with bankruptcy, essentially insolvency, and it is just a matter of time before our creditors figure out that we don’t have our house in order. By their actions, what message is the president and Congress sending to our creditors? Obviously political stalemate isn’t reassuring. What is being communicated?
David Walker: What is being communicated is that our politicians think that we are immune from the laws of prudent finance, and we are not. You can’t spend a trillion dollars more than you take in, charge it to the credit card, and self-deal in your own debt, and not expect to have a day of reckoning.
Frankly, I have traveled all over the world. I have been to about a 100 countries, all 50 states. When I was Comptroller General of the United States, I was head of strategic planning for auditor generals around the world, I was chairman of the audit committee for the United Nations, so I have a lot of contacts around the world. And frankly, when I talk to them they say, “What are you people doing? What’s wrong with your political system? Don’t they understand that if they don’t put your finances in order they will have all kinds of problems, and everyone else will suffer over time?”
Well, I understand that, you understand that, and most of your readers understand that. The problem is to make sure that we the people make sure that our elected representatives understand that, and if they don’t start doing their jobs and earning their pay, kick ’em out.
David McAlvany: It has been suggested that growth is probably the best way out. A company comes under pressure, and oftentimes you can grow your way out of a difficult circumstance. Some years ago you suggested that either a long-term double-digit growth rate, radical spending cuts, or a radical increase in revenue, could balance U.S. finances. Maybe you could refresh us as to just how radical any of these alternatives would need to be to bring us back to fiscal sustainability and financial freedom.
David Walker: We clearly want to increase economic growth. Right now we have weak economic growth, and to the extent that we can increase economic growth that will grow the pie, that will enhance revenues, that will create new job opportunities, and it will help us to get debt, as a percentage of the economy, down to a reasonable and sustainable level quicker.
That’s what our goal ought to be. Forget about paying off the debt, it’s never going to happen. You don’t need to have a balanced budget, plus the way the government ends up calculating a balanced budget, it’s a bad joke, anyway. But what we do need to do is to get our public debt, as a percentage of the economy, down to a reasonable and sustainable level within the next 10-12 years. That’s what our goal is.
There is a new four-letter word in Washington. It is called math. You need to have a plan that is based upon reasonable and sustainable assumptions, and that the math works. You can’t grow your way out of a 71+ trillion dollar hole, which I referred to before. It would take double-digit real GDP growth for decades. It has never happened. It is not going to happen.
Yes, we want additional economic growth, but we are going to have to make tough choices on budget controls, on defense and other spending. We are going to have to reform social insurance programs, who is eligible for what and when, and at what subsidy. We are going to have to reform our tax system and generate more revenues. In my view, it is about 2-to-1 spending reductions to additional revenues, and the longer we wait the more we are going to have to do, the greater the risk of a crisis, and the more disruption.
David McAlvany: You have suggested that we do have time to get our house in order, in part because of the size of our economy, in part because the dollar represents 60% of global reserve assets. However, that latter has slipped the last couple of years, and as rumblings of discontent with the dollar and the euro get louder, how much time do you think we really have?
David Walker: Only God knows, and God is not telling us. What I know is this. We are clearly on an imprudent and unsustainable path. I don’t think the U.S. dollar is going to lose its reserve currency status, but we are going to continue to lose market share if we don’t put our finances in order. We have more time, but we don’t have unlimited time. It is time to get to work.
David McAlvany: If there were one or two things that you would encourage our listeners to do, to get off the dime and do something, not just listen, not just be informed, not even just have a dinner conversation about what we are talking about today, but what are some action points?
David Walker: First, I think people need to educate themselves at KeepingAmericaGreat.org. In addition to that, I would encourage them to go to NoDealNoBreak.net. That is a new online campaign to try to help get Congress to spend more time in Washington until we end up getting a grand fiscal bargain.
Believe it or not, Congress takes off a week for every federal holiday. They have a two-week spring break coming up. I’ve never had a spring break in my life. And they get off all this time. It doesn’t mean they don’t do anything, but they are sure not working to solve this problem when they are out of Washington.
It is time that they spend more time in Washington. It is time that they start generating some results, quit going from short-term crisis to short-term crisis, quit treating the symptoms rather than the disease. We have to reform social insurance programs, we need comprehensive tax reform, and we need it in 2013.
David Walker: Thank you very much.
Kevin: David, unfortunately, David Walker uses the four-letter word that Washington hates to hear. He uses the word, m-a-t-h, math.
David: It has to add up. It must add up. This is the problem. The government, today, keeps three sets of books. That is typically a practice by someone who wants to hide something, and we have to get past that, moving toward transparency. Step number one: Moving toward a budget that is sustainable. Step number two: It would be time well-spent, as David Walker suggested, spending some time at KeepingAmericaGreat.org, NoDealNoBreak.net.
What we are basically saying to Congress, and what he is saying in this initiative, is “You don’t get to take time off until you’ve done your job. Vacation is not there. You must do work before play, and we are all on hold as a country, we are waiting for the outcomes, whether it is the sequester or a grand bargain, we are waiting, and you are doing what?”
This is the equivalent of fiddling while Rome burned. “Where were you when all of this went down?” “Oh, I was taking my spring break. Oh, I was on my summer vacation.”
Kevin: Jay Leno said, “President Obama wants Congress to increase the minimum wage. Believe me, when it comes to doing minimum for their wage, Congress knows what they are talking about.”
David: This really does boil down to what David was suggesting. We have to be involved. We have to be interested. We the people have to make more of a difference than we have over the last several decades, when we have essentially delegated the responsibility of governance to a “professional class.” And that can’t be the case moving forward. We know what the results look like when that is the case.
Kevin: And David, we know the audience listening to this program is an audience that likes to educate themselves, and so, as he said, go to KeepingAmericaGreat.org. That education is so important, because frankly, you have to know the math so they can’t fool you with theirs.