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  With reductions in disposable income like that, the children of 2000 will inherit a much different kind of America in 2030. That’s when they will be turning thirty, entering their most productive years.

  So much of their money will be devoted to keeping the government afloat that they’ll have relatively little for everything else in life. Their homes will be smaller and drabber. There will be less to spend for cars, vacations, dinners out, and big TV sets, all of which their parents took for granted. They’ll still read about the consumer society and conspicuous consumption, but mainly in history texts. Maybe it’s a good idea for America to become less materialistic—but the idea should be to give our children that choice, not to impoverish them.

  The resulting financial pressures will take a toll on the young families of 2030. Financial problems are the number one cause of divorce and family tensions—and there will be a lot more of those.

  The collective loss of spending power will likely cost our country in broader ways. Our young families in 2030 may conclude that a third or even second child is beyond their means. Right now Americans have a birthrate of 2.1 children per family. That is, we are replacing ourselves, which gives us an advantage over other industrial countries like Japan and Russia, where the birthrate is falling. But that advantage may not last if the next generation of American parents simply can’t afford to have that many kids.

  Think of these young adults of 2030 looking at the generations that come before and after them. They will have less to offer their children, including fewer educational opportunities. They will still have some version of Social Security and Medicare, but much of their hard-earned money will have gone to pay the nation’s debts—leaving them with nothing like the retirements of prosperity and travel that the boomers are about to enjoy.

  These young adults of 2030 are alive right now. They are my grandchildren, and I am embarrassed by the mess we are passing on to them. If I were a young American looking at this kind of future, I wouldn’t exactly be saying, “Thanks, folks.” I would be marching out in front of the nation’s capitol waving a sign that protested taxation without representation.

  When my youngest granddaughter, Grace, was three years old, I told her about what the federal government was doing to her future. Believe it or not, her response was, “Devastating, Granddaddy.” If a three-year-old can get it (and how about that vocabulary?), Washington ought to get it.

  Young people won’t be the only ones affected. What would you do if the government took twice as much of your income out of your paycheck? Could you afford to take a nice vacation? Would you have to get rid of your second car? Would you have to move to a smaller house? Could you afford to send your kids to college? Would you be able to have the retirement lifestyle that you always dreamed of? If you think it’s tough today, you ain’t seen nothing yet based on our current path.

  While these consequences are bad enough, much higher interest rates and inflation levels would likely precede any dramatic tax increases. Higher interest rates result in tighter credit and higher effective costs for anything that requires a loan. Inflation is nothing but destructive, robbing us of our incomes and savings. Contrary to assertions by some people, we can’t grow or inflate our way out of our fiscal challenge. Why? Because the math doesn’t come close to working. Inflation reduces our purchasing power no matter what our income level is.

  THE COST TO OUR NATIONAL STANDING

  More than our families and lifestyle are at stake. Our fiscal imbalance at home can damage America’s overall economic strength and our leadership in the world. Global diplomacy is the ultimate stage for realpolitik. If you are weak economically, you are weak in every other way, and your influence declines. If you have less money to invest in education, in scientific research, in critical infrastructure, your national well-being will suffer—and so will your national competitiveness.

  Our fiscal weakness already makes us uncomfortably reliant on others. Here’s how. In the past few years, you and I have been able to shop till we drop because interest rates have been so low, making money cheap.

  Why has the cost of credit been so low? In part because in China and other countries people have accumulated a lot of American dollars from the exports they sell us and save a lot more than we do. They need to do something with that money, so they often invest in American Treasury bonds. The huge demand for our bonds has helped our government issue them at low interest rates. That, in turn, helps to keep our interest rates low and credit available. For a long time, that cheap credit kept housing values high (if your mortgage rate is low, you can afford a more expensive home), thereby giving Americans leverage to buy more.

  There is a price to be paid for being unduly dependent on foreign lenders. To a significant extent, we are putting our economic health in their hands. The U.S. government has gone from having no foreign debt right after World War II to about 19 percent of public debt in 1990 to about 50 percent as of August 2009, and the level is still climbing. (See figure 2.) In short, America is being mortgaged. And increasingly that mortgage is being held by non-Americans. Among our top lenders are countries whose national interests can diverge from our own, including China, Russia, and oil giants like Venezuela, Saudi Arabia, Nigeria, and Iran.

  This dangerous dependence on foreign lenders is not in our nation’s economic, diplomatic, or national security interests, nor does it support our domestic tranquility over the long term. For one thing, we are vulnerable to policy changes by our investors. What if a huge partner like China decides to cultivate its domestic market to a greater extent, requiring it to buy fewer U.S. bonds? That could well cause U.S. interest rates to rise, making it more expensive for us to buy everything from autos to real estate.

  Figure 2 Percentage of U.S. public debt held by foreign lenders. America’s reliance on foreign lenders has grown dramatically, passing 50 percent in 2009.

  We also have to worry about angering our key investors. We can’t play hardball with China on human rights or dispute its claims to Taiwan at a time when Beijing is our biggest lender. Let’s get real. China is not going to lend us money to defend Taiwan. After all, national pride is more important than money.

  Investors from abroad have begun to flex their muscles. To satisfy the concerns of China, among other reasons, the U.S. Treasury said in the summer of 2009 that it would issue greater quantities of bonds that pay a dividend higher than any change in the consumer price index. That’s a hedge against inflation. The demand for more U.S. inflation-protected bonds demonstrates China’s worries that America’s massive borrowing and spending, combined with the Federal Reserve’s loose monetary policy, will ignite a damaging round of inflation once the economy turns around.

  Our foreign lenders have already shown that they are ready to use their leverage to get what they want. Consider the debt issued by Fannie Mae and Freddie Mac, companies sponsored by the U.S. government to stimulate the mortgage market. Although both enterprises functioned as private corporations, they had a public purpose and had a number of political figures on their boards.

  As a result, many foreign investors assumed that the U.S. government guaranteed these corporations’ debt, even though U.S. law did not provide for any such guarantee. When Fannie Mae and Freddie Mac got into trouble, these foreign investors, especially the Japanese and Chinese—our nation’s largest lenders—demanded that the U.S. government guarantee them. Washington complied. That’s why we taxpayers now stand behind more than $5 trillion in Fannie Mae and Freddie Mac debt obligations in order to protect foreign investors. It is too soon to say what our ultimate cost will be, but now we know that federal officials have to pay attention to what our foreign lenders say.

  Let’s see how willingly the foreigners pour in the money when we run trillion-dollar-plus deficits several years in a row, or after our baby boomers stop working and start drawing on the retirement and health benefits we have promised them. That huge social shift will put enormous new pressure on America’s finances and may give
these lenders second thoughts about how much more money to lend us and at what rate of interest.

  There is no way we can increase our workforce fast enough to keep up with that kind of obligation. As we look to the future, fewer workers will support a growing number of retirees. This will place an increasingly unfair burden on younger workers, who will end up bearing the brunt of future tax increases needed to finance the federal government’s programs and promises.

  The recent financial crisis and recession do have one bright side. Americans are beginning to understand the consequences of taking on too much debt. (I certainly hope this book helps spread the word!) And yes, many Americans for the first time in their lives now know what a “rainy day” looks like. As a result, many are starting to be more cautious about their spending and their use of credit. They are also starting to save more. This may slow economic growth in the short term, but it will help us to achieve more sustainable growth over time.

  At the start of this chapter, I wrote about the dangers of a do-nothing policy and called that a disaster scenario, crippling the future of our children and of our nation. But actually, what I have written so far is not the worst-case scenario. It assumes that we will eventually work our way out of the present financial crisis, avoid reaching the tipping point of confidence in our ability to put our federal financial house in order, and keep our society together.

  President Obama has taken steps to get the economy moving and to restore public confidence. The price tag has been high, and the “cure” will add greatly to our national debt load. What if our federal financial hole keeps getting deeper? There will come a time when the foreign lenders who have been propping up our prosperity will stop believing in the strength of our financial system. It’s true that China, Japan, and certain other countries can’t call our debt and have reason to want us to continue to buy their exports. However, what if these foreign lenders lost confidence in America’s ability to put its financial house in order and took much of their money elsewhere? That’s when you could expect real trouble. We would start talking about a dramatic decline in the value of the dollar combined with a dramatic increase in interest rates, all of which could lead to a new Great Depression—a true worst-case scenario.

  We need more than Obama’s economic rescue plan. We need a national fiscal recovery plan, a way to fundamentally transform how our government collects and spends our money. It must be based on principled, systemic reforms that lead us toward a new era of responsible spending that is consonant with American values and our obligations to the next generation. Let’s explore those principles and values in the next chapter.

  Three

  PRINCIPLES FROM

  OUR HISTORY AND

  COMMON SENSE

  I have traveled to more than forty-five states and met with many thousands of people since September 2005. I always bring along my charts and graphs on deficit and debt trends and my projections showing how they are set to skyrocket in the future. I also explain our increasing foreign dependency and the deepening federal financial hole. All of these get my audiences’ attention. But do you know what really captures their imagination? When I remind them that we are all Americans, and I ask them to think of our fiscal crisis in terms of the principles and values that we all learned at home and in grade school. And do you know what tugs at their hearts? It’s when I show them a picture of my three grandchildren and talk about my concern for their future.

  We’ve all heard about our founding principles and values a million times: Americans believe in individual rights and equal opportunity, as well as the personal responsibilities that come with them. We support freedom, democracy, and our Constitution. That Constitution claims its authority based on the will of “We the People” but at the same time makes clear that the government it creates has limited powers. For our Founding Fathers, the aim of government was not only to provide order and security, but also to preserve human liberty. Anyone on the ideological spectrum from the far right to the far left should be able to agree with those basic principles. That’s why the Founding Fathers offer us a useful starting point in our efforts to transform ourselves and our federal government.

  I take these founding principles seriously, as someone whose family came to America in the 1680s. The plain truth is that over the years we have strayed from many of them. Now we must come back to this bedrock. Like any prudent exercise in political decision making, a sound fiscal policy should reflect our basic principles and values, since they define who we are as a society. If you look at our fiscal policies from this perspective, we come off looking not just irresponsible but downright un-American. Let’s examine how.

  The Founding Fathers created a government empowered to achieve a set of general goals for the new nation, while at the same time separating and limiting the powers of that government. The broad goals—“to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty”—are laid out in the preamble to the Constitution. Fearful of concentrations of power in any agency of government, they separated those powers among the Congress, the executive branch, and the federal judiciary. And, in a delicate balancing act, they sought to energize the new government by granting to the Congress important new powers—including the authority to levy and collect taxes, to borrow money, to regulate commerce with foreign nations and among the states, and to declare war.

  In fact, during its early years of operation, the new federal government used these powers sparingly. The government used its powers of taxation to pay off the substantial debt of the Revolutionary War. Aside from that obligation, however, the principal expense of government involved running a postal service and overseeing the collection of customs duties.

  Look where we are now. In fiscal 2008, you could trace less than 40 percent of our federal government spending back to the bedrock responsibilities envisioned by the founders. In budget language, all of those original programs and the others that relate to the responsibilities reserved to the federal government under the Constitution, including national defense, foreign relations, and the federal judicial system, are considered discretionary.

  Early Americans gave us not only our love of individual rights and responsibilities but the economic manifestations of those principles. Their culture valued thrift and savings and frowned on debt. While America’s farmers of the Revolutionary years bought their land and financed their operations on a web of credit, excessive debt was abhorred, meriting time in a debtors’ prison.

  Today, too many Americans have followed the bad example of the modern federal government and have become addicted to debt. Those who get too deeply into hock simply file for bankruptcy. There is little to no shame in that these days. In fact, too many individuals and businesses look to bankruptcy as an acceptable exit strategy from excessive debt. Today, we no longer have debtors’ prisons, and I’m not suggesting that we bring them back; however, we now have something closer to debtors’ pardons, and that’s not good.

  The very idea of thriftiness is now as antiquated as the piggy bank. Earlier in our history, the practice of saving for the future—of taking responsibility for our own financial lives—was taken for granted. In the 1930s, President Franklin D. Roosevelt and the New Deal created social programs to help Americans ruined by financial losses from the Great Depression, including the Social Security program. At the time, Roosevelt described Social Security as a modest offer to “give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”

  Look what has happened since then. About 35 percent of Americans rely on Social Security for 90 percent or more of their retirement income. The fact is, too many Americans look to the government to secure their retirement because they don’t save enough on their own. And Social Security is only one example. Over the years, the federal government has created a number of social insurance programs—including the Medi
care plans for doctors’ visits and prescription drugs—that provide significant taxpayer subsidies to even middle-and upper-income Americans.

  We started these programs as a safety net for our hard-luck fellow citizens, and of course that safety net must remain strong. My point is that programs designed to help the needy should not become enshrined as benefits to which all are entitled. Too many of us who can afford to contribute more to our own well-being are jumping into the safety net instead. That approach is not affordable or sustainable. More important, it’s not the American way.

  WAR AND DIPLOMACY

  The framers of our Constitution also set out various founding principles to guide our nation in its relations with other countries. True, the world has changed a lot since our founders admonished us to avoid meddling in foreign conflicts. George Washington asked: Why should we “entangle our peace and prosperity in the toils of European ambition, rival-ship, interest, humor or caprice?” The answer is that today we have no choice but to involve ourselves with others on a whole range of issues.