Comeback America Page 6

  The societies that have survived great challenges and turmoil in their histories succeeded by reinvigorating their basic principles, returning to their core values, and reinventing their place in the world. That is how Germany and Japan recovered their national identities and their economies after World War II. That is how China is shaking off centuries of stagnation, foreign interference, and socialist experimentation to reclaim its place on the global stage today.

  No republic in history has shown more resiliency and adaptability than the United States of America. We have the tools and the ability to maintain our prosperity and stay a great nation. What we have to do is wake up, recognize our situation for what it is, acknowledge our challenges, and take steps to solve them.

  CITIZEN WATCHDOGS

  There’s one basic political factor that I haven’t given much attention to yet: you and me. It’s amazing how closely Congress and the president pay attention to the facts during times when American citizens are paying attention to them. Presidents, with their bully pulpits, have the best opportunity to harness public opinion—Nixon invoking the “silent majority,” Reagan directing an antitax uproar at Congress, and now Obama engaging in a public campaign for health care reform.

  But there’s no reason, in this electronic age, that we can’t start a movement from the grass roots. For one thing, we can generate our own financial numbers. We at the Peterson Foundation are working to create a Federal Financial Irresponsibility Index. It will combine a number of key fiscal and financial factors into a single index that demonstrates the federal government’s relative financial risk. We will only be able to take our analysis as far back as the 1990s because, believe it or not, the federal government did not issue consolidated financial statements until then.

  We will acknowledge that some level of federal deficits, debt, reliance on foreign lenders, and other financial burdens can be acceptable. All that considered, we will come up with a figure that does provide an accurate picture of the relative risk of a “hard landing.”

  While we have not finalized our methodology, one thing is clear. Our nation’s overall relative risk has increased dramatically in recent years. Based on projections by the Congressional Budget Office and on the automatic growth of the federal financial burden under current law, the risk is likely to get even worse if we continue on our present path.

  We must recognize and begin to reduce rather than increase our nation’s risk. In order to help people understand this need and to increase public pressure for policy makers to take action, we at the foundation have decided to publish the index periodically, so stay tuned. Everybody will be able to understand this number, and hopefully we can make it something that our representatives must pay attention to. Indices like these help to convey the simple and stark truth. If our representatives continue to sleep and fail to take steps to put our nation on a more prudent and sustainable path, our risk will continue to increase with the passage of time. And when will we pass a tipping point?

  We are not condemned to repeat our mistakes. We can reassert our founding principles, return to our core values, and learn from history. We can resolve our many challenges and make sure that our future is better than our past. But it will require a long-term commitment to real transformation. It will also require the combined efforts of elected officials and millions of everyday citizens like you and me.

  Four

  OBAMA’S CHALLENGE

  In 1981, Ronald Reagan shaped the politics of a generation when he declared, “Government is not the solution to our problem; government is the problem.” What a change a generation can make. Barack Obama has, in his first year, sought to use the government to tackle the recession, regulate the financial system, save the auto industry, ensure universal health care, and beef up our education system, environmental protection, critical infrastructure, and scientific research, among other things. Not since LBJ’s Great Society have we had a president who was as enthusiastic about government’s ability to make a positive difference in people’s lives. In my view, the proper role for the federal government lies somewhere in between Reagan’s and Obama’s philosophies. We need a limited but effective government that focuses on the roles and functions that only government can and should perform. Government is necessary but it isn’t the solution to many of our problems. That’s what our nation’s founders thought, and they were right.

  Of course, all of President Obama’s programs cost money, but as both candidate and president, Obama pledged to solve our long-term fiscal problems. Setting the tone in his inaugural address, Obama called for “a new era of responsibility” and imposed his own standard: “Those of us who manage the public’s dollars will be held to account, to spend wisely, reform bad habits, and do our business in the light of day, because only then can we restore the vital trust between a people and their government.”

  Further signaling his seriousness about this issue, the president held a “Fiscal Responsibility Summit” at the White House early in his first term. He invited roughly a hundred people from government, business, labor, academia, and the not-for-profit sector, including Pete Peterson and me, to discuss our fiscal challenge, with breakout sessions on the budget process, Social Security, health care, tax reform, and procurement. All of these are certainly in the sweet spot of our problem, and they are all discussed in this book. The president wanted to emphasize that although it was necessary to spend hundreds of billions to bail us out of a major recession and address our other immediate challenges, he was determined to leave a legacy of fiscal responsibility.

  When the president called on me, I took the opportunity to review the scary numbers—the government’s balance sheet was about $11 trillion in the hole, and our obligations off the balance sheet were a much scarier $43 trillion. I also reminded him that he had called for a “grand bargain” to reform our budget process, Social Security, health care, and our tax systems. I told him candidly that I think it’s going to take some type of extraordinary process that engages the American people and that provides for fast-track consideration of a package of needed reforms in Congress. I said that with his leadership, that could happen.

  The president responded with vague assurances that he would indeed make these things a priority, and I went away encouraged but not satisfied. I was pleased to have a president who had pledged to take on the fiscal crisis and not punt tough choices to the next administration. Now, eight months later, I still have hope, but much has happened in the meantime to give me pause. The president has continued to say the right things. For example, in an interview with Fred Hiatt of The Washington Post, he publicly acknowledged that it may take a special commission to get this job done. But when will we get one?

  Our financial markets showed signs of optimism in the summer of 2009 (though, of course, I can’t be sure whether that’s continued as you read this). The government’s economic overseers spoke tentatively about signs of a recovery and a return to economic growth. Even housing prices in a number of cities were edging up. The New York Times suggested that Obama’s massive stimulus spending had helped turn the tide and that historians may credit him (and the Federal Reserve) with reviving the economy.

  I hope we’re coming out of the woods. I love rising markets and economic growth as much as the next person. But short-term deficits and market swings are not what is threatening our future. The danger fundamentally comes from that ever-deepening federal financial hole. Ultimately, our economic health depends on our ability to tax and spend responsibly and with a focus on the future. A lot of factors are more important in this equation than short-term growth and optimism. I’m telling that to you now just as I told it to Congress in early 2001, when we had a balanced budget and our challenges existed beyond the typical ten-year budget horizon.

  President Obama has talked the talk about our nation’s long-term interests, recognizing our bad fiscal habits. “What we have done is kicked this can down the road,” he said after his election victory. “We are now at the end of the ro
ad and are not in a position to kick it any further. We have to signal seriousness in this by making sure some of the hard decisions are made under my watch, not someone else’s.”

  I am sure he was serious about that when he said it. But in his stimulus spending, his championing government control of General Motors Corporation (aka Government Motors Corporation), and his first budget, he has shown few signs that he intends to engineer the type of fundamental transformation it will take to put us on a more prudent and sustainable path. For a president who shows a great awareness of language and takes great care in choosing his words, a lot of what the Obama administration says has not been consistent with its actions. More government is not the answer when government has already promised more than it can deliver.

  We have to be vigilant with our presidents for the basic reason that they want to remain popular and get reelected. Toward the end of his first year in office, Obama was still campaigning so hard that he risked overexposure. Presidents tend to drop in popularity if they follow a path that requires them to deny things to various constituencies. Even if they try to take that path, they face the obstacles of competing agendas among their staff, the Congress, and a broad range of special-interest groups. What did Chief of Staff Rahm Emanuel mean, for example, when he said, “You never want a crisis to go to waste”? Did he mean that we need to make tough choices to put our nation’s finances in order? Or was he talking about spending more on initiatives that Democrats have been promoting for a long time but haven’t been able to get passed? Early indicators are that he may have had more spending in mind.

  PRIORITY NUMBER ONE: THE RECESSION

  In the January of President Obama’s inauguration, the Congressional Budget Office estimated that we were facing a deficit of $1.2 trillion in the budget year ending September 30. That was his baseline—the amount he had to try to whittle down while also working to boost the global economy out of recession and addressing crises in financial institutions and the housing market. Not a very nice inauguration present, particularly considering that this was anything but a garden-variety recession.

  The scope of the financial collapse that greeted the new administration essentially gave Obama an opportunity to do whatever he thought it took to get us out of it. And indeed, the spending he let loose to stimulate the economy, combined with other actions by the government and the Federal Reserve, seem to have had an effect. Nonetheless, our nation’s financial condition has continued to deteriorate. In the spring of 2009, the deficit for the fiscal year was estimated to be $1.7 trillion, roughly $500 billion more than President Obama inherited from President Bush. (It ended up being $1.42 trillion for fiscal 2009.) The new president’s stimulus spending had a lot to do with the spreading red ink—and the problem seemed to be getting worse.

  We can’t fault the president for having to raise spending to some degree, and some level of stimulus was both appropriate and necessary. Any new leader would have been compelled to use all the tools available to help jolt the economy out of severe recession—and the biggest of those tools is the power to spend lots of money. In evaluating President Obama’s commitment to fiscal sanity, we need to look at the degree to which this spending was designed (1) for its immediate impact on the economy, and (2) to expire after a reasonable period of time.

  By these tests, Obama’s plan didn’t pass muster. The president wanted some of the money for his own projects, and members of Congress had spending plans of their own. The result was a $787 billion package that included middle-class tax cuts and catchall spending on state aid, infrastructure, health care, education grants, alternative energy, and other Democratic priorities.

  According to the Congressional Budget Office (CBO), only 23 percent of the spending and tax cuts were designed to hit the economy in fiscal 2009 (by September 30) and only about 30 percent in calendar 2009. And not all of it was temporary. Some of the spending extended government programs, some of it expanded them, and some required states to make multiyear spending commitments as a condition for accepting the additional assistance. In summary, the American Recovery and Reinvestment Act (popularly known as the stimulus bill) provided for $288 billion in tax relief and $499 billion in direct spending. The largest spending categories were related to state and local fiscal relief ($144 billion), infrastructure and science ($111 billion), protecting the economically vulnerable such as the unemployed ($81 billion), health care ($59 billion), and education and training ($53 billion).

  You can’t blame Obama alone for this excessive spending. As he was moving into office, the Democrats controlled both houses of Congress and the White House for the first time in fourteen years. That created a perfect storm for spending. Democrats coming to power were eager to satisfy pent-up demands for their programs just as the country needed a massive stimulus. Billions of dollars of careless spending, some of it destined to extend for years, was practically guaranteed as the Democrats pushed through the stimulus package in a rushed, haphazard way, while every special-interest group in town joined the feeding frenzy. Fresh from making promises of fiscal responsibility, Obama let it all go through, arguing that the economy needed the boost even if some of the spending was unwise.

  I’m not writing to oppose children’s preschool programs or health insurance for the unemployed. But committing to such new benefits without providing a way to pay for them is how we got into this mess in the first place. That’s the problem at the root of our deficits: Nothing makes you more popular than providing a new benefit. It’s easy to give people money. It’s hard to take it away, even when you can’t really afford the benefit.

  MORE BAD SPENDING

  In addition to signing the bloated stimulus package, President Obama signed a $410 billion omnibus spending bill for fiscal 2009—a bill that funds a wide range of programs Congress has approved. (“Omnibus” indeed.) The bill included an 8.3 percent increase in the prior base of spending for discretionary programs (that is, spending for things like defense and infrastructure, which Congress has control over). How can one justify such a significant increase in spending when core inflation is almost zero and when most businesses, governments, and not-for-profit entities are tightening their belts? This should not make us feel reassured about the president’s commitment not to “kick the can down the road.”

  The omnibus bill also included a 10 percent increase in spending for the legislative branch and more than 8,500 “earmarks”—pet projects inserted by lawmakers—worth $7.7 billion. What about Obama’s promise to be fiscally responsible? He let the earmarks and excessive spending go through, arguing that they were developed on President Bush’s watch. However, Bush no longer had a veto pen (even though he had trouble finding it during his own time in office). President Obama did.

  He could use a poor excuse like that only once. The $3.5 trillion fiscal 2010 budget is the Obama administration’s first major annual spending document, and he owns it. On the plus side, Obama’s numbers are more truthful and transparent than Bush’s. It shows the costs of the Iraq and Afghanistan wars rather than putting them in supplementary appropriations, as Bush did, hiding these huge expenditures outside of the government’s regular budget. Obama extends his budget projections for ten years rather than Bush’s five, giving us a better idea of the long-term effects of our government’s decisions.

  That longer horizon shows more clearly the dangerous growth of our structural deficit—the built-in gap between what we will have to pay for social benefits and the revenue we will collect to pay for them. It also shows the cumulative damage caused by Bush’s tax cuts. This is an important step, and Obama should be praised for it. Finally, Obama’s first budget sets a goal to cut the deficit by more than half—to $533 billion—by 2013. It’s good to have a goal.

  That goal is nothing to cheer about, however, and neither is Obama’s budget. It contains hundreds of billions of dollars in new spending for health care, education, and energy programs. But it lacks any major transformational reforms that might address our huge struct
ural deficits. Even if Obama can’t fix Social Security, Medicare, and other hemorrhaging programs once and for all, he must at the very least do something to stop the bleeding. For example, he could have pushed hard for the return to tough statutory budget controls after the economy turns around, but he didn’t. Maybe he will in later budget proposals.

  In fairness, Obama’s plan proposes to squeeze savings, if modest ones, from Medicare, Medicaid, and other health programs by introducing more competitive bidding into Medicare, reducing planned provider reimbursements, and other steps. It also includes revenue from rolling back the Bush tax reductions for wealthy Americans and from limiting some of their tax deductions. This new money would go into a $635 billion reserve fund set aside to pay for health care reforms.

  There are two problems with this reserve fund strategy. One is that $635 billion is not enough. The true cost of expanding health coverage as President Obama initially proposed was more than $1 trillion for the first ten-year period alone, according to independent estimates. The second problem is that the so-called “reserve fund” is a delusion, because no money is really being set aside for anything. The federal government has never had a “reserve fund” with one dime of real money in it. I’ll explain the government mentality later in the book where I write about the Social Security “trust funds.”