Comeback America Read online

  After ten years, under Obama’s 2010 budget plan, the federal deficit would still amount to about 4 percent of the nation’s economy, and that’s too high. And it might go even higher. Obama’s projections assume a rapid recovery from the recession, including 3.4 percent growth in 2010 and 5 percent over time. Others are not so optimistic. The Congressional Budget Office estimated 1.5 percent growth in 2010 (an estimate made before the stimulus), and the Blue Chip Consensus forecast predicted 1.8 percent at the time.

  That may not look like a huge discrepancy, but as the president himself conceded, small differences add up to a lot of money over time. If his economic assumptions are too optimistic, the actual deficits are likely to be much higher. The Congressional Budget Office estimated that the actual ten-year budget deficits will be $2.03 trillion higher than original White House estimates, primarily due to differences in economic growth assumptions. Obama’s budget director, Peter Orszag, conceded that deficits that high would be unacceptable and unsustainable.

  In August 2009, the CBO and the Office of Management and Budget (OMB) released their updated projections of the budget deficit for fiscal 2009 and the next ten years. They contain both good news and bad news. On the positive side, the nonpartisan CBO estimated that the fiscal 2009 deficit will be about $1.6 trillion rather than the $1.7 trillion it estimated in the spring. (It ended up being $1.42 trillion for fiscal 2009.) On the negative side, the CBO raised its ten-year deficit estimates to more than $7.1 trillion, up from $4.4 trillion in the spring. That reinforces the idea that our primary problem is not the short term, it’s our longer-term structural imbalances. The OMB’s ten-year deficit number was even higher, at about $9 trillion, up from about $7 trillion in the spring. There’s a difference between the CBO and OMB calculations. The CBO’s are based on current law, whereas the OMB’s are based on President Obama’s proposal policies.

  THE LANGUAGE OF SPENDING

  With escalating deficit and debt levels like those the CBO and OMB show, one might ask, where precisely does the administration draw the line that defines the term “unacceptable”? And what does President Obama mean by “a new era of responsibility”? Based on these huge numbers, it’s still the big spenders who are setting the parameters. To see that, all you have to do is compare what Obama’s team said with what it actually did.

  As the recession deepened throughout 2008, Harvard economist Larry Summers, who had served as Clinton’s Treasury secretary, emphasized that Washington’s stimulus package must be timely, targeted, and temporary. I had made similar comments in the past, as had others.

  By the time Summers joined Obama’s transition team, on his way to becoming the president’s chief economic adviser, his tone had changed considerably. In one op-ed column, he called for a stimulus package that would help us recover from recession and serve also as “a down payment on our nation’s long-term financial health.” Summers used the term “invest,” “investment,” or “reinvestment” thirteen times in the article, all variations of that favorite Obama euphemism for spending.

  Then there’s Summers’s term “down payment.” What does that mean in Washington? Well, people who are fiscally responsible usually think it means taking steps to reduce the federal government’s tens of trillions in liabilities and unfunded promises. But it looks like Summers and the Obama administration may have meant more debt-financed spending and an expanded role for the federal government. If so, hold on to your wallets.

  Here’s how to think of Washington’s “investments.” The federal government borrowed $787 billion as a “down payment” for the stimulus bill. That’s right, there’s not a dime of equity, and the entire amount was added to our national debt. Does that remind you of anything? How about all the Americans who made no down payments and took out subprime loans to finance homes they couldn’t afford? Those irresponsible borrowing practices, abetted by all the middlemen making a quick buck, caused the subprime mortgage crisis. Now our government is acting like one of those irresponsible mortgagees.

  So let me see if I have this right. In order to help us recover from our past borrow-and-spend excesses, the federal government is going to do more borrowing and spending, on a more massive scale, in part to fund additional expansions in the role of the federal government. Does that make sense to you? Now you know why I call Washington “the La La Land of the East.” It’s just not attached to the real world.

  WHAT PEOPLE WANT

  President Obama has to maneuver his way through a lot of constituencies, including Democratic senators and congress members, his own staff, and special-interest groups. Underneath it all, he may actually be a fiscal reformer. If he enacts major fiscal reforms, he will have one indispensable constituency on his side: public opinion. Ask the American people, and they will tell you overwhelmingly that our sustained fiscal health is fundamentally important. In fact, we at the Peterson Foundation did ask them. The foundation commissioned a rigorous national poll by Hart Research Associates and Public Opinion Strategies in late March 2009. We wanted to see whether the recent hard times had made people more likely to accept reforms. And the answer was yes.

  Above all, Americans told us that they want to get the economy back on track. But their second priority for the Obama administration was somewhat surprising. They wanted the president and the Congress to address our escalating deficits and debt levels.

  A cynic might suggest that it’s easy to endorse fiscal responsibility—as long as the money to pay for it doesn’t come out of your own pocket. Bill Clinton succeeded with the help of a strong economy; in the 1990s, we didn’t feel that the government was picking our pockets. In the 2010s, our weak economy could work for Obama: We have seen what irresponsible spending can lead to, and it’s scary. With the right leadership, Americans may be ready to accept tough choices to secure a better future.

  You can’t get a better consensus for reform than we found. In summary, 73 percent of Republicans rated our growing budget deficits and national debt as a very big threat, along with 72 percent of independents and 58 percent of Democrats. About 90 percent wanted Washington to take action to address these issues. Somewhat surprisingly, the respondents rated this issue as being more important than health care reform and middle-class tax cuts. Americans also saw escalating deficits and debt as a danger more serious than global warming and our declines in education and manufacturing. In our poll, public concern about our economic future even trumped fears of a rogue nation developing a nuclear weapon (see figure 4). That’s what I call concern!

  Yes, public opinion can shift quickly as the wind changes. If terrorists attacked us again on our home soil, the poll numbers would change. But my point is that in the early phase of his term, Obama had powerful public backing for the “grand bargain” on taxing and spending that, in January 2009, he said he wanted to achieve during his presidency.

  Public concern continued to increase in succeeding months. In fact, it was manifest not just in more recent public opinion polls but in public anger during many town hall meetings during Congress’s August 2009 recess. It’s true that some of the assertions and actions by protesters in town hall meetings regarding the pending health care reform proposals were inaccurate, inappropriate, and irresponsible. However, people had a right to be concerned about out-of-control spending and about plans to further expand the federal government. I fully expect that public concern will increase more now that the August 2009 long-term deficit projections have been released and Washington pushes for even more health care entitlements.

  Figure 4 Voters’ views on our nation’s greatest threats. Hart Research Associates and Public Opinion Strategies poll, March 2009.

  We’ve heard other presidents make strong statements regarding fiscal responsibility. Even President Bush 43 pledged to be fiscally responsible. Boy, was he telling a whopper! Let’s be fair to President Obama. It’s still early in his first term. However, as of this writing, there is no plan to put a process in place to achieve a “grand bargain” or to serio
usly reform federal spending programs and tax policies. Hopefully, one will be coming soon—possibly as part of his fiscal 2011 budget proposal, which is due in February 2010.

  Cracks are continuing to appear in our government’s financial foundation. In the fall of 2009, the Federal Deposit Insurance Corporation, which insures our bank deposits, revealed that it faced serious cash-flow challenges. So did the Transportation Department’s Highway Trust Fund. And the Social Security Administration disclosed that the retirement and survivors insurance program was expected to pay out more than it took in during 2010–11.

  A WAY FORWARD

  The job of putting our finances in order is not all Obama’s, of course. When push comes to shove, all Americans have to do what’s right to help ensure a better future. According to our poll, a lot of Americans still think Washington can address our escalating deficits by doing the relatively little things—eliminating earmarks, pulling out of Iraq, or ending the Bush tax cuts. This is wrong.

  And many Americans oppose changes that might affect them—like raising the eligibility age for Social Security or Medicare. Left to our worst instincts, in other words, after all the financial trauma we have been through, we still want maximum services for minimum payments.

  It’s time to get real. There is a way forward out of this fiscal mess, and it will make us all stronger, not weaker, over time. Let’s start with the reality of what I call the three rules of holes. First, when you find yourself in a hole—especially if it’s a multi-trillion-dollar hole that is getting deeper every day—stop digging. Second, you need to develop a good plan for climbing out. And third, once you start making progress, you need to be sure that you can keep from falling back in.

  To get out of that hole, Washington needs to employ tough-love principles right now. Rather than championing solutions, the major parties are standing their ground. The Democrats resist dramatic reforms to Social Security, Medicare, and other benefits. The Republicans resist raising taxes. Both sides happen to be wrong. We must make our benefit programs affordable and sustainable, and we must increase revenues above historical levels. We can find ways to go through the back door on some of these changes—trimming benefits for future retirees rather than present-day recipients, for example, and cracking down on tax breaks rather than raising rates. But we have to clean up both sides of the budget—income and outgo.

  We don’t need a nip and tuck. We need reconstructive surgery. Most Americans love Social Security, Medicare, and the other programs that cushion us from life’s hard landings, and many Americans rely upon them to a greater extent than they should. But we must recognize the truth. These programs must be reformed if we want to get on a prudent and sustainable fiscal path while also ensuring that the government will deliver on its promises in the future.

  A president can’t focus on providing all that people want, because they want too much, especially if they think someone else will pay for it. We need a president who will focus on the collective best interest of our nation both today and tomorrow. What do we really need, and what can we afford and sustain over time, and how should we pay for it? The president who brings real reform will answer these tough questions. And “We the People” need to follow that president.

  Most of this requires no more than courage and common sense. In less than ten years I’ll be eligible for Medicare, but should I receive significant premium subsidies for my optional Medicare coverage, as people whose lifetime earnings are near the poverty level do? The answer is clearly no, but unless the program is reformed, that is what will happen.

  Frankly, our country cannot afford to give people like me benefits we do not really need or deserve. The government safety net should be designed first and foremost to protect those who are in need. It’s fine to give others the option to buy into certain social insurance programs, but not to the extent of subsidizing middle-and upper-income people, especially when the bill will be paid by future generations.

  Rethinking social programs is only part of the challenge. President Obama also must show some tough love to make our government more cost effective. A reform government must streamline the Pentagon, for one thing, to reduce the number of units and bureaucratic layers, rationalize weapons systems for the post–Cold War world, and reform the acquisition and contracting systems, abolishing the inappropriate roles that contractors currently play. President Obama has said he wants to reduce waste in the Pentagon and eliminate a range of federal programs that don’t work or are outdated. To his credit, during his first eight months in office, he called for trimming back or dramatically changing several weapons programs, including the F-22 fighter/ground attack tactical aircraft and the Army’s Future Combat System, to more reasonable levels. This is a positive step, but much more needs to be done. Has he unveiled any major transformational reforms that will serve to reengineer the foundation of government and put us on a more prudent and sustainable fiscal path by the time you’re reading this book? If not, when will he?

  We need a broad swath of reforms, including transformations of the way our government and politics work. You will read about those in the rest of this book. The place to start is with common-sense reforms to our tax and spending policies.

  We have a model in our own backyard, as I learned during a September 2009 meeting with Canada’s comptroller general, Rod Monette. Canada makes a clear public accounting of its fiscal condition—which is healthier than ours. Among other things, Canada puts limits on what it pays for health care, and so should the United States. There are plenty of other useful models of fiscal responsibility, if we look around the world.

  Let’s all hope that the normal processes of government finally work this time—that President Obama comes up with effective reforms and that Congress improves them and passes them into law. Do you worry that won’t happen? I sure do.

  There is another way, outside of the normal flow of government, that will guarantee first, that serious reforms find their way to the national agenda, and second, that Congress will consider them. We need a Fiscal Future Commission that will engage a meaningful and representative number of the American people and come up with a reform plan for consideration by the Congress and the president. Don’t roll your eyes at the thought of another government commission. This would not be another Inside-the-Beltway-Andrews-Air-Force-Base-Trust-Us Commission. The time for such approaches is long gone. Washington is sick, and the cure has to be imported from the real world. This commission would do far more than give advice. Its reform proposals would be spliced into the legislative process as a way to turbocharge the kind of comprehensive changes we need.

  This commission would be created by law to explore a range of budget, spending, tax, and other reforms. It would also educate and engage the public in an effort to identify possible reforms and engineer a more radical restructuring of the federal government. The group would include elected representatives and administration officials. It would also include several capable and credible experts who have no other connection to government and who are willing to dedicate a significant amount of their time to restore fiscal sanity and help save our future.

  A properly designed commission would venture far outside Washington’s Beltway to conduct town hall forums with a representative group of Americans around the nation, and it would leverage the Internet to get millions of people involved in needed reforms. Everything would be on the table—health and retirement programs, tax policy, and budget rules.

  Ultimately, the commission would present a package of recommendations to Congress that our legislators could not ignore because so many of us would support them. In fact, the rules setting up the commission would require Congress to hold hearings and vote on the body’s recommendations—if a predesignated supermajority of commission members endorsed them. And Congress would not be able to amend the commission’s recommendations in a way that hurt the fiscal bottom line.

  If the commission showed it could be successful, it would work wonders. In my view, it should foc
us first on saving Social Security. A consensus for that reform is within reach, as those of us in the Social Security breakout group at President Obama’s Fiscal Responsibility Summit agreed. A major Social Security reform would give us a big win that would push us on to more difficult policy issues.

  Once we start to climb out of the fiscal hole, we have to make sure we don’t fall back in. President Obama needs to bring back the budgetary controls of the Bush 41 and Clinton era and impose some new ones as well. When mandatory spending programs or tax breaks increase to a certain level, the government needs a trigger forcing their scrutiny, even if those programs are sacred cows such as Social Security, Medicare, federal pension and retiree health benefits, the home mortgage interest deduction, and the individual exclusion of employer-provided health care insurance from taxation. Our social programs are growing unhindered. And the federal government is losing more than a trillion dollars a year in revenue due to a range of tax breaks that are also on autopilot. We need to put our hands back on the controls. We need to force disclosure of the longer-term costs—beyond ten years—of major spending and tax proposals before they are voted on. The president’s budget should be required to project ahead for at least ten years and contain an express fiscal goal. In addition, the president should be required to issue a long-range fiscal sustainability report—looking forty years out—at least every five years.

  We have to avoid finding new ways to waste money. We should consider creating a capital budget to better manage government building projects, for example. But we must make sure that we base the projects on merit and that we control their costs.

  We also need a better way to understand and monitor exactly what we’re getting when a piece of major legislation passes. We need rules that will force Congress to define the outcomes-based objectives of the legislation in ways we can measure. Then it becomes the executive branch’s job to implement the law as efficiently and effectively as possible. This includes specifying appropriate criteria for who should receive federal money and what can and cannot be done with the money. Unfortunately, this didn’t happen with the first $350 billion installment of the $700 billion Troubled Asset Relief Program (TARP). It also didn’t happen with much of the stimulus spending. If the process works as it should, we citizens should understand exactly what a law is intended to do and be able to measure whether it succeeds. Coupled with the right kind of systems and controls, such a process will result in significant savings, improved performance, and enhanced accountability.