Monday, December 27, 2010

The Prophecy of Dave Walker

Do you hear that defining roar in the distance? It's the Leviathan, the Biblical colossal from the sea, the accumulated voices warning about federal government finances. As with a lot of modern life, it's all about numbers. Here are merely four:

The annual deficit load in FY 2010 was $1.3 trillion.* As of today, the total debt is at $8.87 trillion, which is roughly 61 percent of U.S. GDP in 2010. Government spending for FY 2010 was at $3.72 trillion, while federal government revenues (your taxes and all fees) are coming in at approximately $2.165 trillion.

The figures are hard and in stark contrast to the opaque and incessant hand-wringing. It's fiscal Armageddon! How did we get into this massive bind? Why didn't someone warn us?!

Someone did: His name is Dave Walker, former Comptroller General of the United States and head of the U.S. Government Accountability Office (GAO). GAO is a Washington, D.C. institution that commands universal, if not sometimes grudging, respect for nonpartisan, non-ideological fairness and accuracy. Walker used a late-summer 2003 National Press Club speech to stick a flag in the capital's ramparts and calmly state: The nation's financial situation is unsustainable and without change, things will get catastrophically worse.

Below is a New York Times op-ed Walker penned with your's truly providing assistance (ok, ok folks -- I formatted the fonts and ran spell check).

This was written seven years ago. It highlights Walker's prophetic view of the U.S. government's financial bind. In here are allusions to the impending collapse of the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Association (Freddie Mac); inexorable federal health care spending exemplified by Medicare and to a leser extent, Medicaid; and, corporate financial reporting, before Bear Stearns, Lehman Brothers, AIG, Goldman Sachs, and Citigroup.

Walker was a leader in the early-warning federal budget alarm system called the Peter G. Peterson Foundation and has now started his own organization, the Comeback America Initiative.

Starting with the title, Walker foresaw in clear terms the intractable bind we are in today. And it's an astonishing piece to revisit amidst today's increasingly desperate fiscal tumult.

New York Times, February 4, 2004
The Debt No One Wants to Talk About
by David M. Walker

WASHINGTON -- "We might hope to see the finances of the Union as clear and intelligible as a merchant's books," President Thomas Jefferson wrote to his secretary of the Treasury in 1802, "so that every member of Congress and every man of any mind in the Union should be able to comprehend them, to investigate abuses, and consequently to control them." Unfortunately, straightforward government financial information seems as elusive in 2004 as it did in Jefferson's day.

The truth is that the United States faces a long-term deficit that will only increase as the baby boomers retire. The resulting fiscal imbalance will test the nation's spending and tax policies.

Washington's recent difficulty in maintaining fiscal restraint has not helped matters.
The fiscal 2005 budget President Bush released on Monday includes a deficit of $364 billion. Although the administration and the Congressional Budget Office show declining deficits in the years ahead, and an improving economy will reduce deficits further, the long-term projected gap is now so large that we will not be able simply to grow our way out of the problem. Difficult choices are inevitable.

But the current system of federal financial reporting provides an unrealistic and even misleading picture of the government's overall performance and financial condition. Few agencies adequately show the results they are getting with the taxpayer dollars they spend, and too many significant government commitments and obligations are not fully disclosed.

Particularly troubling are the many big ticket items that taxpayers will eventually have to reckon with, including Social Security, Medicare, civilian and military retirement and health care benefits, and veterans' medical care. Despite their serious implications for future budgets, tax burdens and spending flexibility, these future obligations get short shrift in the government's financial statements and in budgetary deliberations.

The federal government's gross debt -- the accumulation of the annual deficits -- was about $7 billion last September, which works out to about $24,000 for every man, woman, and child in the country. But that number excludes items like the gap between the government's Social Security and Medicare commitments, and the money put aside to pay for them. If these items are factored in, the burden for every American rises to well over $100,000.

They new Medicare prescription drug benefit will add thousands more to that tab. This benefit is unquestionably popular and will make it easier for some older American to afford expensive prescription drugs. But it also comes with a steep price that few want to talk about. The truth is that the drug benefit as signed into law is one of the largest commitments ever undertaken by the federal government. Preliminary estimates of the long-term cost in current dollars run up to $8 trillion through 2070.

To put that number into perspective, it is about four times the entire federal budget. Long- term simulations from the legislative agency I lead, the General Accounting Office, paint a chilling picture. Even before the new drug benefit was enacted, thsese simulations showed that by 2040, current policy would require a 50 percent reduction in Federal spending or a doubling of taxes, to balance the budget.

Either would be devastating. And keep in mind it is likely that efforts will be made to expand the drug beneift in the future.

A key lesson from Enron, World-com and other business failures is that our free-market system depends on public confidence in the accuracy of corporate financial information. Recent G.A.O. reports have highlighted the increasing frequency of corporate earning restatements. Who would knowingly buy stock in, lend to, or do business with a company that conceals its true financial conditions?

As Jefferson pointed out, truth and transparency are even more essential in the public sector. Government services -- mail delivery, food inspections, Social Security and defense to name a few -- directly affect the well-being of of every American. But sound decisions on federal programs and policies are nearly impossible without timely, accurate, and useful information.

Fortunately, we are starting to see efforts to address the strengthening of federal financial reporting. The latest annual report of the federal government focuses more on the the nation's long-range fiscal imbalance. The president's Management Agenda, which closely reflects G.A.O.'s list of high-risk government programs, is bringing additional attention to troubled areas and is trying to better assess the results that programs are getting, with the resources they are given.

The General Accounting Office and other experts continue to encourage reforms in the federal budget proces to better reflect the government's commitment and to signal emerging problems. Among other things, the G.A.O. has recommended the government issue an annual report on major fiscal exposures -- explicit and implicit promises for future government spending.

Much more must be done, however. A top-t0-bottom review of government activities to ensure their relvance for the 21st century is long overdue.

From a practical standpoint, our elected representative are not likely to get too far out in front of the American people when addressing complex and controversial issues. These fiscal risks however, are long-term problems whose impact will not be felt for some time. The understanding and support of the American people will be critical to providing a foundation for action.

A national education campaign to help the public understand the nature and magnitude of the long-term financial challenges facing the nation is essential. After all, an informed electorate is indispensable for a sound democracy. Young American especially need to become active in this discussion -- because they and their children will bear the heaviest burden if today's leaders fail to act.

Public officials will have more incentives to make difficult but necessary choices if the public has the facts and comes to support serious and sustained action to address our fiscal challenges. Without meaningful public debate, however, real and lasting change is unlikely. The sooner we act, the sooner it will be to turn things around.

* Guess what: Things just got worse. The Congressional Budget Office (CBO) just released its January document, "Budget and Economic Outlook: Fiscal Years 2011 to 2021." The deficit for FY 2011, if current laws remain unchanged, drives to $1.48 trillion.