2007 August 13 Monday
David Walker Sees Gathering Fiscal Storm

US General Accounting Office Comptroller General David Walker thinks "dramatic" tax rises, large cuts in government services, and dumping of US government debt by foreign governments are possible elements of our national future. Walker says we are not on a sustainable path (true enough).

“One of the concerns is obviously we are a great country but we face major sustainability challenges that we are not taking seriously enough,” said Mr Walker, who was appointed during the Clinton administration to the post, which carries a 15-year term.

The fiscal imbalance meant the US was “on a path toward an explosion of debt”.

“With the looming retirement of baby boomers, spiralling healthcare costs, plummeting savings rates and increasing reliance on foreign lenders, we face unprecedented fiscal risks,” said Mr Walker, a former senior executive at PwC auditing firm.

Current US policy on education, energy, the environment, immigration and Iraq also was on an “unsustainable path”.

Note that he includes immigration on the list of areas which are costing us. That's right. Low skilled, low wage illegal aliens use far more in services (e.g. we pay to subsidize their medical care and to try to educate their kids and to imprison the criminals among them) than they pay in taxes. They are net liabilities.

Walker sees foreign holdings of US debt as a loss of sovereignty.

Mr Walker told The Times that foreign investors have more control over the US economy than Americans, leaving the country in a state that was “financially imprudent”.

He said: “More and more of our debt is held by foreign countries – some of which are our allies and some are not.”

If (or should I say when?) foreigners stop buying US debt then interest rates will rise quite a bit. We might find ourselves in stagflation with rising unemployment and rising inflation at the same time.

Everything other than entitlements and debt payments will get cut out of the federal budget as the fiscal crisis intensifies.

"The fact is, is that we don't face an immediate crisis. And, so people say, 'What's the problem?' The answer is, we suffer from a fiscal cancer. It is growing within us. And if we do not treat it, it could have catastrophic consequences for our country," Walker said.

"If nothing changes, the federal government's not gonna be able to do much more than pay interest on the mounting debt and some entitlement benefits. It won't have money left for anything else – national defense, homeland security, education, you name it," Walker warned.

In the first 10 months of this fiscal year federal revenues grew 7.4% from $1.97 trillion to $2.116 trillion. As a result taxes are taking a growing portion of the economy.

Earlier in the year OMB estimated that revenues as a percentage of GDP would reach 18.5 percent in 2007. But as of a month ago that figure had reached 18.8 percent, approaching the levels that typically produce popular demand for relief. But as spending interests become stronger and more widespread in Washington, popular demand for lower taxes faces more resistance. It seems safe to conclude that George W. Bush will go down in history as the biggest taxer and the biggest spender ever.

As a larger portion of the population becomes retirees a growing fraction of the electorate sees a vested interest in higher taxes to pay for their retirement benefits. In spite of the huge amounts of money wasted on the Iraq war Medicare/Medicaid and Social Security each use more money than the DOD.

So far this budget year, the biggest spending categories are programs from the Health and Human Services Department, including Medicare and Medicaid, $560.2 billion; Social Security, $516.1 billion; military, $437.7 billion; and interest on the public debt, $385.1 billion.

We should withdraw from Iraq to save money. The occupation of Iraq is a waste of money and lives. Also, we should start raising retirement ages for eligibility for old age entitlements and do means testing for eligibility. We should also stop and reverse the influx of low skilled workers. Stop adding more liabilities and get rid of some of those we already have.

Update: There's one other way to improve our fiscal position: Accelerate Education To Increase Tax Revenue, Reduce Costs. We can do this with technology such as prerecorded lectures and online tests to allow kids to learn at an accelerated pace all year long. We need standardized tests that allow kids and adults to earn credit and credentials without attending bricks and mortar colleges.

Share |      By Randall Parker at 2007 August 13 10:54 PM  Economics Government Costs


Comments
John S Bolton said at August 14, 2007 1:50 AM:

If having over-65's live here is the same as issuing them
a medical insurance policy worth 20,000 a year, those with
usable foreign connections might be offered 5,000 a year
additional to cover their medical insurance overseas,
if they would reside elsewhere. Our medical system is intensely
parasitized with shystering, but the rest of the world doesn't have that problem.
Walker deserves praise for breaking the official
code of silence on the net public subsidy of
immigration cohorts.
How can we respond to gathering threats if elites of power
and influence enforce an omerta on mentioning even that they exist?
To the extent that the public defers to these authorities, other than Walker and maybe
three scholars, they would believe that immigrants are net taxpayers, or that immigration cohorts are
such; yet the public response to the last three giant amnesty attempted logrolls
indicates that such elites are being defied as dishonest, disloyal and dishonorable.

Wolf-Dog said at August 14, 2007 2:12 AM:

The Federal Reserve Bank, had the policy of continually buying the Treasury Bonds every year. Normally the Fed buys less bonds per year than the government issues these IOUs, but there is no reason the Fed cannot increase that percentage of purchases per year. By the way, when the Fed purchases government bonds, these bonds are retired for all practical purposes (i.e. the gov't does not have to pay interest on the bonds to the Fed.)

Ned said at August 14, 2007 8:36 AM:

Maybe Mr. Walker should run for president - he's making more sense than any of the candidates. The US is like a rich, powerful family that has decided to live beyond its means. For a long while, this works out fine, because lenders are happy to lend the family money to pay for their extravagant lifestyle - after all, they really are rich and powerful, aren't they? But eventually, the debts pile up, and lenders become less willing to continue lending. And then crunch time comes - the debts are out of control, and the family has to take big cuts in lifestyle in order just to survive. Plus, the lenders start telling the family how to scrimp and save. Vacations will be spent in a tent at the state park - no more private jets to the Bahamas. I think most politicians know this but choose to ignore the issue. After all, who wants to run on a platform of higher taxes? And who wants to tell seniors that their Medicare and Social Security goodies have been vastly inflated and are going to be cut substantially in order to assure that the programs can survive, albeit in greatly reduced forms? The last glimmer of fiscal responsibility was in the late 90's, when the Republicans who controlled Congress clamped down on spending in order to spite Clinton, whom they hated. The federal budget went into surplus and the economy boomed. Then Bush II got into office and all semblance of fiscal restraint went out the window - bloated new entitlements to hasten the demise of Medicare (the prescription drug benefit), a bigger federal presence in education (No Child Left Behind), and a useless, expensive war in Iraq. Federal spending has increased more under this Administration than at any time since the glory days of LBJ, who also decided to fund his own little war (Vietnam) plus lots of new entitlements without a tax increase.

legaleagle said at August 14, 2007 11:23 AM:

Ohhh, it's just so moving to witness the scales fall from Republican eyes! Fiscal crisis? Unsustainable economic priorities? The need to balance revenue and spending? What radical ideas! And hey, that wisdom just happens to come at the tail end of 8 years of unchallenged profligacy, when even discussing the costs of the Iraq war was regarded by Republicans as wholly irrelevant -- if not, as usual, downright treasonous -- because, you know, the war really MATTERED. Remember the contemptuous dismissal of Democratic "pay-as-you-go" budget rules as a partisan gimmick? After all, such fiscal responsibility only applies to such matters as providing health insurance for poor children or getting crippled veterans out of rat-infested holes, but not to such really IMPORTANT objectives as awarding Halliburton multi-billion-dollar war contracts. Funny, but all these sudden concerns with economic soundness and fiscal responsibility seem to have one element in common: the stink of Republican propaganda. Here's a good solution: all the fanatical Republican tax-cutting ideologues should just sit out the next 8 years (at least) in which Democrats will be running the United States government. If they'd like to try some wild new experiments in economic responsibility, they can feel free to do so the next time the voters are desparate and deluded enough to put them back in power. In the meantime, they can just shut their mouths.

Quequeg said at August 14, 2007 12:38 PM:

From the original post:

We should withdraw from Iraq to save money. The occupation of Iraq is a waste of money and lives. Also, we should start raising retirement ages for eligibility for old age entitlements. We should also stop and reverse the influx of low skilled workers. Stop adding more liabilities and get rid of some of those we already have.
Our total military-related expenditures amount to nearly a trillion dollars. Ron Paul would like to cut this in half in order to save a half trillion dollars, which would then be used to help cover liabilities like social security and medicare. Eventually, he would like to phase out these programs by allowing younger workers to opt-out. Of course, to save all of this money would require us to stop being the policeman of the world and we would have to withdraw out of most of the 130 countries in which our troops are currently stationed. Also, Ron Paul has a good grade on illegal immigration, according to www.CongressGrades.com.
Support Ron Paul for President: www.RonPaul2008.com

PunditGuy said at August 14, 2007 2:23 PM:

>awarding Halliburton multi-billion-dollar NO BID war contracts

Fixed that for you.

birch barlow said at August 14, 2007 5:11 PM:

I've read many anti-Bell Curvers say "if The Bell Curve is true, what would the policy implications be?" Well elimination of unskilled immigration, not raising education spending beyond population/inflation (or maybe even cutting it back to what is was in the 1960s/70s/80s), and not trying to democratize countries like Iraq come up as obvious policy implications. And guess what? These are exactly the policy recommendations of the US General Accounting Office Comptroller General David Walker, a Clinton appointee no less!

I tend to see TBC as just the most plausible theoretical framework describing *why* the kind of unsustainable policies that the US is pursuing *are* unsustainable...it should be obvious to all but the most ideological leftists/anti-racists/neocons that these policies don't work, for whatever reason.

Unfortunately, increasing education spending and maintaining/expanding low-skill immigration are popular amongst US politicians. Also, it is unfortunately quite difficult to dispell wishful thinking about issues like immigration and education without an outlook at least somewhat sympathetic to The Bell Curve. Many people seem to see low-skill immigration and increases in education spending the way Chomskyites see Communism: well, it didn't work, but if we do things just right, maybe it will *this time*. The above way of thinking is the way some people *define* insanity: doing the same thing over and over again, and expecting different results.

It's one thing to be queasy about The Bell Curve/IQ/"race realism;" it's quite another to say that b/c The Bell Curve is so distasteful, we *must* pursue the kind of policies opposed in The Bell Curve, regardless of the fact that they don't work.

Randall Parker said at August 14, 2007 6:43 PM:

legaleagle,

The scales falling? Do you think this post represents a change in my own position?

Go to my Economics Demographic category archive and page all the way down to the bottom and see what I was saying when I first started this blog in 2002 and see what I said in 2003. I was arguing that we are on the road to a demographic train wreck back in the 1980s.

Old folks make sure that which ever party is in power we keep maintaining an old age entitlements program that is headed for a fiscal train wreck. Lots of Democrats demagogue whenever a Senator tries to propose substantial changes.

Ideologues? Plenty on both sides of the aisle as far as I can see.

What we need: A Republican Congress and Democrat as President. That's our best bet for reduced fiscal irresponsibility. Note that we'll still have fiscal irresponsibility in that case, just not as bad.

Quequeg,

Our total military expenditures are a trillion dollars? Per year? How do you add that up? I'm seeing a number half that big. Social Security and Medicare/Medicaid are each bigger than DOD.

We could save about $150 billion/year by withdrawing from Iraq. We could also raise retirement ages and do means testing on some old age retirement benefits.

Quequeg said at August 14, 2007 7:53 PM:

Randall,

Ron Paul may be mistaken (or maybe I misrecall), but I recall hearing him on several occasions say that our military expenses are nearly a trillion per year.

But I just did a search and found this article by Ron Paul in April, 2007:

For those who thought a Democratic congress would end the war in Iraq, think again: their new budget proposes supplemental funds totaling about $150 billion in 2008 and $50 billion in 2009 for Iraq. This is in addition to the ordinary Department of Defense budget of more than $500 billion, which the Democrats propose increasing each year just like the Republicans.
The 2008 Federal Budget - by Ron Paul - April 2, 2007

So, I guess this is only $650 billion.

On the other hand, I came across this other page (WarResisters.org), which showed that the 2008 military budget is 1.2 trillion.
$727 billion (current military - e.g. retirement pay, Iraq war, etc)
$461 billion (past military - e.g. veterans benefits, interest on national debt incurred from military expenses)
------------
1.2 trillion

Whether you accept these numbers as valid, it's true that we can't do much about most of these expenses. So, maybe saving $500 billion is too optimistic. How much could we save and still have a strong defense? Certainly over 200 billion, maybe 300 billion.

Cutting out some of the militarism would help save some money that could be used to fund entitlement programs and reduce the deficit. Yet, it probably would not completely take care of medicare.
Ron Paul liberty cards

Randall Parker said at August 14, 2007 8:39 PM:

Quequeg,

Those quacks you link to believe that without military spending we'd have no national debt and hence no interest payments. So they apportion all interest payments to military costs.

Reality: With a shrinking military in the 1990s Bill Clinton took the opportunity to ramp up social spending without raising taxes. So government spending did not shrink as the military shrank.

Reality: WWII made the income tax possible and the income tax made high government spending possible. But then are we to blame FDR for getting into WWII for the big government we have today?

Quequeg said at August 14, 2007 9:48 PM:

The two parties will spend all the money in the budget and then spend some more. Democrats would prefer to freeze or reduce military spending, while increasing entitlement spending. Republicans would prefer the opposite. But the budget will get spent and then some.

Yet, it is theoretically possible to cut spending in one area, while freezing spending in another, and thereby reducing deficits. Whether this ever happens will partially depend on who we elect.

langx said at August 14, 2007 10:22 PM:

Reality: With a shrinking military in the 1990s Bill Clinton took the opportunity to ramp up social spending without raising taxes. So government spending did not shrink as the military shrank.

Reality: The Debt shrunk to a surplus. How about that.

Now we have no surplus trillions in debt and a war with no end.

Don't forget social spending is down now and crime is rising at a ridiculous rate.

I'll take the 90's

Randall Parker said at August 14, 2007 11:04 PM:

langx,

You have a distorted view of reality.

The deficit shrunk in the 90s because the internet boom generated a rapid growth in taxable income and because the DOD shrunk due to the collapse of the Soviet Union.

Social spending is not down now. Entitlements continue to grow as a percentage of total GDP mostly due to the continued growth in the number of retirees. But also immigration has swollen the ranks of Medicaid recipients too. Also, Bush signed into law a huge expansion of Medicare with the drug benefit. Plus, he upped educational spending.

Ned said at August 15, 2007 6:33 AM:

There were three factors that produced the shrinking deficit of the late 90's. In order of importance, they were:

1. Revenue surge (tax increase plus booming economy)
2. Fiscal restraint
3. Reduced defense expenditures (i.e., increases less than the rate of inflation)

Here are the actual data (from one of my previous posts on this board):

Your assertion about lower defense spending as a cause of the budget surpluses from 1998-2001 is only partly correct. During the Clinton years, from 1993-2001, defense spending actually increased from $292.4 billion to $306.1 billion. But this was much less than the rate of inflation, which would have yielded a defense budget of $354.5 billion in 2001, so, in effect, real defense spending did decline. It also declined as an overall percentage of the federal budget, from 20.7% (1993) to 16.4% (2001). During this period, the greatest budget surplus was in 2000, when revenues totaled $2,025.5 billion and expenditures totaled $1,789.2 billion, for a surplus of $236.3 billion, or 13.2% of the budget. The defense budget in 2000 was $295.0 billion, and, if this had kept up with inflation to maintain 1993 levels, it would have been $346.2 billion, or a saving of $51.2 billion. This $51.2 billion saving accounted for 21.7% of the overall budget surplus, not a trivial amount, to be sure, but also not the biggest cause of the surplus. During the period 1993-2001, federal expenditures increased by $453.7 billion, or 32.2% (about 4% per year), while revenues increased by $836.9 billion, or 72.5% (about 9% per year). Yes, there was a tax increase during that time, which helped reduce the deficit, and the extra tax revenues from the boom of the late 90's also helped, although it could be argued that the newfound fiscal restraint was as much a cause of the boom as a result.

From 2001 to 2005, revenues grew by $162.5 billion, or 8% (about 2% per year), while expenditures grew by $609 billion, or 30.6% (about 7.7% per year). Recent surges in revenue have helped reduce the deficit, but, as you say, this isn't going to last forever. I think we can see where the problem lies.

Hiaim said at November 29, 2016 2:57 AM:

The Federal Reserve Bank, had the strategy of ceaselessly purchasing the Treasury Bonds each year. Regularly the Fed purchases less bonds every year than the administration issues these IOUs, yet there is no reason the Fed can't build that rate of buys every year. Coincidentally, when the Fed buys government bonds, these bonds are resigned for all handy purposes (i.e. the gov't does not need to pay enthusiasm on the bonds to the Fed.)


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