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TwitThisRead more memos to President-Elect Barack Obama.
For the last two decades the U.S. has sidestepped many needed economic reforms. Our political system has developed a chronic case of shortsightedness. Too many of us have engaged in wishful thinking, believing that the impending rapid rise in federal budget deficits and debt accumulation—driven by a widening gap between government commitments and projected government revenues—will be reversed on its own, with no need to take corrective action. Hard decisions have been avoided on how to pay for our current wars and for increased homeland security (which are all paid for by borrowing), ensure the sustainability of Social Security, Medicare and Medicaid, as well as bring long term revenues and spending into balance. For years we collectively have ignored the serious implications of inertia.
The government's budget deficit will rise in the near term as the result of needed government actions to revive U.S. economic growth and the flow of credit, as well as a predictable slowdown in revenues. The numbers will be large but the stimulus is needed. However, it is the deficits expected in future decades that will present a more ominous problem. Years after the current crises in our housing and financial markets has passed, the country could face even more severe problems if the government repeatedly spends far more money than it takes in. The threat is not only financial; chronic, large and growing budget imbalances and the resulting massive accumulation of debt will weaken our national security as well as the resilience of the U.S. to meet future domestic and international crises—and impose enormous burdens on our children and grandchildren.
Not only has policy been shortsighted, but it has also fallen into the trap of compartmentalization. Tax cuts and spending increases have not been weighed against other resource requirements. Often those who zealously supported increased appropriations have been reluctant to advocate tax increases to pay for them. And frequently those who insisted on large tax cuts failed to champion with equal zeal spending cuts for programs of low national importance; in fact, such spending rose. "Earmarking" of funds for pet projects has produced billions of dollars of additional outlays unrelated to national priorities. But this is relatively small compared to excesses that occurred in the regular budget process, which time and again was not subject to sufficient scrutiny. Highway and homeland security funding, for example, frequently were determined not by a careful assessment of vulnerabilities and needs but instead by who was powerful enough to win legislative battles. Presidents Truman, Eisenhower, and Reagan would have used the "veto pen" on such programs several times by now.
But a far more ominous fiscal burden is looming on the horizon. Past legislation has committed enormous sums to future beneficiaries of Social Security, Medicare, and Medicaid. These are wonderful programs. They should be funded at levels high enough to ensure promised benefits to people who require them. But the federal government will not have the resources to meet all of its promises in the future unless it engages in enormous amounts of new borrowing, imposes much higher taxes on future generations of workers, and chops large amounts out of the regular budget.
Social Security is one of the most successful programs in our nation’s history, and decades of hard-working Americans have depended on it during their retirement years. They should be able to continue to do so. It now enjoys a large surplus. The U.S. Treasury currently borrows tens of billions of dollars annually from its Trust Fund to pay for programs in the regular budget. But before the end of the next decade, this Fund will be paying out far more to retirees than it takes in. And over the next 75 years—the lifetimes of many of our children and grandchildren—commitments will exceed cash inflows by $5 trillion. The Medicare numbers are even starker. The upshot is that in order to pay what the government has promised in just these two programs alone, taxes would have to climb from the present 18 percent of GDP to nearly one-quarter of GDP in 2030—with a lot more to come.
Given the reluctance of the country to accept higher taxes, much of the money would have to be borrowed. That would produce unprecedented increases in the national debt—far greater than we face today. While the government has engaged in massive amounts of borrowing, and consequently experienced a rapid rise in debt, during wartime and recessions or depressions, these have declined quickly when the emergency that precipitated them ended. However, the borrowing and debt buildup resulting from these retirement and medical benefit programs will not decline; it will continue to grow in magnitude, pushing up interest rates, retarding economic growth, and increasing already outsized dependence on foreign funds.
The recent tendency of Americans to expect instant gratification from their political leaders—and to penalize them at the polls if they suggest reforms that entail short term pain, even if they produce long-term national improvements—threatens to damage the country's future strength and prosperity. Younger Americans especially are the victims when our politicians seek solutions that produce only short-term fixes, because they will inherit all the unpaid bills. Therefore they, more than any other group of Americans, should urge out national leaders to agree on more rigorous spending priorities—investing in crucial areas such as reducing energy dependence, building infrastructure and improving education—and a multi-decade fiscal strategy to pay for them. But to secure their kids' futures, their parents and grandparents should be equally adamant. This is where you come in. This is where your leadership skills, and your political character, will be tested.
You must convince your fellow Americans, and their representatives in Congress, of the necessity of making hard choices over the next several years on tax policy, reform of retirement and health benefit programs, and in the way we use our national resources in order to invest in the nation’s future while putting the country on a sound long-term financial footing. That will not always mean balanced budgets, but it does mean avoiding ones that impose excessive burdens on our economy. Doing so is imperative to provide our children and grandchildren with at least as great an opportunity to enjoy robust prosperity and security as we enjoyed.
President Eisenhower cautioned Americans to "avoid the impulse to live only for today, plundering for our own ease and convenience the precious resources of tomorrow." Without bold reform now—under your leadership—that is exactly what we will be doing.
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