Bailout Pales Next to Budget Crisis
Unfunded tab of government liabilities projected to reach $53 trillion over next 75 years. (flickr)
Think the $700-billion bailout package was expensive? Well, you ain’t seen nothin’ yet.
Over the next few decades, promised federal spending threatens to drown the economy to a degree that would make the recently enacted financial bailout plan seem cheap, David M. Walker, the former comptroller general, said Wednesday. Including Medicare, Social Security, veterans programs and myriad other financial obligations, the tab over the next 75 years is projected to reach $53 trillion — with a “T.” All unfunded.
Yet despite this projected gaping hole in the budget — one that threatens to consume all the economy in just a few decades — Congress has shown little appetite to rein in spending. While party leaders came together with startling urgency to pass the Wall Street bailout, they’ve done almost nothing to confront the much larger problem of the looming budget crisis.
Illustration by: Matt Mahurin
“That’s not just fiscally irresponsible,” said Walker, now president of the Peter G. Peterson Foundation, a group promoting fiscal sobriety. “It’s morally reprehensible.”
His thrashing — delivered during a gathering of leading economists in Washington on Wednesday — comes during a dark time for the nation’s economy. Risky, mortgaged-backed securities have collapsed in value, leading to a freeze in the flow of the cheap credit that fuels businesses. The freeze has destroyed storied investment firms, bankrupted others, sent home prices plummeting further and foreclosure rates leaping. On Wall Street, stock prices are in a tailspin; on Main Street, unemployment is rising, and no one seems to know when it will end.
In a coordinated effort to make that day come quicker, the Federal Reserve, in coordination with central banks around the world, lowered interest rates half a percentage point Wednesday. The Dow Jones Industrial Average responded with an upward blip, but ended the day down 189 points.
Many experts, including Walker, agree that Congress had to do something to re-instill investor confidence in the financial system. But the bailout, the former comptroller general is quick to point out, constitutes less than 1 percent of the country’s long-term spending obligations.
“My question,” he said, “is when are they going to start dealing with the bigger problem?”
There is good reason for Walker’s alarm.
The nation’s mandatory spending commitments — a combination of interest on the debt and entitlement programs that run on autopilot — account for more than 62 percent of the federal budget, up from 33 percent 40 years ago. And they’re climbing.
The oldest baby boomers will become eligible for Medicare in a few years, adding to the burden. More important, medical inflation is a force unto itself: Medicare alone is projected to grow at three times the rate of the rest of the economy over the next 25 years.
To slow that growth, Congress would have to pass legislation. Yet the surest reform options — raising taxes or cutting benefits — are both political landmines. Lawmakers don’t want to be remembered for doing either.
Walker claims there are “disturbing parallels” between the current financial mess and the nation’s looming budget crisis. Many Wall Street decision-makers, for example, who made out handsomely from their high-risk investments have never been held to account, even as thousands of homeowners have suffered from their choices. In Congress, Walker points out, lawmakers are often rewarded with reelection for their overspending, rather than being punished for tipping the nation’s balance sheets off-kilter.
Another example: Wall Street firms used off-the-books accounting to hide many dubious transactions from regulators. In Congress, the annual budget almost always buries real expenses — emergency funding for the wars in Iraq and Afghanistan, for example, and long-term obligations like Medicare — to create the illusion that overspending is less severe than it is.
In fact, Walker claimed, only two major differences distinguish the current financial mess from that facing the nation’s budget. First, the government crisis is far larger. Second, no one can bail out the U.S. government.
The lack of initiative among policymakers has caused some experts to question the quality of leadership on Capitol Hill. Tim Adams, a former Treasury official under the Bush administration who is now managing director of the Lindsey Group, an economic consulting firm, said the current financial crisis should be the country’s “call to arms to get our fiscal house in order.” To do it, though, the country needs strong leadership, “and right now we don’t have it.”
Election-year politics has contributed partly to Congress’s inaction. Without voters pushing for entitlement reform, few lawmakers have stuck their necks out to make it an issue. In this political environment, some experts say, change will come only when the public is better informed about the problems.
“It’s clear that our dysfunctional Congress is not going to act unless pressured by the voters,” said Rudolph Penner, a former director of the Congressional Budget Office who is now a scholar at the Urban Institute.
The entrenched partisanship of recent years hasn’t helped. With Democrats controlling Congress and George W. Bush occupying the White House, the environment in Washington has been one in which “winning is more important than governing,” according to Leon Panetta, former chief of staff for President Bill Clinton and now professor of public policy at Santa Clara University. As a result, entitlement reform has been close to impossible, even as experts have warned of looming trouble.
On Tuesday, that trouble become more pronounced when the Congressional Budget Office announced that the deficit for fiscal year 2008 (which ended Sept. 30) will be $438 billion — up $276 billion from the year before. In July, the CBO projected the 2009 deficit will reach $482 billion. That’s the largest dollar figure on record, though several deficits under President Ronald Reagan were far higher as a percentage of gross domestic product. The 2009 estimate does not consider the $700-billion bailout, so the real figure will likely top $500 billion.
Earlier this month, the federal debt hit the double-digit trillions — a figure large enough that Manhattan’s celebrated “debt clock” could no longer contain it. The mammoth sum has real budget implications: In 2007, the interest on the federal debt was $237 billion, or roughly 9 percent of the total budget.
Washington observers predict Congress will have to take further steps to treat the ailing economy. There remains disagreement, though, over what form another stimulus package should take.
A $56-billion proposal, passed by the House last month, would fund infrastructure projects, expand unemployment benefits and increase spending on such social services as Medicaid and food stamps. Senate Republicans defeated the measure. It’s unclear if Democratic leaders will try again when the Senate returns to Washington after the elections.
The next president will have no easy time inheriting the mess. Despite the claims of Sens. Barack Obama and John McCain, experts contend that many campaign-trail promises will have to be abandoned as a result of the current economic squeeze. “Most of their initiatives will not be able to be accomplished,” Panetta said.
Some economists are less pessimistic. Mark Zandi, chief economist of Moody’s Economy.com, maintained that, despite its troubles, the United States remains attractive in the eyes of foreign investors. As long as those investors continue to buy Treasury bills, he said, there’s reason to believe the recovery will come soon. “We are still the place you go when there’s a problem,” Zandi said, “even when the problem is here.”
Also a source of optimism, some experts predict that rebalancing Social Security will be easier in the middle of the financial crisis than it was previously. That’s because the major sticking point has been Republicans’ insistence that private accounts be included in any reforms — an insistence that seems absurd as the market continues its stunning fall.
“That’s not going to fly in this atmosphere,” said Alice Rivlin, former head of the Congressional Budget Office and now a Brookings Institution scholar. “Nobody’s going to turn their accounts over to Wall Street.”
As the economic debate rages, some observers see the financial trouble as an opportunity for everyone, not only Washington’s politicians, to try a hand at introspection. Adams of the Lindsey Group suggested the crisis has something to do with all Americans — eager consumers who bought things they didn’t need to fill houses they couldn’t afford.
“Maybe,” he said, “this is a period when we reconnect with what’s real in life.”