America cannot spend its way to prosperity
(This is the guy I wish Barack would have tapped for Treasury Sec.)
By David Walker
Published: January 14 2009 19:26 | Last updated: January 14 2009 19:26
The US Congressional Budget Office expects the federal government to face a cash-based budget deficit of $1,200bn (€910bn, £820bn), or 8.3 per cent of gross domestic product, for the fiscal year ending September 30 2009. This is a post-second-world-war record and a mind-boggling amount.
If that is not bad enough, the CBO’s $1,200bn estimate does not even include the forthcoming fiscal stimulus, which is expected to be at least $775bn over two years. President-elect Barack Obama has said we may experience deficits above $1,000bn for years to come.
What many do not realise is that the US has already had its first deficit above $1,000bn - in fiscal 2008, according to the accrual-based financial statements issued in December 2008. (Unfortunately not many read these statements, including elected officials and other policymakers.) But what transformed our large and growing surpluses at the outset of the Bush administration into growing deficits and mounting debt by the end of it? First, President George W. Bush did not keep his pledge to be fiscally responsible. As I have found during my 15 years leading government agencies spanning the Reagan, Bush (41), Clinton and Bush (43) administrations, it does not matter what politicians say: it is what they do or fail to do that counts.
Unfortunately, Mr Bush is likely to go down as one of the most - if not the most - fiscally irresponsible presidents in US history. Who would have expected that a self-professed conservative would allow the statutory budget controls - which helped move us from large, rising deficits in the early 1990s to large, growing surpluses by the decade’s end - to expire at the end of 2002? Who would have thought there would be no call for "shared sacrifice" after the attacks of September 11 2001 to finance the "war on terror"? And who would have thought that Mr Bush would back the largest expansion of federal entitlement programmes since President Lyndon Johnson? The enactment of the Medicare prescription drug benefit bill added more than $8,000bn to the federal government’s already huge, unfunded Medicare promises. Johnson was criticised in the 1960s for wanting to have both "guns and butter"; Mr Bush pursued "guns, butter and tax cuts" all at once.
In addition to these fiscal failures, regulatory and scrutiny functions failed to prevent the imprudent lending and debt accumulation that led to the mortgage-related subprime crisis. We must learn from these failures.
In fairness, we cannot assign all the blame to Mr Bush. Congress bears some responsibility, as do the American people. After all, in our constitutional republic it is "We the People" who are ultimately accountable for what happens in Washington.
The US is at a critical crossroads. Our future will depend on actions taken within the next few years. We must turn the economy round and address the long-standing challenges associated with our entitlement programmes, spending policies, regulatory approaches and tax systems. Mr Obama’s goal must be to strengthen the economy for today and tomorrow.
To accomplish this, the US will need both a sizeable stimulus package and to address certain troubled industries. The cost of this, combined with falls in revenue attributable to the recession, will cause federal deficit and debt levels to rocket in the near term. That is troubling, but understandable and necessary under the circumstances.
Any stimulus proposal should be timely, targeted and temporary. It should be large enough to make a difference, but not too large, and be properly structured in order to minimise waste. It should be designed to stimulate job growth and make targeted infrastructure and other investments to make America more competitive.
While some stimulus is called for, we cannot spend our way into economic prosperity, especially when all new spending is debt-financed. It was troubling to see one prominent incoming senior economic official refer to the Obama administration’s planned stimulus proposal as a "down payment" on the future. How can something be a down payment when there is no equity involved? This is an example of how words used in Washington do not always fit Webster’s definitions.
The president and Congress must put a process in place that will enable elected officials to reimpose tough statutory budget controls and reform our nation’s Social Security, Medicare, healthcare and tax systems. All these require significant reforms that Washington has delayed for too long. We also need a baseline review of all main spending and tax choices to reprioritise them to reflect 21st-century realities. The US is a great country. But if Americans want their future to be better than their past, policymakers need to make hard choices. In turn, the American people have to reward those who make tough choices designed to create a better future and hold those who do not accountable for their failure to act. |
