Overview of the New Report on the National Debt

Osama bin Laden is not America’s gravest threat, says former Comptroller General David M. Walker.

“The most serious threat to the United States is not someone hiding in a cave in Afghanistan or Pakistan but our own fiscal irresponsibility,” Walker told CBS News earlier this year. “We’re spending more money than we make. . . . We’re charging it to the credit card . . . and expecting our grandchildren to pay for it. And that’s absolutely outrageous.”

In February, Walker quit his job as head of the Government Accountability Office (GAO) -- the nation’s auditing agency -- to barnstorm the country full time as president of the Peter G. Peterson Foundation. The new organization, founded by investment banker and Nixon administration Secretary of Commerce Peterson, is dedicated to alerting the public to an approaching tidal wave of budget deficits just as waves of retiring baby boomers begin claiming trillions of dollars in Social Security and Medicare benefits.

The sum of deficits year after year -- including money raised by selling Treasury securities here and abroad -- is the national debt, now more than $10 trillion.

In a year of catastrophic financial news, three milestones stand out. In February, 62-year-old retired Maryland teacher Kathleen Casey-Kirschling became the first baby boomer to receive a Social Security check, ushering in a flood of retirees whose retirement and Medicare benefits will strain federal coffers.

In October the annual federal budget deficit hit a record $455 billion, up from the previous record of $413 billion in 2004. The increase alarmed many budget analysts, not only because it continued the recent series of deficits but also because it came before the economy and financial markets nose-dived, prompting Congress to approve a $700 billion bailout in October. Also in October the National Debt Clock in New York City’s Times Square topped $10 trillion for the first time -- double the national debt when President George W. Bush took office eight years ago.

Most analysts agree with Walker that two budget issues especially threaten the nation’s future financial health: The recent string of annual federal budget deficits -- which have persisted even in economic good times -- and skyrocketing health-care costs, which threaten to swamp Medicare, Medicaid and the private health-care system over the next several decades.

“As alarming as the size of our current debt is, it excludes many items, including the gap between future promised and funded Social Security and Medicare benefits, veterans’ health care and a range of other commitments and contingencies that the federal government has pledged to support” in the future -- thus understating the true magnitude of budget problems, Walker told the Senate Budget Committee in January.

When countries have obligations they couldn’t otherwise meet, rather than raise taxes or cut programs to save money, governments that already carry substantial debt burdens have a tendency to simply print more money -- called “monetizing” debt. But with more cash available, demand for goods and services swells and prices rise higher in an inflationary cycle, says Herbert I. London, president of the conservative Hudson Institute, a Washington think tank. And when it comes to Social Security and Medicare, “the government is not going to cut these programs,” so “monetizing” may prove irresistible, London says.

Much as with any other debt, such as credit-card debt, the national debt matters because the government has to pay interest on it each year, explains Michael Hudson, a research professor of economics at the University of Missouri, Kansas City, and president of the Institute for the Study of Long-Term Economic Trends, in Forest Hills, N.Y. If the debt rises too high, interest payments can “crowd out other things” the government might want to do, he says.

“We’re already spending twice as much on debt interest as on the Iraq War” -- or over $400 billion a year -- points out Andrew L. Yarrow, author of the 2008 book Forgive Us Our Debts: The Intergenerational Dangers of Fiscal Irresponsibility.

And with foreign central banks now holding a sizable portion of America’s debt in the form of Treasury securities, those interest payments don’t end up back in Americans’ pockets as they did in the past, when “we mostly owed the debt to ourselves,” says Linda Bilmes, a professor of public budgeting at Harvard University’s John F. Kennedy School of Government and coauthor of The Three Trillion Dollar War: The True Cost of the Iraq Conflict. Unlike government spending on items like roads, for example, “interest payments made to the central bank of China” don’t help build the nation or the economy, Bilmes says.

The recent practice of running deficits during both good economic times and bad disturbs most economists. In a healthy economy, deficits typically increase during economic downturns -- when tax revenues fall -- and shrink during boom times.

“But in the mid-2000s the economy grew, but deficits grew too,” as Congress continued to spend while giving out tax breaks, says Hashem Dezhbakhsh, a professor of economics at Emory University in Atlanta. “This is a structural deficit,” which not only causes the total debt to balloon but indicates that the government isn’t behaving conscientiously, he says.

Worse, over the past quarter-century the federal government has run deficits almost every year, even though large, annual Social Security surpluses were borrowed to help shore up federal finances during the entire period.

“The government has used this accounting legerdemain” -- borrowing Social Security surpluses to fund programs, including wars and tax cuts -- says Yarrow, who is vice president of the nonpartisan, public opinion research group Public Agenda. As baby boomers reach retirement age, those IOUs will come due as Social Security is forced to pay promised benefits. When that happens, the government will have to make some tough choices to cope with the loss of ready cash, he says.

Despite concerns, particularly among skeptical younger Americans who fear Social Security will be broke by the time they retire, most economists say it can survive the fiscal tsunami with only some tweaks. Sometime in the next few decades, Congress will have to either increase Social Security taxes paid by workers and employers or cut the benefits, but the change needn’t be drastic, says Roberton Williams, a principal research associate in tax policy at the nonpartisan, mainly center-left-leaning Urban Institute. “We’ll probably have to work a little longer or see our benefits cut a little bit,” he says.

But the health-care system -- Medicare and Medicaid as well as other public and private services -- is another matter. Health costs have been rising faster than the rest of the economy for decades -- a trend widely seen as unsustainable.

“One hundred percent of the problem” with the nation’s fiscal future lies in health care, says Henry J. Aaron, a senior fellow in economics at the Brookings Institution, a centrist think tank. If we solve the health-care problem, “there won’t be a long-term fiscal problem,” he says.

The health-care system must be redesigned to offer incentives for providing only the most effective and cost-effective care, “but we don’t know yet what ‘effective care’ is,” says James R. Horney, director of fiscal policy at the liberal-leaning Center on Budget and Policy Priorities.

Medicare spending growth rates reflect not only the burgeoning beneficiary population but also health-care costs that are growing faster than the inflation rate, said former Comptroller General Walker. “Total health-care spending,” he said, “is absorbing an increasing share of our nation’s GDP [gross domestic product]” -- the total amount of goods and services the country produces in a year. It has risen from about 8 percent of GDP in 1976 to 16 percent in 2006, and is projected to reach about 20 percent of GDP in 2016 -- crowding out other vital spending.

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