The Global Debt Bomb and the Fiscal Unsustainability of the U.S. and Europe
Is There an Accountant in the “House”?
As a Certified Public Accountant and former Member of Congress (a rare combination), I have been sounding the alarm about the inadequate accounting principles used in the U.S. budget process to measure our annual deficits and national debt. After leaving the U.S. House of Representatives in 1989, I set up an educational foundation, Truth In Government, because I believe that America, along with every other country, needs independent oversight to provide the real numbers when it comes to the financial results of government operations. Many countries, including the United States, do not publicize their total debt and obligations for all to see. Hopefully, at this time of fiscal crisis, a genuine debate is starting in America and the Eurozone about unsustainable increases in annual budget deficits and national debt, both “on and off the books,” as a percentage of Gross Domestic Product (GDP).
America’s fiscal vulnerability is becoming more evident with an economy built much more on debt, consumption, and imports than on investment, production, and exports. Because of the recent concern that major bond rating agencies could again downgrade the credit rating of U.S. Treasury securities, members of the House and Senate (and even State Comptrollers) are now recognizing that a government has to consider unfunded pension obligations and actuarially computed liabilities, on a present value basis, for all entitlements that, in the past, were not considered to be part of the national debt. Publicly-traded companies have always been required by the Securities and Exchange Commission (SEC) to calculate and report all of these obligations in order to fairly report to corporate stockholders. The question today is: Will the U.S. government do the same to protect American taxpayers, even those in future generations whose inheritance and future taxation is being determined today without their representation in Congress?
Unaccountable Congress: It Doesn’t Add Up
In 1992, I published Unaccountable Congress: It Doesn’t Add Up to make the case that there should be no double standard when it comes to federal accounting, financial management, and financial reporting. I updated and republished the book in May 2010, and I chose an apocalyptic-looking cover for the new edition—one that includes “a national debt card” on the backs of young people and the Capitol of the United States in flames. I wanted to draw attention to the unsustainable fiscal picture that I see emerging in the next ten years. A partisan, uncompromising political fight on whether to raise taxes or cut spending has been raging since then. (This continuing partisan conflict almost caused the shutdown of the U.S. government during the summer of 2011, when the statutory debt ceiling for America’s bonded debt of $14.3 trillion was reached.) We are now in a Presidential election year, and there is no resolve to do anything but continue political posturing and gridlock on both sides of the political aisle.
When it comes to spending taxpayer dollars and borrowing money, most governments have a credit card mentality. Certainly the United States does, and that is why, when I first published Unaccountable Congress, I put what I called a “congressional credit card” on the front cover. (It was meant to represent a House Member’s plastic voting card, which is inserted into a computer terminal at the end of each row of seats in the House of Representatives in order to record votes.) In one of my first speeches on the House floor, I held up my voting card and called it “the most expensive credit card in the world” and said that every time Members used their plastic cards to vote on spending increases and tax cuts, we were raising the annual deficit and the national debt. I pointed out that while a personal credit card has a limit—one that you cannot change unless you convince the bank to raise it based on increased income—the “Congressional credit card” has no real limit. Even in 1986, under Ronald Reagan, a president who called himself a staunch fiscal conservative, the United States had a $200 billion deficit. Congress passed the “Gramm-Rudman” bill (H.R. 3520) in 1985, a formulaic approach to reduce the deficit and balance the budget over four years. When Congress failed to reach that target in four years, they changed it to five years, and then ultimately abandoned it altogether. And over the last forty-plus years (since the advent of the “unified budget” in 1968 which allowed annual budget deficits to be reduced by the annual surpluses in the Social Security trust funds), the U.S. Congress has changed the budget process to meet the desires of politicians who seem more interested in reelection than the needs of their constituents who deserve a fiscally sound and economically sustainable government.
The problem will only grow, because the U.S. government must raise the debt ceiling limit again at the end of 2012 in order to operate. (Under U.S. law, when our borrowing limit runs out, Congress cannot spend more money until it passes a law raising the statutory debt ceiling.) In the past, Congress has not been serious about the consequences of raising the debt ceiling. Every time the government ran out of money, Congress simply raised the debt ceiling in order to avoid any restraints on its spending and, in the process, increased the national debt. To make matters worse, as stated before, Congress only takes into consideration the bonded debt when raising the debt limit—not obligations for unfunded entitlements like Social Security and Medicare. This is also true in many other countries, and this is why we need to develop better global accounting standards for governmental entities. International accounting standards are now emerging to insure that publicly-traded corporations accurately report on their finances to global shareholders, but they have yet to emerge in the public sector. These standards are necessary to gauge which countries are fiscally sustainable and can continue to borrow money to cover their annual operating budget deficits and to pay out on promised retirement and healthcare benefits.
In June 2003, I published an article, entitled “Cooking the Nation’s Books,” in The National Law Journal. Because there are laws that determine the budget and accounting process in the United States, I wanted to have my opinions vetted by lawyers, not just by accountants. I especially wanted to make the legislative branches in the states and in Washington (where lawyers predominate) aware of the role that they have played in creating America’s fiscal problems and how they can fix them by reforming the budget process, (especially the accounting principles used in the budget process). The goal must be to ensure that all spending and commitments to spend in the future are recognized in the annual financial statements of the U.S. government. Although both political parties represent very different philosophies in Washington, “both sides of the aisle” can no longer ignore the fact that the national debt is becoming so large that just spending more and taxing less, and paying the interest on the ever-increasing resulting debt, can soon bankrupt America.
The fiscal crisis that America faces today is the same one confronting the 17 Eurozone countries. Politicians are controlling the budget process and underrepresenting liabilities for pensions and other entitlements, passing them on to future generations. The U.S. Congress uses what is called a “cash basis” accounting system for the budget process—not “generally accepted accounting principles” (GAAP), which the SEC requires for publicly traded corporations. The “cash basis” of accounting is easily manipulated because one does not need to record an expense until one writes a check, not when one gets the bill. (Under GAAP, an expense and liability has to be recorded when a bill is received or an obligation to pay is incurred.) In an economic sense, GAAP gives a much sounder picture of where a government stands financially. And yet, the Congressional Budget Office still uses the cash basis to determine annual budget deficits, thereby grossly underreporting the obligations being passed on to the next generation.
Partisan Politics is Preventing Fiscal Responsibility
On April 7, 2011, Congressman Paul Ryan, Chairman of the Budget Committee, initiated an important debate over the role of the federal government when he unveiled his budget proposal for cutting federal spending by $5.8 trillion over the next decade. Earlier, in December 2010, President Barack Obama’s “Debt Commission,” a bipartisan commission on “fiscal responsibility and reform” that was chaired by two highly regarded former Senators— Alan Simpson, a Republican from Wyoming, and Erskine Bowles, a Democrat from North Carolina—put forward a plan that never even made it into the Administration’s proposed budgets for fiscal years 2011 and 2012. Now that Congressman Ryan, the “Debt Committee,” and more recently, the failed “Congressional Super Committee” on deficit reduction have sounded the alarm, will Congress finally agree on a bipartisan vision that results in decreasing annual deficits and the national debt?
A bipartisan debate on government spending is important, because the fast-rising national debt curve must be bent downward over the next ten years in order to instill confidence that the United States will be fiscally sustainable. As of this writing, it is projected to go dramatically upward over the next five years, further threatening the currently good Treasury bill and bond ratings of the United States. The projected increase in America’s national debt could create such high future interest costs that all discretionary spending in the next five to ten years will be in jeopardy. (Interest paid on the public portion of the national debt has never been as low as it is now because the Federal Reserve Bank, “the Fed,” has lowered the short- term interest rate to practically zero through “quantitative easing” to keep the United States from plunging into a recession.) As soon as interest rates rise—as they are expected to because of emerging inflationary pressures—there will be another immediate, negative impact on the budget of the United States.
In recent years, the price of almost all commodities, including food, other household staples, and gasoline, have risen steeply. As a result, many believe that the Fed will have to increase interest rates gradually to keep inflation under control. This is what happened in the late 1970s, when President Jimmy Carter’s “stagflation” (a stagnant economy with high inflation) resulted in a prime interest rate of 21 percent. The Fed will not go to this extreme, but it nevertheless will be forced to raise interest rates in the next five to ten years to somewhere above 6 percent in order to service a statutorily permitted national debt that is estimated by the Obama administration to exceed $20 trillion by 2017. (At the end of fiscal year 2011, the bonded debt subject to the statutory debt limit reached $14.8 trillion.) If interest is calculated on only the public portion of the projected national debt by 2017, the interest cost at 6 percent would be over $800 billion dollars and would wreak havoc on future discretionary spending for defense, education, and aid to the states. (It should be noted that the public portion of the debt does not include Treasury securities held in the so-called “trust funds” for which interest is accrued for future payment.)
While the so-called “Tea Party” is really a civic movement calling for limited government and dramatic spending cuts without raising taxes at the federal level, many new Members of Congress got elected in November 2010 with “Tea Party” support by promising their constituents that they would shut down the government if deficit spending and the national debt were not dramatically reduced. No one wants to see the U.S. government shut down. Nevertheless, the United States cannot continue with current debt levels and deficit spending as a percentage of GDP. Much attention is now focused on the European debt crisis, but the United States is not disconnected from what is happening in Greece, Spain, Portugal, France, and Italy. Alarmingly, the U.S. government’s deficit was reported to be $1 trillion, $300 billion for the fiscal year ending September 30, 2011. This is the third year in a row that spending has exceeded revenue by over a trillion dollars, adding to an already bloated national “bonded” debt, which is just over 100 percent of GDP. (And, the federal government still has no budget resolution for the fiscal year 2012!)
A Global Perspective on Fiscal Sustainability
The 2012 edition of the Pocket World in Figures published by The Economist lists the World’s gross domestic product (GDP) at about $63 trillion or approximately $11,000 per person in 2011. Since America’s GDP approximated $15 trillion at the end of 2011, this means that the United States is responsible for about one quarter of the sum of economic activity in the world, or about $48,000 per U.S. citizen. The Eurozone, which now includes seventeen European countries, is roughly equal to the United States in total and per person GDP. China has a GDP of approximately $5 trillion, which is now in excess of Japan’s. Nevertheless, China’s GDP per person is estimated at only $6,800 because of the enormity of its underutilized population. Looking at the ten-year average annual growth rate by country through 2009, China is indexed at 10.3 percent and India at 6.9 percent, because both countries are trying to boost their domestic economies as well as their exports. The United States has a projected growth rate of about 2.2 percent, although this rate is projected by many economists to increase as long as the country does not slide into a “double dip” recession. Against the backdrop of this global perspective, the U.S. economy plays and will continue to play an important role in the future.
Europe is also facing a debt crisis of enormous proportions. Greece has technically defaulted on its debts. The extent of the problem was made clear when we learned in the spring of 2011 that Greece’s debt equaled 150 percent of its GDP. Meanwhile, although the United States has a recognized “debt-ceiling-limited” national debt of almost $16 trillion, the real debt is much larger. Actuaries have computed pension and entitlement liabilities on a present value basis for the United States as of September 30, 2011, as follows: $8 trillion for Social Security and $37 trillion for Medicare Parts A, B, and D. When this $45 trillion total is added to almost $16 trillion in outstanding Treasury securities, the national debt of the United States exceeds $60 trillion, which is an amazing 400 percent of America’s GDP.
Whether we are talking about the European debt crisis or the US national debt, the key word is “sustainability.” Are Europe and America economically sustainable? That question must now be answered country by country. Is a country able to sustain a certain level of debt based on its economic activity? In response to that question, Stanford University sponsored a research project that created a “sovereign fiscal responsibility index.” Compared to thirty-four other countries, the United States was ranked low at twenty-eight. But if the budget reforms that President Obama’s “Debt Commission” have recommended were implemented, the United States would be ranked at sixteen, as stated in the 2011 index produced by Stanford University’s Public Policy and International Studies Program (see Appendix 1).
According to the Stanford researchers, there are several factors that go into determining a country’s “sovereign fiscal responsibility index.” There is a “fiscal path,” which describes how a country’s debt level is managed over time. “Fiscal status” concerns the level of a nation’s debt and how it is determined. And, finally, “fiscal governance” describes the financial structure of a government and its budgeting and accounting processes in order to ascertain whether a country is fiscally responsible and transparent. Australia and New Zealand, for example, are ranked number one and two, respectively, because they use GAAP accounting and have financial management systems and controls that restrain unnecessary spending and borrowing. By contrast, Greece has a zero “sovereign fiscal responsibility index” and is ranked last at thirty-four because it is technically in default, in need of a massive bailout, and is currently fiscally unsustainable as a country.
Preserving the “Promise of America”
The Founding Fathers of the United States envisioned a limited federal government. Listening to many politicians today, one would think that the federal government created the states when, in fact, the states created the federal government. The biggest debate that the United States will face over the next ten years concerns the urgent need to reduce federal spending and to decide what the role of the federal government should be. The United States is a democracy, but it is also a republic in which each state is sovereign. Over the years, the U.S. government has become the paymaster for many programs—such as healthcare, education, and retirement benefits. In the process, this has moved government too far away from the people, creating an inefficient and hard-to-manage bureaucracy. The question now is whether we will bring government closer to the people, so that we can see how effective or inefficient government expenditures really are.
The debate that is taking place in America about the fiscal crisis and the national debt needs to take place in every country. The United States is spending money that it does not have and borrowing from foreign countries that do not share its commitment to democracy and human rights. As a result, America is threatening the very foundation of its democracy and the prospects of the next generation to continue the American dream of financial self-sufficiency, family empowerment, and personal freedom. The challenge that Americans face is keeping that “promise of America” alive. It will be good not only for the economic, political, and social sustainability of the United States, but also for those countries around the world that look to us for leadership and financial support. I believe that this can be done only if the politicians tell the truth about what they are spending and how this impacts our national debt and America’s fiscal sustainability, now and in the future.
DioGuardi, Joseph J. June 23-June 30, 2003. “Cooking the Nation’s Books,” The National Law Journal.
The Conference Board, The U.S. Economic Forecast. http://www.conferenceboard.org/data/usforecast.cfm
The Economist, Pocket World in Figures 2012 Edition. 2011. (London: Profile Books, Ltd.).
Augustine, T. J, Maasry, A., Sobo, D, Wang, D., under the guidance of the Honorable David M. Walker. 2010. “Sovereign Fiscal Responsibility Index 2011” (Stanford University and the Comeback America Initiative). www.tcaii.org/pefs/SFRI_Final_Report_Executive_Summary.pdf