Are you concerned about the deficit and the national debt? I am. Very concerned. One of my biggest fears is that despite my hard work and diligent savings, my accumulated savings will be decimated by inflation and currency devaluation because of high deficit and national debt.
With interest, I read Comeback America by David Walker. Walker is a former head of Government Accountability Office, a non-partisan investigative arm of Congress. At the time he wrote this book, he was CEO of The Peter G. Peterson Foundation. Peterson is the author of Running on Empty about the unsustainable entitlement programs. I read Running on Empty a few years ago and I liked it.
Both books are about fiscal responsibility. They sound the alarm about the problems of current budget deficit, and more importantly, the projected increase in deficit and national debt due to unfunded liabilities in the entitlement programs: Social Security, Medicare, and Medicaid.
Although the title Comeback America sounds like a tea party’s manifesto, it’s not. Walker is a true advocate for reducing the gigantic budget deficit and unfunded liabilities. The approach is best described as whatever it takes. Both spending cuts and tax increases are on the table.
Some of the ideas in the book may appear as not politically acceptable: means-testing Medicare; adding a VAT. However, the specifics are not as important as recognizing the problems and doing something about them. The only things that are not an option are the status quo or going the opposite direction: more spending, more promises, and more tax cuts.
Unfortunately, the opposite direction is exactly what’s happening right now. Both political parties are in favor of maximizing the current enjoyment and deferring the problems to the future. Democrats like spending and promises. Republicans like tax cuts. They only pay lip service to fiscal responsibility. Democrats want to expand health care; Republicans say we can’t afford it. Republicans want to make Bush tax cuts permanent; Democrats say we can’t afford it. They only invoke fiscal responsibility at their convenience against the other party, never against their own agenda.
You can’t blame the politicians. Their constituents want it that way. Tackling the problems means making sacrifices now for a sustainable future, and nobody is in the mood of making sacrifices. Making sacrifices means higher taxes for those who work and lower benefits for seniors. Any political candidate who campaigns on either higher taxes or lower benefits to seniors is doomed.
As a result, taxes can’t go up no matter what, not for 98% of the population anyway. It doesn’t matter that Democrats were vehemently against the Bush tax cuts when they were enacted. Medicare Part D benefits can’t be rolled back either. It doesn’t matter that Democrats were against it because it wasn’t paid for. The first thing the new health care law does is filling a donut hole in Medicare Part D, and thus digging deeper the fiscal hole.
I’m glad Walker and Peterson are fighting for fiscal responsibility. Along the same lines, they also produced two excellent documentaries: I.O.U.S.A. and I.O.U.S.A. Solutions. If you don’t have time to read the book, just watch the videos. Note: I.O.U.S.A. Solutions has five parts. Find the next part in the list of related videos after you are done with one part.
However, I can’t help being cynical. Despite their best intentions, I don’t see Walker and Peterson’s advocacy going anywhere. People live in a world of now. Pandering to the desire of now always wins – be it lower taxes = higher paychecks or no scaling back on Medicare no matter what.
The country is operating on a giant credit card and charging more and more. Dave Ramsey can save some consumers from debt overload only when those consumers are motivated to get out of debt and never get into debt again. David Walker can’t do it for our country because the current generations are not motivated to alleviate the problems for the next generations. As long as the credit card still works, they vote for policies that keep on charging on that card.
Am I too pessimistic? Tell me how it ain’t so.
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J says
Good news: the Affordable Care Act tackled Medicare spending with the creation of an Independent Payment Advisory Board:
http://voices.washingtonpost.com/ezra-klein/2010/03/can_we_control_costs_without_c.html
I sincerely hope Congress has the courage to leave the IPAB alone and does not repeal it.
Harry Sit says
J – The IPAB is better than nothing, but according to the WaPo article “Those reforms won’t increase cost sharing or taxes and they won’t change eligibility or benefits.” The board’s hands are tied with that limitation. Technical refinement, yes, true reform, no.
Ace says
I’m a fan of your blog, TFB, because I subscribe to your same financial philosophy. I believe in self-reliance and living within one’s means–not popular concepts in government today. I used to feel stressed about our government spending with no realistic prospect of ever paying off debt without raising taxes so high that the economy falters. It doesn’t really bother me anymore.
Frankly, our government has been outspending its income by billions for the past fifty years. Has it mattered? You and I can’t do that, because eventually our debt is called, our assets are repossessed, and we can’t afford food. Government, it seems, doesn’t have such a limitation. In theory, yes–someone would eventually need to pay down the debt. In practice, what will stop the government from simply running the same ponzi scheme indefinitely? Someone educate me on this. Using the credit card analogy from your last paragraph, what would most consumers do if the credit card had no limit, there was no deadline to pay off the card, and the bank would never cancel the card or try to collect?
Harry Sit says
Ace – Thank you. I don’t mind a Ponzi scheme as long as it doesn’t collapse before I’m out of it. It’s true it has gone on for decades. How many more decades will it run? If I somehow have a guarantee it will continue until my demise, I will go on being a happy camper. Lower my taxes when I’m still working. Load up cash and health care benefits on me when I retire. I won’t complain. I promise. Just please don’t reverse course before I’m done. Please …
KD says
If one were to accept that sometime in the future, this ponzi scheme will collapse right in front of our eyes, then what are the ways to protect yourself from it? Buy real estate, gold, international stock funds, and TIPS?
Ace says
KD – Probably good old diversification. A mix if domestic, international, real estate, etc. But it largely depends on what doomsday scenario you envision. If the U.S. economy collapses, the government defaults on its obligation, and the dollar loses all value, I have a hard time imagining that the rest of the world will hum along without noticing. Thus, you may not find refuge in international investments. By the same token, real estate might not be much good. Who is going to buy it when everyone’s money is worthless? An investment is only valuable to the seller if someone out there wants and is able to buy (which is also why I doubt gold’s value in a true doomsday scenario).
Pelon says
“Government, it seems, doesn’t have such a limitation. In theory, yes–someone would eventually need to pay down the debt. In practice, what will stop the government from simply running the same ponzi scheme indefinitely? Someone educate me on this.”
All Ponzi schemes have the same flaw. For people to get out more than they put in, the number of contributors has to increase faster than the number of people withdrawing their money. Since the population of any group is finite, the scheme eventually has to collapse under its own weight.
The typical life cycle of a Ponzi scheme is this:
1) Early investors get out significantly more than they put in which encourages others to invest.
2) Eventually, the number of new investors is not enough to meet the withdrawal demands of the existing investors.
3) The lack of funds causes the Ponzi scheme managers to stop or severely limit withdrawals. This leads to even fewer investors.
4) Without the new investors, the scheme collapses, and the remaining investors get pennies on the dollar (if they are lucky).
Governments are not immune from this cycle, they just have the ability to prolong it more than most by forcing people to invest and changing the terms of the deal. The end result is the same, though: people will get a lot less in real terms than what they actually invested.
Ace says
Ponzi schemes fail because they require new investors to pay old ones. A ponzi scheme would not fail if it could print money.
Ace says
Well, at least it would take a while. 🙂
J says
TFB, the Affordable Care Act’s IPAB trims *growth* in Medicare spending. It may not cut existing spending, but it does cut future spending. Here’s the Affordable Care Act’s effect on Medicare spending in the future:
http://voices.washingtonpost.com/ezra-klein/2010/10/the_affordable_care_acts_medic.html
The ACA also reduces wasteful spending on Medicare Advantage in 2011, 2012 and 2014:
http://healthreform.kff.org/timeline.aspx
Before, each extra dollar spent on Medicare Advantage spending gave recipients only 14 cents’ worth of value.
http://voices.washingtonpost.com/ezra-klein/2009/10/the_medicare_advantage_scam.html
As long as it is not repealed, the Affordable Care Act will curb our spending on Medicare.
Pelon says
The key is real vs nominal value. The government can print enough money to guarantee that I get more dollars out of social security than I put in, but it can’t guarantee that those dollars will buy an equivalent amount of goods and services. Since we can’t eat dollars, printing money to meet our future obligations is not a good solution. It would hurt savers and drive investors to other countries.
Harry Sit says
J – I’m very familiar with that “14 cents on the dollar” thing on Medicare Advantage programs. It’s based on research done by my former co-blogger now friend Austin Frakt. However, because a small minority of Medicare beneficiaries are in Medicare Advantage programs to begin with, even if Medicare Advantage programs are eliminated altogether, it won’t amount to much: maybe a one-time savings of 2-3% of Medicare spending and that’s it. Given the record on past cost containment effort like the Medicare SGR, are we to believe the IPAB will be successful? I would even say it’s just for show, like the SGR. When push comes to shove, it will be ignored and overruled.
Harry Sit says
Pelon – Your life cycle of a Ponzi scheme is excellent. I note we are in stage 2 with regard to Social Security and Medicare: outflow starts to exceed inflow. We are not advancing to stage 3 because the existing investors vote and control the operator. They vote to continue and expand the scheme rather than letting the operator limit withdrawals.
Chad says
It is interesting that the actual political battle is not mentioned in the review or the comments. The battle isn’t between Republicans and Democrats as they are the same. They both spend and they almost spend it exactly the same (“Democrats like spending and promises. Republicans like tax cuts.” – ‘spending’ should be beside Republicans too). The real battle is now corporate vs. individual. Virtually every proposal from both sides could be a good proposal, but they get corrupted by corporate interests. If you look at the recent healthcare bill you can sections where the government gave in to the insurance industry. Another example is the F-35 fighter. The DoD picked an engine that wasn’t GE’s. GE then turned around and “convinced” certain senators to force through a 2nd engine for the plane, which the DoD didn’t want.
Parties don’t matter anymore.