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What is the Comeback America Initiative?
The Comeback America Initiative (CAI) is a non-profit organization whose mission is to
promote fiscal responsibility and sustainability by engaging the public and assisting key
policymakers on a non-partisan basis in order to achieve solutions to America’s fiscal
imbalances.
The purpose of this Fiscal Facts presentation is to help spread the facts regarding the
true financial condition and fiscal outlook of the U.S. Government. These fiscal
imbalances threaten the future standing of America in the world, the strength and
competitiveness of our economy, our future standard of living, and even our future
domestic tranquility. The facts in this presentation have been provided with the intent
that you will use them to educate concerned citizens and pressure policymakers to
enact reforms that will help to ensure that our collective future is better than our past.
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Some have advocated various myths as ways to “solve” our debt problems. Some say that all
we as a nation need to do is either grow the economy, increase inflation, raise taxes, or cut
spending to solve the fiscal challenges we are facing. Doing any of these by themself is
unrealistic and inadequate.
The economy would have to achieve double digit real GDP growth for decades to address our
$62 trillion financial hole. This level of growth has not occurred in the U.S. over such a long
period and it is unrealistic to expect that it will in the future.
Inflating our way out is unacceptable. As has been said, inflation is a hidden tax and arguably
the cruelest tax of all. History has taught us the high-levels of inflation and hyperinflation can
destroy the fabric of society, decimate savings, and provide no long-term benefit to a country
that decides to use the printing press instead of logic. It also tends to harm the most
vulnerable in our society the most.
Increasing revenues alone is unrealistic. The recent historical average of federal revenue
collected as a percentage of GDP is about 18.4%. Based on reasonable and sustainable
assumptions.
To achieve fiscal balance through reducing spending alone would require cuts to government
programs the American people would never accept. For example, if only spending cuts are
used to balance the budget, and revenues were kept at their historical level of 18.4% by 2024,
there would only be enough to revenue to pay for Social Security, mandatory federal health
programs (e.g. Medicare and Medicaid) and interest on the debt. All other spending would
have to be eliminated, which includes such programs as defense, transportation, education,
and homeland security.
What will be required is a concerted effort by politicians and central bankers to work together
to foster growth within the economy, make a sustainable budget with lower projected
spending and higher revenues, than the historical average, in order to restore fiscal sanity.
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What is the size of the federal government?
To measure the relative size of the federal government, you can look at what
percentage of the U.S. economy is made up of by federal government spending. It is
clear by the numbers above that the federal government has grown far larger than
envisioned by our nation’s founders. In 1800 only 2% of the U.S. economy was made
up of federal spending. That has risen to approximately 24% in 2011, and is projected
to be 37% by 2040 absent reforms to existing government programs and operations.
These numbers don’t even include spending by state and local governments. If you
include state and local government spending, total government expenditures are on a
path to exceed 50% of the U.S. economy by 2040.
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What does the federal government spend money on? How has that changed over
time?
This slide shows the composition of federal government spending in fiscal 1970 and
fiscal 2010. As you can see, in the past 40 years our country has undergone a dramatic
change in the composition of the annual federal budget. Social insurance programs,
specifically entitlements such as Medicare, Medicaid, and Social Security, have become
the main drivers of federal spending, making up approximately 43% of spending in 2010
(vs. only 19% in 1970).
These entitlement programs, as well as “Other Mandatory” spending programs, are
budgeted for according to automatic formulas written into law. In other words,
spending for these programs is largely on “auto-pilot”. As a result, in federal fiscal year
2010 only 39% of the budget (Defense + Other Discretionary) was actually decided
upon by the Congress and the President – down from 62% forty years ago. Shockingly,
this shrinking discretionary portion of the budget includes all of the express and
enumerated responsibilities for the federal government under the Constitution and all
the investments for our future. These trends will only become worse with the passage
of time absent substantial reforms.
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Is either political party more responsible than the other for the rise in federal
spending?
Federal government spending has steadily and alarmingly increased for the past several
decades irrespective of the party that controlled the Congress or the Presidency. The
period 2001-2011 was a period of extraordinary spending growth. It seems clear that
irresponsible spending is a bipartisan problem, and it requires both parties to come
together to solve it.
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How have federal revenues changed depending on which political party was in power?
As you can see, different political parties have shared control of the federal government
over the past several decades, and federal revenues have not increased nearly as
quickly as the level of federal spending. In addition, as the dip in revenues following the
tax cuts of the Economic Recovery Tax Act of 1981 show, not all tax cuts generate more
total federal revenue than would have occurred absent the tax cut.
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What about revenues, does the government bring in enough money to support its
spending?
Federal government spending per person adjusted for inflation has consistently
exceeded the amount of revenue, especially in recent years. The last time that
spending per person outpaced revenues as dramatically as it does today was during
World War II. Today, our government is actually spending at an inflation adjusted percapita rate of 40-50% higher than during the World War II era. In addition, today’s
annual deficits are comparable to the deficits experienced to win WWII. At that time,
we were fighting and winning a war to save the free world. What do we have to show
for our current deficits?
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What is the current total federal debt, and how has it changed over the past 10 years?
Fiscal irresponsibility has led to growing deficits and mounting federal debt. Total
federal debt was approximately $14.8 Trillion as of September 30, 2011. This includes
publicly held debt and intragovernmental held debt (e.g. debt owed to Social Security
and Medicare). This amount has more than doubled over 10 years, and is projected to
grow dramatically in the future absent a change of course.
How big is $14.8 Trillion? It equals about 99% of the size of the U.S. economy. It also
equates to each citizen having a share of the debt of more than $47,865. In addition,
the national debt is currently growing at approximately $3.5 billion every day.
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How does today’s relative debt burden compare to our historical levels?
Even during the Great Depression, U.S. debt levels as a percentage of the economy
were far lower than they are today. In fact, the only time debt-to-GDP levels were
higher than today was during World War II – when government spending was
contributing to a far more tangible global cause than it is today.
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How has debt per person changed over time?
The last slide shows that at the end of World War II public debt as a percentage of the
economy was twice what it is now. However, the situation is reversed when we look at
our financial condition in terms of debt-per-capita adjusted for inflation. In other
words, while our debt level was much higher during World War II as compared to the
total size of the United States economy, today our federal debt per person is actually
more than twice as high as it was during World War II – and it’s climbing rapidly. As
stated previously, both parties share responsibility for the growth in federal debt. The
past 10-years have been a period of gross fiscal irresponsibility for which both parties
are to blame.
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What happened to the federal budget surplus?
For a brief period of time, the federal government actually ran a surplus. In fact, in
2001 the Congressional Budget Office (CBO) projected there would be a $796 billion
surplus in fiscal 2010. In reality, we experienced a $1.29 trillion deficit that year for a
swing of $2.37 trillion. While the downturn in the economy played a role, about twothirds of the change were due to spending and tax actions by Congress and President.
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How big is our federal financial hole?
Our federal financial hole is calculated by adding the total amount of liabilities,
unfunded obligations, and various commitments and contingencies the federal
government has. As the above chart shows, while the federal government had explicit
liabilities of about $16.4 trillion as of September 30, 2010, its total liabilities,
commitments/contingencies and unfunded obligations (in present value terms) for
Social Security and Medicare were about $61.6 trillion based on reasonable
assumptions. That liability equals about $200,000 per American and over $500,000 per
American household. These per capita numbers have almost tripled in just the past 10
years. As you can see, most of the financial hole is made up of unfunded obligations
for Medicare. The total financial hole will grow by several trillion dollars each year
absent actions to reform these social insurance programs.
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Can we just cut spending to reduce the deficit?
Some politicians and pundits like to claim we can solve our debt and deficit problems
by cutting discretionary spending. But the truth is that in fiscal 2011 government
revenues are just a little more than government expenditures for Social Security,
Medicare, and other so-called “mandatory spending programs”, including interest on
our debt. We would have to cut 95% of all discretionary spending (which includes such
programs as Defense, Homeland Security, Research and Development, Transportation,
& Education) in fiscal 2011 to balance the budget. In total, the federal government
currently spends more than $3.5 billion more than it takes in everyday – including
weekends.
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What if your household managed it finances like the federal government?
Think about our federal fiscal challenges from the perspective of how you manage your
personal finances. Accumulating modest amounts of debt is fine and manageable for most
households, especially when it relates to things like a home mortgage or education. However,
when you consistently live beyond your means, and fail to bring in enough money to pay your
normal and recurring bills, eventually you run up debt to a level where all you are paying for is
interest on your credit cards and loans. Eventually, your debt will get to the point where your
credit will be so bad that no one will loan you any more money. Furthermore, your reduced
credit and reduced disposable income will lessen your ability to pay for anything else that could
improve the lives of you and your family. It will eventually get to the point where you are
forced to either dramatically reduce your expenses, or file for bankruptcy.
This slide paints a picture of what a household’s finances would look like if its finances were like
the federal government’s. Failure of our government to get our fiscal house in order will
reduce the credit worthiness of the U.S. government, which could increase borrowing costs for
the government to unprecedented levels. This rise in government interest rates will cause a
rise in all interest rates throughout the U.S. economy, increasing your cost to buy a home,
purchase a car, or take out loans for college. The only way to fix it at that point would be for
the government to dramatically raise taxes, and/or dramatically reduce spending. This could
lead to another recession, or even a depression, leading to unprecedented levels of
unemployment, and an erosion in the ability of future generations to pursue the American
Dream. Furthermore, it is fiscally irresponsible and morally reprehensible for current
generations to pass along this burden to future generations. At the same time, how we address
our fiscal challenge raises moral questions as well.
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How does the U.S. debt compare to other countries?
From an international perspective, the U.S.’s total public debt levels (includes federal,
state, and local governments) are higher than many of the European countries that are
in the news. According to an International Monetary Fund (IMF) report issued in early
2011, the total federal, state and local public debt in the U.S. as a percentage of GDP
was worse than Spain, Portugal, Ireland and the United Kingdom. Within 10 years the
U.S. was on track to hit the levels that Greece did before its debt crisis; however, when
you add the debt owed to Social Security, Medicare and other federal trust funds, in
2011 the U.S. was within three years of reaching the debt-to-GDP level of Greece at the
time of its crisis.
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How does our fiscal situation compare to other nations?
In addition to the harm our fiscal situation could cause our economy, it may seriously
threaten the international standing of our country. From a comparative perspective,
the U.S. lags far behind many other countries when it comes to fiscal responsibility and
sustainability. The Sovereign Fiscal Responsibility Index, created by Stanford University
graduate students in partnership with the Comeback America Initiative (CAI), is a
measurement of a country's fiscal health and sustainability (think of it as a “Fiscal
Fitness” Index). According to the SFRI analysis of 34 countries around the world, the
United States ranks an embarrassing 28th – far behind countries like Australia (#1),
China (#5), Brazil (#10), and Mexico (#18). Its rank is far closer to that of countries that
face severe debt and fiscal crises, including Ireland (#30) and Greece (#34). For more
information on the SFRI, go to the CAI website at www.tcaii.org
The good news is that Australia, New Zealand, Sweden, Canada, and other countries
have faced serious challenges in the 1990s and they rose to meet their challenges. As a
result, they are ranked much higher than the United States today. If they are able to do
it, we can too!
In addition, if reforms along the lines of the Simpson/Bowles Commission were to be
enacted into law the U.S.’s ranking would advance from 28th to 8th. The U.S. would also
achieve fiscal sustainability for 40+ years.
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How are demographics contributing to our fiscal outlook?
The changing demographics of our country are a key contributor to our negative fiscal
outlook. As the above graphic shows, over the past 50 years our country has
experienced a significant change in the age of our population. Because of increases in
life expectancy and a decline in birth rates, a higher proportion of our population is at
or near retirement age than was the case 50 years ago. In contrast, a lower proportion
of our population is either of working age or about to enter the workforce. This trend is
expected to continue over the next 50 years.
This is important for our fiscal future because of the structure of our major entitlement
programs, Social Security and Medicare. Both programs provide benefits mostly to
individuals during retirement, and those benefits are funded on a pay-as-you-go basis.
That means the current money coming into the government through taxes is used to
pay the benefits of current retirees. Therefore, it is necessary that there be an
adequate amount of workers to support the benefits of retirees. This becomes a
problem when more of the population is retired while at the same time there is a
reduction in the proportion of those working to support them.
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What does our fiscal future look like?
If federal revenues return to the recent historical average of 18.4%, and social
insurance programs are not reformed, and defense and other discretionary spending
grow by the rate of the economy, our fiscal future is very bleak. The fastest growing
expense would be interest and by 2055 it would be the only thing the U.S. could pay
with available revenues.
What do you get for interest? Nothing!
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How big will public debt grow in the future?
If the historical and current debt slides are not enough to scare you, our future is debt
levels are projected to be much worse. This graph shows future projections of U.S.
public debt released by the Congressional Budget Office (CBO) based on two different
scenarios. The “Extended-Baseline” scenario is based on current law and is extremely
unlikely to occur, since it is based on politically unrealistic assumptions – including
assumptions that the Bush/Obama tax cuts will expire in their entirety and that
Medicare reimbursements for doctors will be cut dramatically. The more likely debt
levels are shown in the “alternative fiscal scenario” in red, which projects debt levels
with more realistic political assumptions. As you can see, under this scenario the debt
will escalate dramatically and in a manner that is clearly imprudent and unsustainable.
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How much has Federal Healthcare spending been growing?
While changing demographics contributes to our projected financial hole, the main
driver is increasing healthcare costs. As you can see, since the federal health
entitlement programs were created in the 1960s, even after adjusting for inflation,
these programs have grown enormously. This is largely due to the fact that as an
industry, healthcare spending in the U.S. has consistently grown faster than other
spending in the U.S. economy, and thus federal spending on healthcare programs has
also grown faster than other federal programs. The reasons for the rapid rise in
healthcare cost are multiple and complex, however, absent major changes in our
healthcare system, there is no reason to believe that the rate at which these costs are
rising will decline dramatically anytime in the near future.
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How do our total healthcare costs compare to other countries?
The United States spends more than double per person than the average industrialized
nation spends on healthcare. At the same time, the societal outcomes experienced in
the U.S. (e.g. average life expectancy) are below the average for other industrialized
nations. Clearly our current system is not only underperforming, it is unsustainable and
in need of major reforms.
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Is Defense spending really untouchable?
Approximately 20% of the federal budget goes to defense spending. While it has been
higher as a percentage at other times, it still represents a major part of our budget and
one in which hard choices are not always being made. From a comparative
perspective, in 2010, the United States of America spent more than the next 14 highest
defense budgets combined, the majority of which are our allies.
It should be noted, however, that what a dollar purchases in the United States is much
different than what a dollar will purchase in another nation. This comparison is meant
to show the sheer size of US military spending, not military capabilities. In addition,
some countries are estimated by the CIA to be spending much more than they claim
(e.g. China).
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Where does the federal government get revenue from?
Corporate income taxes contribute less than 10% of federal revenues, while an
overwhelming proportion of federal revenues come from payroll and individual income
taxes. Comprehensive tax reform is absolutely necessary for us to simplify our tax
system, improve fairness, encourage growth, enhance our competitiveness, and to
generate aggregate revenues in excess of historical levels so we can pay our bills and
deliver on the promises that we intend to keep.
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Is our income tax system progressive, meaning, do the rich pay more taxes in
proportion to their income?
Yes, contrary to assertions by some, our country does have a progressive tax system:
Those who earn more pay more, although some would question whether the wealthy
pay enough. The graphic above shows total federal tax burdens (e.g., payroll and
income taxes) for households by quintile (e.g., each 20% of the population). For
example, the richest 20% of households make 54% of the total pre-tax income, and pay
68% of total federal taxes.
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How much in income taxes do individuals actually pay, after accounting for various
credits/deductions and special tax rates?
As the previous slide shows, the wealthy pay most of the income tax in this country.
However, approximately 51% of tax filers pay no income tax at all. At the same time,
the median individual effective income tax rate for top 1% of earners is only 18.8%,
which is far below the top tax bracket of 35%. This is, due in large part, because most of
the wealthiest Americans earn most of their income through long-term capital gains,
which are taxed at a flat rate of 15%. We must address both of these factors as part of
comprehensive tax reform.
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What is the way forward? How do we fix this problem and restore fiscal sanity?
The federal government can restore fiscal sanity through a number of reforms. The
Comeback America Initiative issued the “Restoring Fiscal Sanity Report” in July of 2011,
which provides two illustrative fiscal frameworks for U.S. policymakers to consider to
put our nation’s finances back on track. Both frameworks include specific reforms in all
of the above areas. You can view the report and the illustrative reforms by going to the
CAI website at www.tcaii.org. Please do so and encourage others to do so as well.
The two frameworks include 1) a Preemptive (prudent) framework, which includes
examples of reforms the government could take to avoid a debt crisis in the future; and
2) a Reactive (crisis) framework which includes examples of the types of reforms that
would be required if the country experiences a debt crisis.
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How do you know if a reform proposal is feasible?
The CAI’s “Restoring Fiscal Sanity Report” is just one of many that have been issued
with reform ideas to fix our fiscal problems. Regardless of which reforms are ultimately
chosen, you should question the proposal as to whether it meets a feasibility test. The
above six prong test serves as a basis for the two fiscal frameworks included in CAI’s
“Restoring Fiscal Sanity Report”. They must all be met in order for any major spending
and/or tax reforms to be both successful today and sustainable over time.
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What questions should be asked about the effectiveness of government programs?
In addition to questioning specific reforms to address our fiscal situation, the above
questions should be asked of all major government entities, programs and policies, and
depending on the answer, steps should be taken to reform, eliminate, consolidate or
enhance them. We need to establish a special process to do this in a professional,
transparent and systematic fashion over several years.
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What can you do to help?
You can do a lot to help. You can help spread the word by using this presentation and
notes to educate others. For more information, and to sign up, go to www.tcaii.org.
You should also check out No Labels at www.NoLabels.org. It is a non-partisan
organization that is partnering with CAI to help accelerate action in the area of fiscal
responsibility.
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