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THE BOOKSHELF
Examining the Increasing
Level of Federal Debt
By Shayne C. Kavanagh
T
I.O.U.S.A : One Nation.
Under Stress. In Debt
Film directed
by Patrick Creadon
distributed by the Peter
G. Peterson Foundation
2008, rated PG
Book by Addison Wiggin
and Kate Incontrerra Wiley
2008, 288 pages, $19.95
70 Government Finance Review | April 2009
his documentary film and its
companion book shine a spotlight on the increasing level
of indebtedness that the American
federal government has incurred, and
which the filmmakers believe seriously
threaten the future prosperity of the
country. The film primarily stars
David Walker, then the United States
Comptroller General and head of the
Government Accountability Office, and
his “Fiscal Wake-Up Tour,” an ongoing
initiative to educate the public on the
debt and its implications. (Walker
resigned in March 2008 to head the
Peter G. Peterson Foundation, which
distributed the I.O.U.S.A. movie.)
I.O.U.S.A. also features interviews with
financial and economic luminaries
(including Warren Buffet, Paul Volker,
and Paul O’Neill), members of
Congress, and activists.
Walker first points out that the level of
federal debt was $8.7 trillion as of
February 2007, or 64 percent of the
American gross domestic product
(GDP). This compares to 40 percent at
the end of the Revolutionary War, 41
percent at the height of the Great
Depression, 122 percent at the end of
World War II, and 35 percent at the end
of the 1970s recession. Hence, it is not
that the current level of debt is unbearable, but that the past trend and the
future outlook are potentially ruinous.
The film marks the rise of supply side
economics in the 1980s as the point at
which federal debt “exploded” and a
fundamental shift occurred — America
became “addicted to debt” and “never
before had so much debt been created
so quickly.”
While the rising federal debt is worrisome when considered in isolation, the
film puts forward that the United States
actually faces four serious deficits,
making the total problem much more
serious: a budget deficit, a savings
deficit, a trade deficit, and a leadership
deficit.
THE BUDGET DEFICIT
The federal debt is, of course, the
accumulation of budget deficits and
surpluses since the founding of the
Republic. In the past 40 years, there
have been only five surpluses. Surpluses in the Social Security program
have historically been used to help
reduce budget deficits. However, as
baby boomers begin to retire, Social
Security surpluses will begin to disappear — by 2017, Social Security will
start paying out more than it takes in,
resulting in even greater deficits than
we have experienced in the past. In
fact, under current rules, spending on
Social Security, Medicare, and Medicaid
will rise very quickly in the near future
and will, absent countervailing action,
continue to grow, along with interest on
the debt, to consume the entire federal
budget by 2052 (assuming tax rates stay
at historically proportionate levels).
THE SAVINGS DEFICIT
In 2005 and 2006, Americans had a
negative personal savings rate. The last
time that happened was 1933 and 1934.
Unfortunately, 2005 and 2006 were not
an aberration. Personal savings have
been in steady decline since 1980.
Savings are essential for investment and
research and development, which ultimately lead to a strong and vital economy. However, low personal savings are
not necessarily entirely a product of
personal choice. The movie and book
argue that free and easy credit, the
result of federal monetary policy, has
the effect of discouraging personal savings by lowering returns on saved funds
(inflation) and creating a false sense of
wealth (witness the run-up in housing
prices, which were viewed by some as
real wealth creation, only for that
“wealth” to disappear with the collapse
of the housing market).
THE TRADE DEFICIT
The United States had the largest
trade imbalance in the world in 2007,
and by a large margin ($816 billion versus $174 billion for the United Kingdom
and $136 billion for the European
Union as a whole, the second and third
worst performers). There are divergent
views on the impact of a trade deficit,
so the film drafts Warren Buffet to
explain his view on the trade deficit.
Buffet points out that “more trade, overall, is good — as long as it’s true trade. If
it’s pseudo-trade, where we’re buying,
but not selling, I do not think that is
good over time.” Buffet’s comment
refers to the fact that the United States
issues debt to cover its trade imbalances — it borrows from other countries to consume imports. In 1945, none
of the publicly held federal debt was
owned by foreigner investors, but by
2007, they owned 45 percent. I.O.U.S.A.
notes that much of that debt is now
held by China, giving that country a
great deal of leverage over the United
States government policy and also
transferring American wealth abroad.
LEADERSHIP DEFICIT
The filmmakers and David Walker
point out that politicians in Washington,
D.C., have consistently failed to make
fiscally sustainable choices. They mention ill-advised tax cuts, overextension
of the military, and fraud, waste, and
abuse as some of the most visible and
publicly discussed symptoms of the
leadership deficit, along with a more
serious issue: a refusal on the part of
politicians to make hard choices with
respect to entitlement programs, which
represent the vast majority of the problem. To illustrate, the federal government currently has about $11 trillion in
liabilities, including public debt.
However, while the unfunded obligations of Social Security and Medicare
total an additional $41 trillion,there has
been little serious discussion on how to
bring these programs into line with
financial realities. Loose monetary policy also plays a role, according to the
film, which says artificially low interest
rates contributed to a housing bubble
for which we are currently experiencing the fallout.
CALLING FOR REFORM
I.O.U.S.A. makes the case that multifaceted reform will be needed to confront these four pernicious and interlocking deficits. The movie and book
suggest a number of broad actions,
including:
■
Greater demand by voters for fiscal
responsibility from politicians, similar to that which existed for a brief
period in the early 1990s, when both
parties worked together to reduce
the deficit.
■
Major reform in taxes to simplify the
tax code and generate more revenue.
■
Major reform in Social Security and
Medicare to control spending growth.
■
Reform of health care, which is one
the country’s biggest expenditures
and a major driver of Medicare costs.
■
Energy conservation and a coherent
energy policy to reduce trade
deficits owing to petroleum imports.
However, the solutions presented are
kept intentionally vague and are limited
to an overview in order to preserve the
non-partisan character of the film. The
foundations that support the “Fiscal
Wake-Up Tour,” such as the Peterson
Foundation, Heritage Foundation,
Concord Coalition, and Brookings
Institute, have available their own much
more detailed policy prescriptions.
In summary, I.O.U.S.A. provides a
decidedly non-partisan, compelling,
and engaging examination of the
United States’ precarious financial situation. As David Walker said, “The most
serious threat to the U.S.is not someone
hiding in a cave in Afghanistan or
Pakistan, but our own fiscal irresponsibility.” This film makes a great contribution towards creating recognition of the
problem, which is the first step towards
resolution. ❙
SHAYNE C. KAVANAGH is a senior manager
in the GFOA’s Research and Consulting
Center in Chicago, Illinois.
April 2009 | Government Finance Review
71