November/December 2008: And You Thought Things Couldn’t Get Worse?

Washington Watch | November/December 2008
By Bruce Moyer

Debt—both short-term and long-term—lies at the vortex of the financial troubles that have beset the nation's economy. The housing bubble was created by debt; and now debt has left almost one of every six home owners under water, as they say, with a mortgage larger than the value of their home. Debt was the leverage fuel that enabled Wall Street banks to borrow $30 for every $1 they owned.

But the financial turmoil of this fall may pale compared to what may lie ahead. Debt may yet appear in an even larger starring role, constraining America's global leadership in far more self destructive ways than we have seen thus far. The United States could inevitably be forced to cope with the costs of an even larger financial bailout package that rescues the nation from the triple dynamics of debt brought about by the war in Iraq, tax cuts put in place nearly a decade ago, and, most especially, the costs of America's social insurance programs—Medicare, Medicaid, and Social Security.

Even though the Democratic and Republican presidential nominees had largely avoided taking stands on the hard choices underlying the future of Medicare, Medicaid, and Social Security, there is a growing recognition that the country is on a path of unsustainable federal entitlement spending, propelled by the mounting costs of health care and growing numbers of retiring baby boomers.

Medicare, Medicaid, and Social Security spending today consumes approximately 8 percent of the nation's gross domestic product (GDP). But by 2050 those programs are predicted to make up 18 percent of GDP. Experts predict that, if there are no changes in the system, Medicare receipts will be outpaced by Medicare expenses by 2019 and Social Security expenses by 2041.

This means that the debt that America has piled up already has stolen resources from the future. Keynesians wouldn't mind if that debt were used to build schools and send everyone to college. But the mountain of debt that America has piled up has merely financed current consumption—not schools, roads, airports, and certainly not the nation's medical system or a path toward energy dependence. In fact, because of the impending explosion in Medicare costs, there will be even less federal money in coming years to fix those schools and roads.

The most chilling nightmare scenario, some economists say, involves the federal budget deficit growing so large that foreign investors, especially the Chinese, will look elsewhere, deciding that other economies represent safer bets and shifting more of their lending to those countries. That would leave the United States struggling to pay its bills and facing a far more disastrous crisis. The economic consequences could have vast implications—both political and military.

Will that prospect be enough to galvanize a serious response to the long-term economic problems in the United States? Or are there still more crises to come?

There are signs that the next Congress may try to take a serious stab at addressing deficit reduction and the potential impending insolvency of federal entitlement programs, including Medicare, Medicaid, and Social Security. Bipartisan legislation, co-authored by Rep. Jim Cooper (D-Tenn.) and Rep. Frank Wolf (R-Va.) would adopt an approach to the entitlement crunch that is similar to the one used for legislation dealing with base closures; their idea is to establish a bipartisan commission that would provide remedial options, subject to an up-or-down vote by Congress. Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee and Sen. Judd Gregg (R-N.H.), the ranking Republican member on the committee, and others have proposed similar ideas involving a commission. Democrats are particularly divided over the approach, although House Majority Leader Steny Hoyer (D-Md.) regards a bipartisan approach as the best way—maybe the only way—to give lawmakers the political cover they need to overhaul entitlement spending.

The ranking Republican member of the Budget Committee, Rep. Paul Ryan (R-Wisc.) has drafted a massive blueprint for entitlement reform. A 49-member group of conservatively fiscal Democrats in the House, called the "Blue Dog Coalition," is seeking to influence the party over budget issues, insisting that new spending programs not be enlarged or created without offsets on their cost.

Will change truly happen? Perhaps, but only if things get worse. "The political system does not deal well with gradual, long-term problems," Peter Orszag, the director of the Congressional Budget Office, recently told the New York Times. "It deals with crises, often imperfectly, but it does deal with them. The current experience makes the case.

Bruce Moyer is government relations counsel for the FBA.
© 2008 Bruce Moyer. All rights reserved.

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