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2/01/2005

Comptroller General David Walker Dislikes GWB

Just received in my inbox, a press advisory from the GAO:

The U.S. Government Accountability Office today is releasing a report from a forum of experts that sought to address ways to improve public understanding of the nation's growing fiscal imbalance. The report is available on the GAO website at www.gao.gov/cgi-bin/getrpt?GAO-05-282SP.

The forum, convened by Comptroller General David M. Walker on December 2, 2004, included 63 representatives of think tanks, government agencies, key private sector players, the media, and public opinion experts. Under the ground rules of the forum, individual speakers are not identified in the report unless they made a formal presentation before the group, but the report reflects the discussion during the day-long gathering.

Commenting on the report, Walker states: "Simply put, our nation's fiscal policy is on an unsustainable course. As long-term budget simulations by GAO, the Congressional Budget Office (CBO), and others show, over the long term we face a large and growing structural deficit due primarily to known demographic trends, rising health care costs, and relatively low levels of federal revenues as a percent of GDP.

Continuing on our present path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our national security. It will also increasingly constrain our ability to address emerging and unexpected budgetary needs.

"Regardless of the assumptions used, all reasonable simulations indicate that the problem is too big to be solved by economic growth alone or by making modest changes to existing spending and tax policies. Nothing less than a fundamental reexamination of all major federal spending and tax policies and priorities is needed. This reexamination should also involve a national discussion about what Americans want from their government and how much they are willing to pay for those things. This discussion will not be easy, but it must take place because time is
working against us.

"As with any major public policy challenge, effective and sustained leadership will be critical. But leadership cannot succeed without public understanding and support."

Walker also will address the impact of the government's fiscal imbalance on Wednesday, February 2, at a conference for state and local government officials at the National Press Club. Walker is the keynote speaker at lunch; the conference is sponsored by Governing magazine and the NCSL Foundation.

For more information, contact Paul Anderson, GAO managing director of public affairs, at 202-512-4800.
There is a crisis, and it's George W. Bush's misplaced priorities, fiscal mismanagement, expensive wars, and tax cuts for the rich. Bush will talk tomorrow night about how he's on track to halve the deficit - but it's lies, smoke and mirrors.

Below I've excerpted highlights from the GAO report [PDF], and reorganized them a bit. The report is really just a brainstorming session, with a number of contributors from academia, the financial community, think tanks, and government. My quick count indicated a pretty strong conservative bias, but it was a bias toward Concord Coalition conservatives, rather than complete idiots.

Highlights:

Fiscal Mismanagement

  • "In fiscal year 2004, the federal budget deficit increased and the long-term outlook worsened significantly. The unified deficit was $413 billion, or about 3.6 percent of the economy. This deficit includes $151 billion in Social Security surpluses, without which the deficit would have been that much larger.7 Indeed, the on-budget deficit for fiscal year 2004 was $568 billion, or 4.9 percent of gross domestic product (GDP). Fiscal year 2004’s deficit followed upon several years of increasingly negative federal fiscal outcomes.

    In addition, as the Fiscal Year 2004 Consolidated Financial Statements of the U.S. Government show, in fiscal year 2004 the federal government added $13 trillion in new liabilities, unfunded commitments, and other obligations, principally due to the new Medicare prescription drug program. The federal government’s net liabilities, unfunded commitments, and other obligations now amount to more than $43 trillion, or about $350,000 for every full-time worker, and these unfunded commitments are growing larger every day. [Page 6-7]

  • "If we assume that all tax cuts remain in effect rather than expire as scheduled under current law, and if we further assume that for the first 10 years discretionary spending grows with the economy rather than at the rate of inflation, a dramatically different picture emerges. This simulation is called “Discretionary Spending Grows with the Economy and All Expiring Tax Provisions are Extended.” (See fig. 2.) Under this alternative simulation, by 2040 the government would have only enough money to pay interest on the federal debt!" [Page 8]
Deficits are not necessarily bad. It depends on what use the borrowed money is put to. Defense Spending is an inefficient investment; interest payments are worse; policy that actually hurts the country, the worst. Education is generally a good investment, as is most infrastructure.

Social Security

  • "Health care is a bigger problem than Social Security. Participants acknowledged the need for Social Security reform but emphasized that Social Security is a relatively small part of the long-term fiscal challenge when compared to spending on health care. One participant noted that the estimated Social Security shortfall is about one-third the estimated cost of recent tax cuts if made permanent. Several participants observed that few members of the public are aware of this. Rather, the general public impression is that solving Social Security would solve most of the longterm fiscal challenge, and this is not correct. Indeed, one forum participant stated that it was only by attending this forum that he had learned that health care spending was a much more important, and potentially far more difficult, component of the long-term fiscal challenge than Social Security.

    Participants expressed the view that in characterizing the long-term fiscal outlook, several key distinctions needed to be made between Social Security and the largest federal health programs, Medicare and Medicaid. Participants observed that the public was largely unaware that health spending accounted for a much larger share of the long-term fiscal problem than did Social Security.

    In addition, many approaches to reforming Social Security have been articulated and were well known. For example, approaches included raising the retirement age, changing the indexation of initial benefits from a wage-based index to an inflation-based index, modifying the tax base, and so on. Many specific proposed solutions had been under discussion for some years. In contrast, many participants expressed the view that approaches to slowing the growth of health care spending remain elusive. [Page 12]"
Public Ignorance of Fiscal Mismanagement.
  • "Research on public opinion, however, shows that while the public is aware of the long-term fiscal challenge, it does not have a good handle on the size and implications of this challenge. In addition, the public consistently ranks our long-term fiscal challenge as low priority relative to other issues, such as the current state of the economy. This gap in public understanding of the nature and magnitude of the longterm fiscal challenge—and how to bridge it—was the subject of GAO’s December 2, 2004, forum on the long-term fiscal challenge." [Pages 2]

  • "Comptroller General [Walker] noted that describing the problem to the public presents numerous challenges. For example, estimates of future federal spending and deficits are so large—current longterm federal liabilities, unfunded commitments, and other obligations are estimated at more than $43 trillion1—that the numbers are beyond what most people can comprehend or relate to. Translating these numbers into a more human scale—such as “burden per capita”—might be helpful in communicating the magnitude of the challenge. In addition, how we measure the magnitude of the long-term fiscal challenge is complex. For example, tax preferences, such as the exclusion of employer-provided health benefits from individuals’ income, are usually not discussed although in some years their value may equal or exceed that of total discretionary spending (e.g., defense, homeland security, transportation, judicial system, education, environment etc.)." [Page 4]

  • In general, polling data suggests that the public is “worried but not that worried” about deficits, Ms. Belden said. Although aware of the long-term fiscal challenge and concerned about it, the public rates the federal budget deficit as of lower priority relative to other issues. In addition, a majority of those polled supported additional spending for highly valued programs over balancing the budget.

    The public’s attitude toward federal budget deficits in general is complex. About two-thirds of those polled would prefer balancing the budget to cutting taxes, and about half of those polled expect today’s deficits to worsen in years to come. At the same time, the deficit is seen as far less prominent than many other issues. These higher-ranked issues include the economy, terrorism, jobs, education, and Iraq. In particular, over half of those polled indicated concern about the future of the economy. Only 4 percent, however, listed the deficit as their biggest concern." [Page 14]

Nowhere does the report discuss the obvious reason for public misinformation on the nation's fiscal health: the administration's deception and accounting trickery. They tell the American people that the deficits are nothing to worry about. The American people can still remember how painlessly Clinton was able to pull us out of deficits, and believe that we can do it again.

Media:

  • "Some media representatives suggested that there may be a sense in some editorial circles that deficits are especially “boring” for younger people, who increasingly tend to get their news from nonprint sources, such as Internet “blogs”—Web logs, or diaries—and television. Journalists and opinion writers may feel pressure to choose different material more likely to attract younger readers, who are crucial to the future of their publications.

    Media representatives and other forum participants suggested that these nonprint media should be explored as ways to get the message to younger people, who will be most affected if the long-term fiscal challenge is not effectively addressed. Television programs that satirize current events and public television were also cited as venues for reaching out to younger people who do not regularly read print media.

    Forum participants offered many specific suggestions for how to talk about the long-term fiscal challenge in media presentations. The main message of these suggestions was that presentations need to resonate with ordinary people; otherwise, nothing will change."
The report includes this piece of general information on Federal Trust Funds:
"Many forum participants noted that federal trust fund accounting is confusing and misleading, creating serious transparency and integrity issues in connection with financial reporting and budget matters. For example, the amount the federal government owes a trust fund is not considered a liability of the federal government under current federal accounting standards because it is a claim of one part of the government against another.

Unlike a private trust fund manager, the federal government both owns the assets of most trust funds and can, through legislation, raise or lower fund collections or payments, or alter the purposes of the trust fund. Also unlike a private trust fund, which can set aside money for the future, federal trust funds are simply budget and accounting mechanisms for the budget as a whole. They record receipts and expenditures earmarked for specific purposes.

When a federal trust fund such as the Old-Age and Survivors Disability Insurance (OASDI) trust funds for Social Security or the Medicare HI trust fund runs a surplus of payroll tax revenues over benefit payments, that surplus is invested in special, nonmarketable U.S. Treasury securities that are guaranteed for principal and interest by the full faith and credit of the U.S. government, and the cash is used to meet current needs of the government. When a federal trust fund runs a cash deficit, as the HI trust fund did between 1992 and 1998 and again in 2004, it redeems these securities to pay benefit costs that exceed current payroll tax receipts. However, in order to redeem these securities, the government as a whole must come up with cash by increasing taxes, lower spending, increased borrowing from the public, retiring less debt (if the total unified budget is in surplus), or some combination thereof.

While the special Treasury securities in a trust fund do not have any current effect on the economy, they do have legal implications for the trust fund’s capacity to pay benefits. Projections of trust fund exhaustion may receive media attention because projected trust fund exhaustion has historically been perceived as the primary action-forcing event. An exclusive focus on these projections, however, misses the point. From a macro perspective, the critical question is not how much a trust fund has in assets but whether the government as a whole has the economic capacity to finance the trust fund’s claims to pay benefits both now and in the future and at what cost as it relates to other competing claims for scarce resources.

While projections of trust fund balances provide information on program solvency, they do not provide information on sustainability, that is, the capacity of the budget and the economy to pay benefits. In some cases trust funds may provide a vital signal of imbalances in the long term. A shortfall between the long-term projected fund balance and projected costs can signal that the fund, either by design or because of changes in circumstances, is collecting insufficient monies to finance future payments. This signaling device can eventually prompt policymakers to action. Trust funds for payroll tax-funded programs such as Social Security and Medicare HI can serve as a signal to policymakers in this way.

In other cases, the trust fund mechanism may provide no warning signals. For example, unlike the OASDI and HI trust funds, Medicare’s SMI trust fund is financed not by payroll tax revenues but by a combination of beneficiary premiums and general revenue. Under the legislative formulas governing SMI financing, the SMI trust fund can never be exhausted because general revenue will always fill the gap between payments and premium revenues.

As a result, there is no signal or “speed bump” provided by the trust fund mechanism for SMI. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 included a provision that focuses on monitoring the share of total Medicare spending financed by general revenues. Under certain circumstances, the Medicare Trustees are required to warn the President and Congress if the general revenue share is projected to be above a certain level. Where this is the case, the President is required to make a legislative proposal to address “excess general revenue” in Medicare, and Congress must consider the proposal." [Page 34]

 

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