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Is the United States flat-out broke?
Posted By Jon Dougherty On 06/06/2003 @ 1:00 am In Front Page | Comments Disabled
When the government announced this year its publicly held debt was in the neighborhood of $3.6 trillion, it was quoting a figure that “ignores massive imbalances” in other mandatory spending programs – such as Medicare and Social Security – which actually inflate the national debt by a factor of 10, according to published accounts.
Dallas Morning News columnist Scott Burns wrote June 1 that the government’s debt is actually “a mind-numbing $43 trillion,” hinting that data was left out of the current budget document because it may have hurt President Bush’s chances to sell a tax cut to the American people.
In his column, Burns said he met in January with Boston University economist Dr. Laurence J. Kotlikoff at a restaurant in Sante Fe, N.M., shortly after John Snow had been named to replace Paul O’Neill as secretary of the treasury. Burns said he met Kotlikoff as part of his work on a new book project.
The newspaper columnist said Kotlikoff received a phone call as they were leaving the restaurant informing him that “six months of work by two economists was going to be deleted from the president’s budget,” which was to be published in February.
“The material to be deleted from the budget document was an updating of generational accounting. Mr. O’Neill had requested an estimate of the true, long-term obligations of the U.S. government,” Burns wrote.
The estimate reportedly was to include the U.S. treasury’s formal debt as well as the government’s pledge to provide retirement income and medical care.
“The resulting information might easily have been lost in a document whose online girth is measured in megabytes,” Burns said. “Except for one thing. The new accounting shows the United States is broke.”
Burns said the data showed that the government’s actual obligations “are 10 times larger than the treasury debt held by the public.” And it showed the current value of “these unfunded obligations is a mind-numbing $43 trillion.”
The newspaper columnist said he called Dr. Jagadeesh Gokhale, the economist who had called Kotlikoff that night in January, to ask why he thought his work was eliminated from the budget estimates.
Gokhale, who is a senior economist for the Federal Reserve Bank of Cleveland, “was circumspect,” Burns said. “He suggested that the figures were a surprise to the new treasury secretary.”
But Burns saw another angle.
“Mr. Snow’s first task was to sell the president’s tax cut,” he wrote. “The sales job would be awkward if an official government document announced we were already $43 trillion in the hole.”
Burns said the Federal Reserve has put the net worth of all U.S. households at just $40.6 trillion. “This problem,” therefore, “goes way beyond whether to tax the rich, the poor or the middle-income,” he said.
“Republicans and Democrats have distracted us with unending battles between haves and have-nots for decades. Over the same period, they have bankrupted the country,” Burns wrote.
He also said the real budget estimates could be why the U.S. stock market fell, rather than rose, on news the president had signed the $350 billion tax cut last month.
In early March, the other economist on the project, Dr. Kent Smetters, testified before a subcommittee of the House Judiciary Committee, Burns wrote.
Smetters told the subcommittee: “The government reports that the national debt in 2003 was about $3.6 trillion in the form of government ‘debt held by the public.’ But that number ignores massive imbalances in Medicare and Social Security programs and the government’s other programs.
“When the liabilities associated with those programs are taken into account, the nation’s fiscal policy is currently off-balance by over $43.4 trillion in present value, a number that is not reported in standard budget documents,” he told the subcommittee.
Smetters also said he supports “practically any effort to make it harder for one generation to pass large fiscal burdens to future generations.”
Rejecting business as usual
The Bush administration has said it is concerned about the federal debt and is focused on controlling spending, despite increases in the federal budget in each of the president’s years in office. And in defense of White House fiscal policy, administration officials also discounted the information contained in Burns’ column.
Budget Director Mitch Daniels, in a joint statement with then-Treasury Secretary O’Neill Oct. 24, 2002, said the “surge” of revenue toward the end of the last decade was temporary, and that new defense and homeland security expenditures were needed.
“Given these two developments,” he said, “it is absolutely essential that we set aside business as usual and keep tight control over all other spending.” Last fiscal year’s budget deficit was $159 billion, according to Treasury data. Treasury officials say the deficit this year may approach $300 billion.
Rob Nichols, a spokesman for the Treasury Department, told WorldNetDaily that the figures cited by Burns initially came from a report in London’s Financial Times, but that the story was “completely inaccurate and false.”
While Smetters used a similar shortfall number as Burns – $43 trillion – Nichols was not critical of his testimony.
Nichols said Smetters – a former Treasury official – upon leaving the department “wrote a pretty thoughtful, comprehensive look at where [the government's] liabilities are, pertaining to entitlements – the real deficit challenge.”
“We actually don’t disagree with many of his conclusions,” said Nichols, “but the report that we ‘shelved’ data to pass the recent jobs growth plan, that’s just inaccurate.”
He said Smetters and another colleague “were set to publish” their work, but it had not been released yet.
Betsy Holahan, another Treasury spokesperson, directed WorldNetDaily to an Office of Management and Budget report online entitled, “The Real Fiscal Danger.” That report quotes David Walker, comptroller general of the United States, and the Interim Report of the President’s Commission to Strengthen Social Security discussing the need to reform both Medicare and Social Security.
“The current system is financially unsustainable. Without reform, the promise of Social Security to future retirees cannot be met without eventual resort to benefit cuts, tax increases or massive borrowing,” said the August 2001 Social Security report. “The time to act is now.”
“Without meaningful reform, the long-term financial outlook for Medicare is bleak. …When viewed from the perspective of the entire budget and the economy, the growth in Medicare spending will become progressively unsustainable over the longer term,” said Walker.
The “fiscal danger” report says current deficits are manageable, but notes the government is far more concerned about funding its major entitlement programs.
“… Whatever judgment one reaches about the deficit of this year or even the next several years combined, these deficits are tiny compared to the far larger built-in deficits that will be generated by structural problems in our largest entitlement programs,” it said.
“Citizens and policymakers rightly monitor and debate the size of the national debt, which stands at $3.5 trillion in public hands, with another $2.7 trillion credited to various government trust funds,” the report said. “But in 2002, the combined shortfall in Social Security and Medicare of nearly $18 trillion was about five times as large as today’s publicly held national debt,” or “roughly the equivalent of the total income Americans will earn over the next year and a half.”
“Despite the enormous revenue flows into Social Security and Medicare, totaling $729 billion in 2002, these programs are going to spiral out of control,” the report stated.
Worse, lawmakers have promised to send to President Bush a new Medicare prescription drug benefit this year that will inflate the anticipated shortfalls for that line item. Currently, the government provides benefits for 39 million seniors, or 14 percent of the U.S. population. And with the “baby boom” generation expected to begin retiring in massive numbers in a few years, the costs – and debt – could skyrocket.
“Americans have often heard that Social Security and Medicare are in deep trouble financially, and the simple reason is that the benefits promised under these programs will soon far outstrip their dedicated revenues,” the report said. “Over the long term, the actuaries of the Social Security Administration project that the cost of all benefits paid to current beneficiaries and promised to future retirees exceed Social Security revenues by almost $5 trillion. The Medicare shortfall is even worse at more than $13 trillion.”
Others economists are also concerned about future generations inheriting mountains of debt. Milton Ezrati, senior economist and strategist with Lord Abbett & Co., told Dow Jones Newswires that while today’s government deficits aren’t troubling, they could be down the road.
The deficit for fiscal year 2003 is expected to total 3.5 percent of GDP, down from the 6 percent of GDP it comprised during part of the Reagan years. Ezrati said the current deficits would begin to be a problem if they began to approach 6 percent again.
But he also said that while recent tax cuts would not have an immediate effect on the economy, on balance they should at least stimulate the economy, which would benefit the country over time. The White House has said its tax cuts are aimed at boosting economic activity.
Trent Duffy, an Office of Management and Budget spokesman, told WorldNetDaily the long-term impact of unfunded entitlements is of a “primary concern” to President Bush.
“The Bush administration has been trying desperately to shed the spotlight on this very issue because of the seriousness of it,” he said. “The reason why he’s trying to work so hard to modernize and strengthen Social Security and Medicare is this very issue.”
Duffy also defended the president’s recent tax cuts.
“Surpluses don’t create balanced budgets,” he told WorldNetDaily. “But growth creates surpluses, not the other way around. So it’s most important for the federal government and the American people to get the economy growing.”
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