The Coming Deficits Crisis

Raise your hand if you would run your household finances or your business like Congress and the White House manage theirs?

Of course, all us understand that we live with limited financial resources. We balance our check books and work hard at keeping positive cash flow from month to month.  Now the numbers coming out of Washington are not just big, but predict a looming disaster ahead.

John Fund in the Wall Street Journal writes about David Walker, a CPA who served in a variety of government positions since the Reagan administration.

"We suffer from a fiscal cancer," he tells a meeting of the National Taxpayers Union, the nation's oldest anti-tax lobby. "Our off balance sheet obligations associated with Social Security and Medicare put us in a $56 trillion financial hole—and that's before the recession was officially declared last year. America now owes more than Americans are worth—and the gap is growing!"

If you looked at your bank account and you owed more than your worth, you'd have to declare bankruptcy. Let's assume that we are now at that point at a nation. Just for conversation's sake. We are our of money. So, how do we then address this statement floating through Facebook status updates?

No one should die because they cannot afford health care, and no one should go broke because they get sick. If you agree, post this as your status for the rest of the day.

This only makes sense if you are not responsible for paying for the health care of the nation. Just pass it off to someone else, and feel pleased about your compassionate nobility.The thought that came to mind when I read it was to imagine what it would require to put 300 million people on life support because the aim of health care is for no one to die.

Now here's the real issue that no one in Washington is willing to address. Listen to what Walker has to say.

"We have four deficits: a budget deficit, a savings deficit, a value-of-the-dollar deficit and a leadership deficit," he tells one group. "We are treating the symptoms of those deficits, but not the disease."

Mr. Walker identifies the disease as having a basic cause: "Washington is totally out of touch and out of control," he sighs. "There is political courage there, but there is far more political careerism and people dodging real solutions." He identifies entrenched incumbency as a real obstacle to change. "Members of Congress ensure they have gerrymandered seats where they pick the voters rather than the voters picking them and then they pass out money to special interests who then make sure they have so much money that no one can easily challenge them," he laments. He believes gerrymandering should be curbed and term limits imposed if for no other reason than to inject some new blood into the system. On campaign finance, he supports a narrow constitutional amendment that would bar congressional candidates from accepting contributions from people who can't vote for them: "If people can't vote in a district not their own, should we allow them to spend unlimited money on behalf of someone across the country?" (emphasis mine.)

We can wring our hands about health care and climate change, but if we don't address the crisis of spending in Washington, there will be nothing left to do anything. 

Walker makes an important point about the sequence of change.

"President Obama got the sequence wrong by advocating expanding coverage before we've proven our ability to control costs," he says. "If we don't get our fiscal house in order, but create new obligations we'll have a Thelma and Louise moment where we go over the cliff."

After Katrina, it was clear that the problem with federal government programs was their organizational systems. For example, last year the federal government determined that the FEMA trailer program would end and the people who had been given them would have to move into new housing. This decision seemingly was made without any assessment whether there had been sufficient recovery of the housing based. It was a bureaucratic decision instead of one of based on human need.

I agree with Walker. We need to change the functioning of the government before we create a crisis that will paralyze the nation.

An Additional Thought

The impact of these rising deficits has been impacting state and local governments for years. Indiana Governor Mitch Daniels writes about what is happening with state tax revenues in a Wall Street Journal opinion piece.

State government finances are a wreck. The drop in tax receipts is the worst in a half century. Fewer than 10 states ended the last fiscal year with significant reserves, and three-fourths have deficits exceeding 10% of their budgets. Only an emergency infusion of printed federal funny money is keeping most state boats afloat right now.

Most governors I've talked to are so busy bailing that they haven't checked the long-range forecast. What the radar tells me is that we ain't seen nothin' yet. What we are being hit by isn't a tropical storm that will come and go, with sunshine soon to follow. It's much more likely that we're facing a near permanent reduction in state tax revenues that will require us to reduce the size and scope of our state governments. And the time to prepare for this new reality is already at hand.

The coming state government reset will be particularly wrenching after the happy binge that preceded this recession. During the last decade, states increased their spending by an average of 6% per year, gusting to 8% during 2007-08. Much of the government institutions built up in those years will now have to be dismantled.

If this is happening to state governments, you can be sure that it is happening to your local municipal ones.

During the early part of the decade, I had several projects working with local governments and organizations supporting them. At that time, a sales tax revenue conflict emerged in several states. In essence, locally generated sales taxes went to the state to be distributed back to local municipalities. In a number of states, the state held onto those revenues, putting a huge burden upon city and county governments. Then good times returned and local and state governments began to expand.

Governor Daniels is right to be concerned. This is what happens when politics and class warfare, from both sides of the political spectrum replace leadership and wisdom in public office. Nothing that I see in happening in Washington gives me hope that this pattern has changed.  State and local governments are beginning to understand this. They must operate within their financial means. Washington just prints more money. 

I don't know what the answer is from a policy perspective. I do know that at the heart of this deficits crisis is an ethical crisis. And until we address the issues of power, wealth and influence in Washington, the rest of the nation is going to be at risk.

Be sure to read all of Fund's article and share it with family and friends.