California Chronicle Blog :- Gretchen Hamel

Friday, June 25, 2010

Take Prudent Action to Reduce the Debt or Pay More Later

By Gretchen Hamel

Procrastination isn't one of the seven deadly sins, but if one were making a list of deadly economic behaviors, it would surely be near the top of the list. As the U.S. heads into the G-20 meeting, it should heed the advice it will receive from other countries regarding our fiscal fiasco.

Last week the world learned that European political leaders failed to act when they first became aware of the magnitude of the debt crisis. As early as February, officials from the U.S. government and the International Monetary Fund (IMF) warned European leaders that the debt problems in countries like Greece had the potential to impact the world economy. European leaders stalled, hoping that Greece's problems would be contained.

Unfortunately, their problems became more severe.

Analysts estimate that the cost of rescuing Greece from bankruptcy would have been $35 billion if measures had been taken when initial warnings were issued. Instead, Europe’s leaders fiddled while Athens burned and now the cost of bailing out Greece is $140 billion. That additional $105 billion is just a small portion of the total cost of the delayed response to Greece's meltdown.

Investor confidence in European debt has been profoundly shaken by the Greek crisis, leading to a precipitous drop in the value of the Euro currency, and contributing to stock market declines worldwide. Europe and the IMF are now creating a $1 trillion fund that can be used to stabilize countries facing potential default.

In retrospect, it seems obvious that the Greeks ought to have made changes long ago to bring their country's accounts closer to balance. Similarly, European nations, whose economic futures are wedded to Greece's because of their shared currency and interlocking debt relationships, should have taken action to stabilize Greece before the problem became a crisis.

Hindsight, as they say, is 20-20, but it seems like Congress is refusing to learn from the stark example Europe has provided.

Last year, the Congressional Budget Office offered this bleak assessment of U.S. economic prospects: “Under current law, the federal budget is on an unsustainable path—meaning that federal debt will continue to grow much faster than the economy over the long run.... CBO’s long-term budget projections raise fundamental questions about economic sustainability.”

President Obama has heard this grim prognosis. At a townhall meeting last summer, the President himself said: “We can’t keep on just borrowing from China...We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

Congress, like Europe, has been warmed.

But they’re fiddling while Washington, and all 50 of the U.S. states, burn. Congressional leaders are currently debating another stimulus, and the debate is about whether to spend $50 billion or a $100 billion, not whether any billions are needed, or, if they are, where to find cuts to make up for the new spending.

Congress has decided to forgo the budget preparation entirely, with Majority Leader Hoyer explaining that it would be useless to try to budget without hearing the recommendations of the fiscal commission. Yet one hardly needs a commission to know that the first solution to debt problems is to stop overspending immediately.

The CBO now expects our debt to reach 90 percent of GDP (more than $20 trillion) by 2020. By then, our interest payments will have quadrupled. By 2020—that's just ten years from now, when today's first graders are getting driver's licenses—interest payments and our entitlement programs, like Social Security and Medicare, will require 9 out of every 10 dollars in the federal budget.

Policymakers know the numbers. They have heard the warnings. They know our present course is unsustainable. The question is are they going to do anything about it before it's too late?

Gretchen Hamel is the executive director of Public Notice, an independent, bipartisan, non-profit organization dedicated to providing facts and insights on the effect public policy has on Americans’ financial well being. For more information please visit www.thepublicnotice.org.

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Wednesday, May 26, 2010

Will We Have the Resources to Fight?

By Gretchen Hamel

Memorial Day is an occasion to remember all of the brave men and women who gave their lives for our country. Indeed, America has a proud history of defending freedom the world over. Yet this weekend, Americans should also consider the future. Will we have the resources to fight the next time our country is called to duty?

Fighting a war requires more than just heroes, of which the United States has an abundance. It also requires money and resources. During war times, the government steps up spending and consumes more of the economy. Yet today, our government is expanding not in the cause of our nation's defense, but just because the government is assuming responsibilities that were once left to the people. This growth of government means we will have less to invest in the military if we do confront a major future conflict.

Consider this history. In 1930, government spending accounted for just 3.4 percent of GDP. During that decade, when the country faced the Great Depression and President Franklin Roosevelt rapidly expanded the federal government, spending grew to account for 9.8 percent of the economy. It's worth noting that during that decade the economy actually shrank: in 1930 GDP was $97.4 billion, while in 1940, GDP was just $96.8, having dipped all the way down to $57.6 billion in 1933.

Yet shortly thereafter, as America committed to entering and winning World War II, government spending exploded. The economy grew from less than one hundred billion in 1940 to $221.4 by 1945—that's more than doubling in just five years—but government grew even more rapidly. Government went from consuming less than ten percent of the economy in 1940 to 43.6 percent in 1943, a level it stayed at until the war's end in 1945.

After World War II, government appropriately contracted, though it never returned to its pre-war or pre-depression level. By 1950, government accounted for 15.6 percent of GDP. It slowly rose during the next decades. Since that time spending has hovered around 20 percent of GDP, rising slightly above that level during the 1980s in response to the Cold War, and falling below 20 percent for most of the last two decades.

Today, Washington is permanently expanding the government's share of the economy. Government's spending jumped to 24.7 in 2009 in reaction to the financial crisis and economic downturn. Yet that financial crisis can't explain why the Congressional Budget Office estimates that in 2020, if the President's current budget proposal becomes law, the federal government will still consume 24.1 percent of GDP.

These estimates are likely to understand the severity of the crisis we face. Consider that government spending per household doubled during the last 10 years, and is on course to double again in the next 10 years. As a result, each American family's share of the debt will balloon from about $115,000 today to nearly $200,000 in ten years. By that point our national debt will exceed $20 trillion and interest payments to service our debt will be four times higher than they are today.

In 10 years, interest payments and entitlement programs alone will take up 90 percent of the federal government's revenue. How will we pay for our military? What will be left to spend if disaster strikes and our country is again called to fight for freedom?

Americans have always risen to challenges in the past, and our brave men and women in the armed services stand out in their service to our country. Today, we need Americans to rise to a challenge again. This time it's not war, but the threat that we are permanently weakening our country by allowing Washington politicians to grow government and accumulate such a massive debt. We need an army of citizen soldiers to honor the men and women who have defended the country in the past to stand up and send a message to our elected representatives: we need to preserve and protect this country from a mountain of debt by cutting government spending now.

Gretchen Hamel is the executive director of Public Notice, a independent, bipartisan, non-profit organization dedicated to providing facts and insights on the effect public policy has on Americans’ financial well being. For more information please visit www.thepublicnotice.org.

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Friday, April 30, 2010

Facing Fiscal Crisis Head On: Lessons from New Jersey

By Gretchen Hamel

Ohio has major financial problems. Unemployment is 11 percent. The state expects a shortfall of nearly $300 million this year and has unfunded pension liabilities of $26 billion. The Governor, legislature, and city councils are struggling to close budget gaps. What should they do?

There are no easy answers, but policymakers can look to other states for lessons. In particular, Ohio should pay attention to New Jersey for lessons good and bad. While Ohio has problems, they are mole hills compared to New Jersey's mountains. For fiscal year 2011, New Jersey faces a budget deficit of $10.7 billion—that's 36 percent of the previous year's budget (Ohio's current shortfall is about one percent of its total budget). New Jersey already has the highest tax burden of any state in the nation. With a per-person state and local tax burden of $6,610, raising taxes simply isn't a realistic option.

How did New Jersey get into this mess? New Jersey, like every other state, lost tax revenue due to the economic down turn. Total revenue for 2011 is expected to be 15 percent less (just under $5 billion less) than it was in 2008.

But revenue decline isn't the primary cause of the fiscal crisis: runaway government spending is. New Jersey state spending increased nearly 60 percent between 2001 and 2008. And so, even during flush economic times, New Jersey's debt ballooned from $16 billion in 2001 to nearly $52 billion in 2009. As a result, New Jersey must use $2.5 billion of its budget just to service debt.

New Jersey's situation is even worse than these numbers suggested. In addition to the current deficit and explicit debt, New Jersey faces unfunded pension liabilities of $46 billion. The state's pension crisis is another example of lawmakers' irresponsible spending habits: liabilities doubled between 1999 and 2008, while the assets grew by little more than a third, leaving a serious financial hole.

New Jersey's new Governor, Chris Christie, has been clear about how he plans to tackle New Jersey's financial problems: he is cutting spending, and cutting it a lot. The Governor plans to reduce state expenditures by $10.1 billion in 2011. He will reduce the number of state jobs; eliminate, streamline, and privatize programs; and root out waste wherever possible. He will cut education spending—a necessity given that education consumes more than one third of New Jersey's budget—by $820 million.

Not surprisingly, these proposed cuts have created controversy. The Governor urged teachers to accept a wage freeze, but unions are loath to make these concessions. Yet this sometimes-ugly political tug-of-war has served an important purpose in educating the public about the budget crisis.

Few voters understood just how generous state worker benefits were until Gov. Christie laid it out: A retired teacher who, while working, paid a total of $62,000 toward her pension and nothing for full medical coverage will receive $1.4 million in pension benefits and another $215,000 in health care benefits. Is this system really fair to taxpayers who have to foot the bill?

These cuts are just a first step in getting the state's fiscal house in order. Pension reform must come next. Christie's budget forgoes more than $3 billion in contribution to the state pension retirement system. This helps the immediate budget crisis, but exacerbates the long-term problem of unfunded pension liabilities.

The Governor has already begun the difficult process of reforming the pension system. Last month he signed laws that modestly scaled back benefits by increasing employee contributions to healthcare, limiting payouts for unused leave time, and eliminating recent benefit increases. More pension reforms are needed and, thankfully, being proposed.

New Jersey and Ohio aren't alone in facing the uncomfortable task of having to reduce public pension liabilities. The Manhattan Institute found nationwide all 59 pension funds dedicated to public school teachers face shortfalls, with total unfunded liabilities as high as $933 billion. With liabilities so high, and taxpayers already stretched so thin, states are going to have to face these pension issues or face financial ruin.

It's too soon to tell what the outcome of this looming crisis will be. But it’s good governors and state lawmakers are having these conversations. Ohio voters should encourage straight talk and tough choices from their state officials because, ultimately, it's the citizens who pay the price of government's runaway spending.

Gretchen Hamel is the executive director of Public Notice, a new independent, bipartisan, non-profit organization dedicated to providing facts and insights on the effect public policy has on Americans’ financial well being. For more information please visit www.thepublicnotice.org

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