Comeback America: The Nation’s Fiscal Challenge and A Way Forward

America at a Crossroads: Turning the Country Around and Restoring Fiscal Responsibility

Dartmouth College Hanover, NH

January 9, 2012

Hon. David M. Walker Founder and CEO

The Comeback America Initiative and

Former Comptroller General of the United States

2

Iowa’s Economic Concerns

60% 20%

13%

3% 1% 2% 1%

The price of gasoline Other The stock market No opinion

Taxes

Unemployment The Federal Budget Deficit

Source: CNN/ ORC, Polls, Iowa & New Hampshire, Period Dec. 21-27, 2011. Compiled by TCAII. Note: Mortgages and housing was under 1% and excluded from the graphic. Question posed was “thinking specifically about the economy, which of the following is the most important economic issue facing the country today?”

3

New Hampshire’s Economic Concerns

49%

31%

8%

5% 3% 2% 1%

Mortgages and housing costs The price of gasoline Other The stock market

Unemployment

Taxes

Source: CNN/ ORC, Polls, Iowa & New Hampshire, Period Dec. 21-27, 2011. Compiled by TCAII. Note: No opinion was under 1% and excluded from the graphic. Question posed was “thinking specifically about the economy, which of the following is the most important economic issue facing the country today?”

The Federal Budget Deficit

There are a number of myths about how to solve the Nation’s fiscal problems. The 4 most common are:

We can Grow our way out We can Inflate our way out

We can Tax our way out We can Cut our way out

The simple truth is that none of these by themselves will work and all of them will play a role in order to restore our fiscal sanity.

4

4 Myths

Compiled by TCAII

The country is currently experiencing similar conditions as in 1992 when Ross Perot first ran for President.

Fiscal Irresponsibility Political Dysfunction

Lack of Trust in Government Absence of Public Confidence in the Future

The country is approaching an even bigger iceberg than in 1992. We corrected our course then and can do so again if we “wake-up” and get some committed and courageous leadership.

5

Learning from the Past

Compiled by TCAII.

6

Deficits and Debt (as a percentage of GDP)

-3.9% -4.5% -4.7%

-3.9%

-2.9% -2.2%

-1.4%

-0.3%

-1.5%

-3.4% -3.5% -2.6%

-1.9% -1.2%

-3.2%

-10.0%

-8.9% -8.7%

0.8% 1.4%

2.4%

1.3%

-11.0%

-9.0%

-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Fede

ral D

efic

its (-

) or

Surp

luse

s as a

Per

cent

age

of G

DP

U.S. Gross Debt as a Percentage of GDP 1992 2000 2011

64.1%

Source: Office of Management and Budget, Historical Tables, Table 1.3; Congressional Budget Office, The U.S. Federal Budget, December 2011: Infographic;.U.S. Department of Treasury, Bureau of the Public Debt, Debt to the Penny; CBO, Long-Term Budget Outlook (June 2011); Compiled by TCAII. Note: 2011 Gross debt as of Sept 31.

57.3%

98.7%

7

Congressional Approval

56% 34%

10%

Disapprove

2000

18%

78%

3%

Approve

1992

11%

86%

3%

No Opinion

2011

Source: Gallup, Political Polls. Compiled by TCAII. Note: 1992 Poll taken March 3rd, 2000 Poll taken December 2nd – 4th, and 2011 Poll taken December 15th – 18th.

8

Satisfaction with the U.S.

51% 46%

3% Dissatisfied

2000

26%

68%

6%

Satisfied12%

86%

2% No Opinion

2011 1992

Source: Gallup, Political Polls. Compiled by TCAII. Note: The question asked by Gallup is worded as such “In general, are you satisfied with the way things are going in the United States at this time? 1992 Poll taken November 11th – 12th, 2000 Poll taken December 2nd – 4th, and 2011 Poll taken November 3rd – 6th.

• Limited but effective Government

• Individual liberty and opportunity

• Personal responsibility and accountability

• Rule of law and equal justice under the law

• Fiscal responsibility and intergenerational equity

9

Selected Key Founding Principles

2% 23.8%

Federal Spending

36.8%

1800 2011 2040

US GDP: $8.89 Billion

(Constant 2010 Dollars)

Projected US GDP: $14.65 Trillion

(Constant 2010 Dollars)

Projected US GDP: $28.54 Trillion

(Constant 2010 Dollars) Source: Historical Statistics of the United States, Millennial Edition On Line, Cambridge 2006; CBO, The Budget and Economic Outlook: An Update, August 2011; CBO, CBO’s Long-Term Budget Outlook, Supplemental Data, June 2011. Compiled by TCAII. Note: Federal Spending for 2040 is based on the Alternative Scenario Estimates.

10

Growth of Government

42%

20%

4%

15%

12%

7%

Defense Other Discretionary Medicare and MedicaidSocial Security Other Mandatory Net Interest

2011

Source: CBO, The Federal Budget, Infographic, December 2011, Historical Tables. Compiled by TCAII. Note: All dollar amounts are in constant 2010 dollars. .

$944 Billion $3.47 Trillion

19%

18%

21%

20%

15%

6%

1970

11

Composition of Federal Spending (% of Total Outlays)

12

Federal Spending & the Political Party in Power

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Bill

ions

of C

onst

ant 2

010

Dol

lars

Fiscal Years

Democratic Controlled Congress

Republican Controlled Congress

Split Congress

Republican President

Democratic President

Source: OMB, Budget, Historical Tables, Table 1.3—Summary of Receipts, Outlays, and Surpluses or Deficits (−) in Current Dollars, Constant (FY 2005) Dollars, and as Percentages of GDP: 1940–2016; Bureau of Labor Statistics, Inflation Calculator. Compiled by TCAII.

Social Security Act of 1965 (Medicare)

Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and the Invasion of Iraq

America Recovery and Reinvestment Act of 2009

Patient Protection and Affordable Care Act of 2010

Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985

Budget Enforcement Act of 1990

Deficit Reduction Act of 1993 2001 Invasion

of Afghanistan

Vietnam Conflict 1960-75

Korean Conflict 1950-53

End of WWII

End of Statutory Budget Controls

13

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Bill

ions

of C

onst

ant 2

010

Dol

lars

Fiscal Years

Democratic Controlled Congress

Republican Controlled congress

Split Congress

Democratic President

Republican President

Source: OMB, Budget, Historical Tables, Table 1.3—Summary of Receipts, Outlays, and Surpluses or Deficits (−) in Current Dollars, Constant (FY 2005) Dollars, and as Percentages of GDP: 1940–2016; Bureau of Labor Statistics, Inflation Calculator. Compiled by TCAII.

Revenue Act of 1964

End of WWII

Economic Recovery Tax Act of 1981

Tax Reform Act of 1986

Economic Growth and Tax Relief Reconciliation Act of 2001 & Invasion of Afghanistan

Jobs and Growth Tax Relief Reconciliation Act of 2003 & Invasion of Iraq

Omnibus Budget Reconciliation Act of 1993

Korean Conflict 1950-53

Vietnam Conflict 1960-75

Federal Revenues & the Political Party in Power

14

$3.4 Trillion 35% of GDP

$10.1 Trillion 67.5% of GDP $2.3 Trillion

23% of GDP

$4.7 Trillion 31.1% of GDP

$0

$2

$4

$6

$8

$10

$12

$14

$16

Sepetember 30th 2000 September 30th 2011

In T

rilli

ons o

f U.S

. Dol

lars

Intragovernmental Held Debt Publicly Held Debt

$5.6 Trillion 58% of GDP

$14.8 Trillion 99% of GDP

SOURCE: U.S. Department of Treasury, Bureau of the Public Debt, Debt to the Penny; CBO, Long-Term Budget Outlook (June 2011); OMB, Historical Tables, Table 1.2. Compiled by TCAII.

Federal Debt Burdens

15

Historical Debt Burden (1800 through 2011)

0%

20%

40%

60%

80%

100%

120%

140%

1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Perc

enta

ge o

f GD

P

Intragovernmental Debt Public Debt

Source: Congressional Budget Office, Long Term Budgetary Outlook 2009, Supplemental Data; Office of Management and Budget, Historical Tables, Table 7.1- Federal Debt at the End of the Year 1940 through 2016. Compiled by TCAII.

16

Total Federal Debt Per Capita & the Political Party in Power

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Con

stan

t 201

0 D

olla

rs P

er C

apita

Democrat Controlled Congress

Republican Controlled Congress

Split Congress

Republican President

Democratic President

SOURCES: U.S. Census Bureau, U.S. Department of Treasury, U.S. Bureau of Labor Statistics, U.S. House, and U.S. Senate. Compiled by TCAII NOTE: All amounts are adjusted for inflation and in 2010 Dollars. Federal Debt is the total public debt outstanding and intragovernmental holdings.

End of WW2 $ 22,183

As of 9/30/2011 $46,467

In Trillions of Dollars 2000 2011

Explicit Liabilities $ 6.9 $17.4

•Publicly Held Debt 3.4 10.1

•Military & Civilian Pensions & Retiree Health 2.8 5.8

•Other Major Fiscal Exposures 0.7 1.5

Commitments & Contingencies 0.5 1.9 E.g. Pension Benefit Guaranty Corporation, Undelivered Orders

Trustees’ Estimates

Actuary's Alternative

Scenario Social Insurance Promises 13.0 33.7 46.1

•Future Social Security Benefits 3.8 9.2 9.2

•Future Medicare Benefits 9.2 24.7 37.0

Future Medicare Part A Benefits 2.7 3.3 8.5

Future Medicare Part B Benefits 6.5 13.9 21.0

Future Medicare Part D Benefits - 7.5 7.5

Total $20.4 $53.2 $65.5 SOURCE: Data from the Department of Treasury, 2011 Financial Report of the United States Government. Compiled by TCAII. NOTE: Estimates for the Actuary’s Alternative Scenario are found in note 26 of the 2010 Financial Report of the United States. Future liabilities are discounted to present value based on a real interest rate of 2.9% and CPI growth of 2.8%. The totals do not include liabilities on the balance sheets of Fannie Mae, Freddie Mac, and the Federal Reserve. Assets of the U.S. government not included.

17

Federal Financial Hole (For Fiscal 2000 and 2011)

Household Income Statement

Per Week (Constant 2010 Dollars)

Household Income $ 961

Household Expenses $ 1,495

Household Deficit $ (533)

Overall Household Debt, Liabilities, & Unfunded Promises

Average Household Debt (as of Sept. 30, 2011) $ 126,000

Average Household Total Liabilities and Unfunded Promises (as of Sept. 30, 2010)

$ 531,000

Sources: CBO, Budget and Economic Outlook: An Update, August 2011. Medicare and Social Security Trustees Report 2011;. Census Bureau, Current Population Survey, Table H-17. BLS, Inflation Calculator. Compiled by TCAII. Note: Household expenses and deficit are calculated based proportionally on the Federal Government’s finances and numbers may not add due to rounding.

If The U.S. was a Household

18

19

1% 5%

11%

19%

5%

6%

6%

6%

6%

8%

11%

14%

12%

9%

8%

8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2011 2024 2040 2055

Perc

enta

ge o

f GD

P

Revenues

Other Spending

Federal Healthcare

Outlays

Social Security

Net Interest

Source: Congressional Budget Office, Long-Term Budget Outlook (June 2011), Summary Data for the Alternative Fiscal Scenario. Compiled by TCAII.

Our Fiscal Future

20

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%20

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

1620

1720

1820

1920

2020

2120

2220

2320

2420

2520

2620

2720

2820

2920

3020

3120

3220

3320

3420

35

Perc

enta

ge o

f GD

P

Actual Projection: Alternative Fiscal Scenario Projection: Extended-Baseline Scenario

187%

84%

SOURCE: CBO, Supplemental Data for Congressional Budget Office's Long-Term Budget Outlook (June 2011), Figure 1-2. Compiled by TCAII.

CBO’s Public Debt Projections

21

Comparative Debt Burdens

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Greece Italy Portugal Ireland Spain United Kingdom United States

Perc

enta

ge o

f GD

P

2011 2016

SOURCE: International Monetary Fund, World Economic Outlook Database, Sept. 2011. Compiled by TCAII. Note: Data for 2011 and 2016 are estimates. Gross debt consists of all liabilities that require payment or payments of interest and/or principal by the debtor to the creditor at a date or dates in the future. This includes debt liabilities in the form of SDRs, currency and deposits, debt securities, loans, insurance, pensions and standardized guarantee schemes, and other accounts payable. Thus, all liabilities in the GFSM 2001 system are debt, except for equity and investment fund shares and financial derivatives and employee stock options. Debt can be valued at current market, nominal, or face values (GFSM 2001, paragraph 7.110).

22

Growing Foreign Dependency

5%

1970 Total Public Debt

$283 Billion

19%

Foreign Held Debt

1990 Total Public Debt

$2,412 Billion

Source: Office of Management and Budget, Historical Tables; Department of Treasury, Major Holders of Treasury Securities, October 18, 2011, Debt to the Penny. Compiled by TCAII. Note: 2011 public debt and foreign held public debt reflect data from September 2011.

46%

2011 Total Public Debt $10,127 Billion

1. Australia (1) 2. New Zealand (2) 3. Sweden (4) 4. Estonia (3) 5. China (5) 6. Chile (7) 7. Luxembourg (6) 8. India (12) 9. Brazil (10) 10. Denmark (8) 11. United Kingdom (9) 12. Netherlands (14) 13. Israel (19) 14. Canada (11) 15. Korea (17) 16. Poland (13) 17. Mexico (18)

18.Slovakia (16) 19.Norway (15) 20.Austria (21) 21.France (23) 22.Finland (22) 23.Slovenia (20) 24.Germany (25) 25.Spain (24) 26.Belgium (26) 27.Italy (27) 28.United States (28) 29.Hungary (29) 30.Iceland (32) 31.Ireland (30) 32.Japan (31) 33.Portugal (33) 34.Greece (34)

23

Sovereign Fiscal Responsibility Index (As of September 2011)

Source: Comeback America and Stanford Graduate Students’ Sovereign Fiscal Responsibility Index. Compiled by TCAII. Note: Based upon IMF data that was reported in September 2011 and does not take into consideration subsequent events.

Key Dates and Data regarding the financial condition of the Social Security and Medicare Trust Funds

Source: Data from the Social Security Administration, 2011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds; and Centers for Medicare & Medicaid Services, 2011 Medicare Trustees Report; 2010 Financial Report of the United States Government, Notes to the Financial Statements, Note 26 . Compiled by TCAII.

1. Excludes current “assets” in the Social Security & Medicare trust funds. 2. Based on Medicare Actuarial projections that differ from current law.

24

Social Security Medicare Current Beneficiaries 55.0 Million 46.3 Million Year the Trust Fund begins permanently operating with a negative cash flow

2010 2008 (HI Trust Fund)

Trust fund exhaustion year 2036 2024 Discounted Present Value (PV) of unfunded promises¹

$8 Trillion $35.1 Trillion²

Actuarial Balance as a % of GDP 0.71% 1.9%

Social Security and Medicare

25

$3,361

$4,363 $3,978

$4,218

$2,983

$3,722 $3,487

$7,960

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

OECD Average Canada France Germany New Zealand Sweden United Kingdom United States

Per

Cap

ita H

ealth

Car

e C

osts

U

.S. D

olla

rs

Source: Organization for Economic Cooperation and Development, OECD Health Data 2011. Compiled by TCAII. Note: Per capita health expenditures for 2009 uses purchasing power parity for all dollar amounts.

The United States spends more than double the OECD average with below average healthcare results.

Comparative Health Costs

26

Relative Defense Spending

U.S.A

China

United Kingdom

France

Russia

Japan

Saudi Arabia

Germany

India

Italy

Brazil South Korea

Australia Canada Turkey Israel

0

100

200

300

400

500

600

700

800

In B

illio

ns o

f Con

stan

t 20

10 D

olla

rs

$673 Billion

SOURCE: Stockholm International Peace Research Institute, SIPRI Military Expenditure Database 2011; Bureau of Labor Statistics, Inflation Calculator. Compiled by TCAII.

The United States spent more on defense in 2010 than the 15 highest defense budget combined.

$712 Billion

27

Payroll Taxes 35%

Individual Income Taxes 47%

Corporate Income Tax 8%

Excise 3%

Estate and Gift 1%

Custom Duties 1%

Miscellaneous 4%

Other 9%

Total Revenue $2.2 Trillion in 2010 Dollars

Source: Congressional Budget Office, The Budget and Economic Outlook: An Update, August 2011. Compiled by TCAII. Note: New figures for the components of other spending were not published. The same percentage of revenues for these figured is assumed from the June 2011 CBO report.

2011 Federal Revenue Composition

28

Progressive Tax System

29

Effective Federal Income Tax Rates

-6.7% -5.4%

-2.9%

0.8%

3.2%

5.7% 7.2%

9.9%

14.7%

17.5% 18.9%

-10%

-5%

0%

5%

10%

15%

20%

25%

Less Than$10,000

$10,000 -$20,000

$20,000 -$30,000

$30,000 -$40,000

$40,000 -$50,000

$50,000 -$75,000

$75,000 -$100,000

$100,000 -$200,000

$200,000 -$500,000

$500,000 -$1,000,000

More Than$1,000,000

Eff

ectiv

e In

divi

dual

Fed

eral

Inco

me

Tax

Rat

e

Source: Urban Institute and Brookings Institution, Tax Policy Center, Distribution tables by Dollar Income Class, T11-0315 - Effective Federal Tax Rates by Filing Status and Demographics, Under Current Law, by Cash Income Level, 2011. Compiled by TCAII.

Scope of CAI’s Illustrative Fiscal Frameworks: • Budget Controls and Process Reforms

• Social Security

• Medicare, Medicaid, and Healthcare

• Defense and Other Spending

• Comprehensive Tax Reforms

• Constitutional Amendments

30

CAI’s Fiscal Framework

Compiled by TCAII.

31

Fiscal Reforms Must Meet a Feasibility Test:

1) Do they make economic sense?

2) Are they socially equitable?

3) Are they culturally acceptable?

4) Do they pass a math test?

5) Are they politically feasible?

6) Can they achieve significant bipartisan support?

Feasibility Test

Compiled by TCAII.

• When & why was it created?

• Have conditions changed, and have we adapted?

• How are we measuring success, and are we achieving desired

outcomes? • Are there multiple programs, and if so are they working in an integrated

manner?

• Are we using the experience of others (e.g., countries, states) to replicate success and avoid mistakes?

• Can we afford and sustain it in its present form?

32

Transforming Government (Basic Questions for Policies & Programs)

Compiled by TCAII.

•Calendar Year 2012

› Resolution of Payroll, Unemployment, and Medicare Physician Payment Issues (Short-Term)

› Tough 2013 Budget (Short-Term) › Bush/Obama Tax Cut Decision (Short-Term) › Possible Reconsideration of Debt Ceiling Automatic

Spending Cuts (Short-Term) › Congressional Hearings (Structural) › Citizen Education/Engagement (Structural)

• 2013 - ?

› Tough Budget Controls (Structural) › Role and Size of Government (Structural) › Government Transformational Commission (Structural) › Comprehensive Social Security Reform (Structural) › Health Care Coverage Reform and Cost Controls (Structural) › Comprehensive Tax Reform (Structural)

33

A Phased Approach

• Test your fiscal knowledge by going to www.fiscalIQ.net

• To educate others use the Fiscal Facts prepared presentation and notes found on TCAII’s website.

• For further information about: – Non-partisan facts and possible solutions on fiscal sustainability and

responsibility Sign up at The Comeback America Initiative’s website www.TCAII.org

– Promoting progress over partisanship sign up at No Labels website www.NoLabels.org

34

What Can You Do?

Compiled by TCAII.