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Is the Federal Debt Really a Problem?

A sobering conversation with former GAO chief David Walker

May 2011

David Walker is a man on a mission. For the past decade, he has been warning everyone who will listen about the growing federal debt and its potential impact on our country's future.

He should know. As Comptroller General and head of the Government Accountability Office from 1998 to 2008, he was the chief watchdog for the United States Congress. While in office, he launched the Fiscal Wake-up Tour to help Americans realize that by spending too much money, the U.S. government is endangering the future for all Americans.

I recently welcomed David to my radio show to talk about the federal budget deficit, the nation's growing debt — and what we need to do about it. He's addressing all these issues as part of his new Comeback America Initiative to promote national fiscal responsibility and sustainability. Following is an edited transcript of our conversation.

Ric: David, tell us why you are sounding the alarm about the country's finances.

David Walker: In September of 2003, when I was Comptroller General of the United States, I could see that Washington was spinning out of control. The government had grown too big; it was making more promises than it could honor and it was not really dealing with the structural problem that it faced. We had just had another round of tax cuts and Congress was poised to pass Medicare prescription drugs, which was the new entitlement benefit. The surpluses that we had early in the decade were burning a hole in people's pockets. And sure enough, what happened is we went from a $5.6 trillion projected surplus for a 10-year period of time to trillion dollar-plus deficits every year for as far as the eye could see.

Ric: Tell us how you're trying to help with your new organization.

David: The Comeback America Initiative is about restoring fiscal responsibility and sustainability through federal, state and local governments. It's about solutions: what we need to do with the entitlement programs, defense, and other spending and with our tax policies in order to put this country on a more prudent and sustainable path. And frankly, to avoid a debt crisis in the U.S., which is very possible within the next three to five years if we don't start making tough choices.

Ric: There are a lot of folks running around the country acting like Chicken Little, saying that the federal debt is so massive, excessive and unsustainable that it will cause all kinds of problems. They say you need to put all of your money into gold, that the dollar is going to be worthless, that the economy is going to be in tatters and so on. Frankly, in my experience, most of these people have very little credibility and what they say has very little basis in fact. But you're not in that category. In fact, you have the highest level of credibility of anyone I've heard on this subject because, instead of just ranting and raving like an extremist, you are prudently, maturely and professionally describing the facts of the situation. I also note that, at the Comeback America Initiative, you have recruited a board of directors and an advisory council featuring some of the most highly acclaimed individuals in the nation. They are all joining with you, as though to say, "We ain't kiddin' here."

David: I'm very pleased and honored to have all those people associated. These are very diverse individuals with different political and ideological backgrounds and different experiences in different sectors of the economy — and they all understand that this is a great country but that we've been living beyond our means. We've been eating our seed corn; we need to do some things to get the economy going, get unemployment down and improve our competitive posture. But we also need to start putting our finances in order because when you look at the facts, our financial situation is a lot worse than the politicians are admitting.

Ric: I have three questions for you. The first is, if we do not change our fiscal ways — meaning if we do not deal with the federal debt and the level of federal spending — what's going to happen to us and when? Second, can we fix it and if so, how? I'll save my third question for the end.

So, start with the first question, because you said that if we do nothing, it will get ugly in the next three to five years.

David: I believe we will have a debt crisis in this country in the next three to five years if we don't start to make tough choices. And it could happen quicker than that based upon existing ratios. Bond vigilantes don't have duties of loyalty to countries; they are about making money. And bond vigilantes could turn on us at any time. So the question is, if it was to happen, how would it manifest itself?

The way that it would most likely manifest itself is difficulty selling our debt; we'd end up paying a lot higher interest rate in order to sell it. We have the lowest average maturity of all major industrialized nations in our debt. We're paying very low interest rates. So if interest rates go up dramatically, quickly, as they have in some of the European countries that have a debt crisis, we will feel it very, very quickly with regard to interest rates throughout the economy. It will end up plunging us into a very deep recession and potentially worse. Unemployment rates will be much, much higher; the value of the dollar would decline dramatically. Those are things that we can, we should and, in my view, we must avoid.

That gets us to your second question of what we need to do. First, we have to recognize that the threat to this country, believe it or not, is not today's deficits, although they are shockingly high at $1.3 trillion to $1.5 trillion. And it's not today's debt of $14.2 trillion. The threat is what lies ahead, based upon known demographics — retirement of the baby boom generation, longer life spans, rising health care costs, growing gaps between projected expenditures and revenues — and that we are headed for third-world-nation debt levels on our current path. The fact is that we're going to have to relook at what the government should do and how big are we prepared for it to be, and we're ultimately going to have to bring our expenditures and revenues more in line.

Ric: Let's talk about that more specifically as part of question number two: What steps do we need to take in order to avoid the train wreck that you are hypothesizing could otherwise occur in the next three to five years?

David: 2011 is going to be a key year because we have a change of control in the House of Representatives and you now have more checks and balances. Typically, when you have more checks and balances, you have more of a chance to make tough decisions that will stick.

The government right now doesn't have permanent appropriations; it's operating at last year's funding levels, which are, frankly, pretty generous because discretionary spending has gone up 30% since 2007 and over 20% since 2008, even though we've had low inflation. So we're going to have to end up taking a tough line on spending for 2011 and 2012. But the real key is imposing tough budget controls when the debt ceiling limit comes up, which is going to be anywhere from April until the end of May — the kind of budget controls that we had from 1990 to 2002 that prevented the government from making more promises when it already promised too much.

We need budget controls to constrain spending and, more important, have targets that have specific debt as a percentage of the economy that must be hit — and if they are not hit, there will be automatic spending cuts, freezes and tax surcharges that will come into place that will provide transparency and accountability for Congress' failure to act.

Ric: How optimistic are you that Congress will take the steps necessary?

David: I think they'll do something. I think that what's going on in the country with the Tea Party and other groups is that people are ahead of the politicians; they are very concerned. But the people need to understand that what needs to be done needs to be done in a way that doesn't undercut our economic recovery and our efforts to get unemployment down and improve competiveness. That's why these GDP targets really should start about 2013 or 2014 — to give us a little breathing room to get our act together and, frankly, give us a little breathing room to share with American people the facts, the truth and the tough choices and to figure out what needs to be done in a way that can be acceptable to the American people without elected officials automatically losing their jobs.

Ric: So the bottom line is this: The federal government and many other levels of government have grown too big, have promised too much and have waited too long to restructure. They are going to have to restructure.

David: Government is going to restructure its benefit programs to provide somewhat less for people who are better off. The younger you are, the more you're going to be affected. People are going to have to work somewhat longer than they may have expected. And taxes are going up. So, you need to filter that into your plan.

Ric: In light of all this, how are you handling your personal investments?

David: I'm 59 years old. I'm not wealthy because I've spent most of my life in the government or not-for-profit sector. But I've minimized my debt, I save as much as I can and I make sure that I have diversified investments. I don't have long-term bonds or Treasuries. I look for diversification, including internationally. I have some alternative investments, but I'm not a gold bug. I have more real estate than I need; I've got a beautiful home in Mt. Vernon, Va. If somebody wants to buy it, I'd be happy to sell it.

And the other thing is, I'm not worried about inflation in the short term, but I recently had to make some retirement-related decisions. Part of that decision process was to invest in a way that protected me against the possibility of significant inflation in the future, because I think that possibility exists if we do not get our finances in order.

Ric: I want to highlight your comments: Although you are aware of the fiscal problems we are facing — acutely more so than the great majority of Americans — you are not putting your entire life savings into gold and burying it in the backyard. You are maintaining a highly diversified portfolio, both domestically and internationally. You are avoiding long-term bonds because of the credit and interest rate risks they face. You are being prudent in your money management approach. You know, David, how you're handling your assets personally is virtually identical to the advice we have been giving to our clients. I find it really interesting that someone who is as knowledgeable about our fiscal crisis is not saying, "Therefore you should own nothing but gold." I mean, that's all you hear on so many talk shows and on TV and radio commercials. They all seem to be saying is that gold is the solution for everything.

David: It absolutely is not the solution. The fact of the matter is, I try to practice what I preach and I try to lead by example. Look, all of us need to be able to do what we can to take care of our own finances, but we also have to discharge our responsibility as citizens of this great country and to start putting more pressure on elected officials to start making some of these tough choices — basically to make the political price associated with doing nothing greater than the political price of making some tough choices to help create a better future. We need more accountability in Washington.

Ric: Thank you so much for joining us. We all wish you and the Comeback America Initiative the best of success.

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