Call this a crisis? page 2
During past financial crises and wars, the government went into debt because our nation's survival was at stake. What has changed is that piling up debt has become business as usual, even during times of prosperity.
Today we are headed toward debt levels that far exceed the all-time record as a percentage of our economy. In fact, by 2040 we are projected to see debt as a percentage of our economy that is double the record set at the end of World War II. Based on GAO data, balancing the budget in 2040 could require us to cut federal spending by 60% or raise overall federal tax burdens to twice today's levels.
Medicare, Medicaid, and Social Security already account for more than 40% of the total federal budget. And their portion of the budget is expected to grow so fast that their cost, and the cost of servicing our debt, will soon crowd out vital programs, including research and development, critical infrastructure, education, and even national defense.
The crisis we face is one of numbers and demographics but also of attitudes. Promises were made in an earlier time, when they seemed more affordable. Like homeowners borrowing against the value of their homes in the expectation that the values would go up forever, the American government borrowed against the future and assumed that the economy would grow fast enough to make that debt affordable.
But our national debt is not limitless, and our foreign lenders are not fools. If we persist on our current "do nothing" path, our future will be jeopardized. Americans need to reconcile the government we want with the taxes we're willing to pay for it.
True, attempts at reforming Medicare and Social Security have foundered in the past, and there may be some Americans who think that if the government can bail out the financial sector, it can bail out our entitlement programs. But the political difficulty of tackling these problems, hard as they are, has to be overcome this time.
The next President, working on a bipartisan basis with the Congress, must make sure that tough controls are put in place to get control of the budget, once economic conditions improve. (Example: We can require that all new spending programs, commitments, and tax cuts are paid for by comparable spending cuts or revenue increases in other parts of the budget.)
We'll need to make some tough decisions on which of the Bush tax cuts we can afford to keep, and resolve what to do about the alternative minimum tax.
These problems are not beyond our ability to master them. Social Security can be made sustainable and secure with some modest changes over time in retirement benefits, the retirement age, and the tax structure, as Republicans and Democrats did in the early 1980s.
As for Medicare, there are a number of good ideas that would introduce more cost sharing for the wealthy, increased competition, better cost controls, more use of technology, and other steps to curb the growth of health-care spending.
I urge the government to set up a bipartisan commission that would begin working in early 2009. It should keep everything on the table - all entitlements, other spending, and tax programs - and make recommendations on both sides of the federal ledger.
If we bring together the talent and expertise that abound in our great country, we can see our way through the current financial crisis and find solutions for the next one. From Washington we'll need leadership rather than laggardship. The 78 million baby-boomers aren't getting any younger.