Knowledge@Wharton Law and Public Policy Research Article

When most people look at the turmoil in the American economy over the last month -- wild gyrations in the stock market, giants of finance failing or requiring government rescue, rising unemployment, sinking home prices and a wave of mortgage foreclosures -- they see an immediate crisis and a bleak future.

But Alice Rivlin, who was head of the U.S. Office of Management and Budget in the Clinton administration, also sees an opportunity. Rivlin was among a number speakers who came to the University of Pennsylvania recently as part of a "Fiscal Wake-Up Tour" organized by a bipartisan coalition of think tanks and government watch-dog groups trying to focus voters on America's mounting debt. A Wharton department was among the sponsors of the tour's recent visit to the university.

Rivlin said she has long believed that only a short-term crisis atmosphere might spur political leaders in Washington to make some of the difficult long-term choices to head off a rising tide of red ink. "I have said that a mini-crisis would actually be useful, something like a rapid plunge in the dollar," said Rivlin, currently director of economic studies for the liberal-leaning Brookings Institution. Instead, she said, the much larger economic storm now unfolding could convince Washington -- as it is pressed to take bold and sometimes unpopular action related to the credit crisis -- to wrap in some forward-looking solutions to rising costs associated with Medicare, Social Security and Medicaid -- costs that will make the taxpayers' Wall Street rescue effort, which could amount to more than $1 trillion, seem petty by comparison. A General Accounting Office study concluded that in less than 20 years, the cost of Social Security and Medicare will exceed all government revenues.

David M. Walker -- president and CEO of the Peter G. Peterson Foundation, a non-profit that focuses on the national debt and related challenges -- agreed with Rivlin that the current economic crisis could be a teachable moment for the nation's leaders about the risks of fiscal inaction. "They waited for a crisis until they did something about it," said Walker, referring to the credit logjam that has locked up the flow of credit that lubricates the economy. When it comes to government action on tough economic issues, he said, "the system is dysfunctional."

Walker, Rivlin, and their co-panelists -- Robert L. Bixby, executive director of the debt-fighting Concord Coalition, and Stuart M. Butler, vice president for domestic and economic policy studies for the conservative-leaning Heritage Foundation -- are carrying on the Fiscal Wake-Up Tour that was launched back in 2005. Since the beginning, the campaign has been trying to persuade Americans to pay less attention to day-to-day ups and downs of Wall Street and the U.S. economy, and focus more on the bigger picture of projections for the staggering future costs of federal entitlements.

Bringing the Message to Battleground States

The tour's visit to the Penn campus was co-sponsored by Wharton's Business and Public Policy Department as well as the Annenberg School for Communication, the Department of Political Science, the Fels Institute of Government and the Fox Leadership Program. Officials said the selection of Pennsylvania -- a key battleground state in the presidential election less than three weeks away -- is part of the Fiscal Wake-Up Tour's strategy of visiting key states right before major political events such as the New Hampshire primary or Iowa caucuses. Its ultimate goal, organizers said, is a better-informed electorate.

"We're trying to elevate the issue in front of key constituencies in key states," Bixby said. He later noted that many of the group's events have been held on college campuses because the anti-debt coalition believes any solution will ultimately come from greater involvement by the generation now voting for the first time. "If young people get involved, and we can view the situation as a leadership problem, we'll go a long way toward getting it solved."

The broader problem quite simply is this: America is already dangerously deep in debt, and will soon see an explosion in costs to provide Social Security, Medicare and other entitlements it has promised to tens of millions of retiring and soon-to-retire baby boomers. While federal spending is now roughly 20% of the American gross national product, which has been relatively constant in the last half-century, that ratio could rise as high as 42% by 2050 if current federal policies on entitlement spending and taxes remain unchanged, according to Bixby. That would be the same rate as when the U.S. was waging World War II. The impact would fall hardest on today's young people.

Driving this projection are the ticking time bombs of benefit obligations to retirees and impoverished families under Medicare, Medicaid and Social Security. Over the next three decades, the percentage of Americans older than 64 will grow from 13% to 20% even as health care costs continue to increase faster than inflation.

Walker, who was formerly the nation's top auditor as its Comptroller General, said unrestrained health care policies are a recipe for fiscal disaster. "We're the only country on the face of the earth that is currently writing a blank check for health care because every other country that has done that has gone bankrupt."

'Arithmetic, Not Ideology'

"It's a matter of arithmetic, not ideology," said Bixby, whose bipartisan Concord Coalition was founded by Warren Rudman, a former Republican senator; the late Paul Tsongas, who served in the Senate as a Democrat; and Pete Peterson, who was Secretary of Commerce in the Nixon administration. Bixby believes part of the problem is that Americans have been too willing to buy into certain myths about our fiscal policies, including the notions that we can close our budget gap simply through growing the economy and increasing revenues, or just by eliminating waste, fraud and abuse in federal spending.

Several speakers emphasized that while their Wake Up Tour can be heavy on charts and graphics outlining the grim mathematics of the problem, the real problem with profligate government spending has a moral component: Is it right for the current generation to take on obligations and hand the bill to the next generation? Walker concluded his presentation with a slide showing his three grandchildren who will inherit the massive debt. "It's really not a fiscal issue," agreed Bixby. "It's a moral issue."

The speakers acknowledged that -- given the wide range of their ideological views -- they do not necessarily agree on all the solutions to the problem, but they want their audience to understand what the choices are -- continued but unsustainable borrowing from overseas sources such as China or the oil-producing nations of OPEC, raising taxes, or making decisions on spending cuts and priorities that so far have proved too difficult for political leaders. In fact, the political hurdles have been so great that some -- including the current co-chairs of the Concord Coalition, Rudman and ex-Democratic senator Bob Kerrey -- have suggested that the only solution would be the creation of a bi-partisan panel to devise a set of solutions that Congress would be required to accept or reject without amendment.

Where to start? Rivlin suggested that longer-term solutions could be wrapped into the current legislative effort to attack the credit crunch and expected recession. For example, she said, "a relatively easy thing to do" would be to gradually raise the retirement age. That would have no impact on current retirees, but would provide significant long-term savings for Social Security.

Butler, of the Heritage Foundation, noted simply raising taxes to cover the deficit is not a likely solution. By 2050, he said, balancing the budget with tax increases but no other policy changes would mean raising marginal income taxes on the wealthiest top bracket to 88%, with a 63% higher levy on the second bracket that comprises much of the middle-class. "If there's a moral problem with passing the debt along to younger people, is raising taxes and taking their money any less immoral?" he asked. He also doubted that Congress would use such additional revenue for debt reduction. If you believe it would, he said, "you're probably one of those people who think professional wrestling is real."

A more likely scenario, as outlined by Butler, would be to look at the most sensible ways to make the benefits that now go to American retirees more affordable, such as reconsidering the current prescription drug benefits for seniors and whether they should be extended to the wealthiest citizens. He noted that billionaire Warren Buffett now receives the same drug benefit as a low-income retiree. The Heritage Foundation expert also said America needs to do a much better job encouraging private citizens to save for the future, citing a recent study that the lowest income households, making less than $13,000 a year, spend an average of 9% of that income on lottery tickets.

Indeed, several of the speakers agreed that the Baby Boom generation now running the country has never been asked to sacrifice and rarely asks such measures of citizens. At the same time, he noted, America's consumer-oriented economy and the rise of relatively cheap credit beginning in the 1980s has resulted in a national personal savings rate of zero. On top of that, Butler political debate has been dragged down in some ways by the rise of the Internet and especially cable television, which "emphasizes conflict while dialogue is eliminated."

In the meantime, the speakers said that ongoing federal deficits -- and a debt service that now costs $238 billion annually and is growing sharply -- are squeezing programs that could make America more competitive in the global economy. These would include a massive program to repair the nation's crumbling infrastructure as well as improving education and health care, especially for children in low-income families. "The large middle class is our backbone, but we can't compete on wages in this country," Walker said, stressing instead the need for a better educated workforce and also for a health care system that delivers better results for the money. "We're mortgaging our future and increasing our obligation on the backs of young people at the same time that we're investing less in them," he warned.

Yet, according to Rivlin, despite all the controversy about the government's current dramatic efforts to deal with the immediate financial crisis, these measures may not contribute much to solving the debt problem. She acknowledged that the Treasury may recover some of the $950 billion it has pledged to unlock credit markets and stabilize key banks, and that a new economic stimulus package under discussion in Congress might stave off a lengthy recession that would also sap tax revenues. "But the danger," she warned, "is that we will lose all discipline, that the recession will be the excuse" to delay difficult choices.

Still, there seemed to be a general consensus among the speakers that the current crisis could raise the public's awareness and interest in a long-term solution to government debt. "There's nobody to bail out America," said Walker, "so the sooner we get started, the better."

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