Day of Reckoning Is Approaching: It’s Pay Me Now or Pay Me Later

By Lawrence P. Farrell Jr.
In the Popeye cartoon, Wimpy would say, “I’ll gladly pay you 5 cents Tuesday for a hamburger today.” That sort of sums up where this country has been heading financially for quite some time. Except that our “Tuesday” has been much further out than next week.

Tuesday is much closer now. In an old commercial for Fram oil filters, a mechanic is seen wiping his hands on a rag, standing in front of a car with the engine disassembled, in a state of major repair. The mechanic intones dramatically, “You can pay me now or pay me later.” His meaning is clear: Changing the oil and the filter on a regular basis is a necessity that can’t be ducked. You can pay a modest fee every 3,000 miles to replace oil and filters (pay me now) or you can pay a much larger fee when the engine has to be rebuilt (pay me later).

The same analogy holds true for financial matters. Investments that are made regularly and consistently over time grow large because of the magic of compounding. Unfortunately, compounding also works against you when liabilities are carried over time. Bills and obligations pile up, and when the reckoning comes, the necessary adjustments are large and most uncomfortable. If those obligations are “promises” to a large number of people and institutions that have planned their lives and futures around these “promises,” the adjustments are more than uncomfortable. They can destroy futures.

A few citizens in this country have seen a promise-delivery disconnect coming for a long time. One such person is the Honorable David Walker, former comptroller general of the United States, former president and CEO of the Peter G. Peterson Foundation and now the founder and CEO of the Comeback America Initiative. Walker is the high priest of financial rectitude. Regrettably, far too many of his pews are empty right now.

Walker has been delivering a consistent message for some time. Back in 2003 when he was the nation’s comptroller general, he said at the National Press Club that “deficits are structural and not manageable without significant changes in status quo programs, policies and operations.” He projected deficits in 2003 and 2004 of $401 billion to $480 billion. When excess Social Security payments were backed out, those deficits rose to $562 billion to $664 billion. He said then that the United States could not grow its way out, because of demographic trends and exploding health care costs. And that annual budget decisions without adequate consideration to longer term costs only digs the hole deeper. He also stuck a pin in the fiction of Congressional Budget Office assumptions which invariably include unrealistic estimates of back-loaded spending reductions and tax increases.

The only two problems with Walker’s message then and now are that we have done nothing in the meantime, and that the outlook is worse. Walker recently gave a presentation at the annual Integrated Program Management Conference.

The U.S. budget deficit has soared since Walker served as comptroller general. It reached $1.3 trillion in 2011 and is projected to stay at that level or higher as far as the eye can see. And in 2011, all federal revenues cover only mandatory spending and interest on the debt. All discretionary spending (defense and non-defense) is borrowed. If current trends continue, in 2040 federal revenues will only cover Social Security and interest on the debt. By 2055, federal revenues will only be enough to pay interest on the debt. The budget submitted by the president for 2012 shows mandatory spending as 62 percent of federal outlays, with interest on the debt growing from $168 billion in 2012 to almost a trillion dollars in 2021. This growth will accelerate as the very low interest rates we enjoy today return to normal levels. And in 2040, 36 percent of our economy will be consumed by the federal government. If one includes state, local and municipal, fully 50 percent of our economy will be consumed by government in 2040.  
So where are we today? The Super Committee is due to report out Nov. 23. It is rumored it is struggling to come up with the minimum of $1.2 trillion in debt reduction to prevent the sequestration written into the law. Just how hard is this task? Well, the job requires a reduction of $120 billion per year over 10 years. The U.S. economy is at about $15 trillion. So $120 billion is only 0.8 percent of $15 trillion, a less than 1 percent reduction per year. How difficult can this be? Unfortunately, the difficulty of this exercise says more about our ability to reach important decisions than it does about the math exercise in actually reducing spending and debt.

One thing is for sure: We are very close to the “pay me later” timeframe. The $1.2 trillion reduction is a very small piece of our $15 trillion debt — now at 100 percent of GDP. By comparison, Italy, which is now going through a major financial crisis, has seen its debt reach 120 percent of GDP. According to Erskine Bowles, who was the co-chair of the deficit-reduction Simpson-Bowles commission, $1.2 trillion in cuts is insufficient to keep the U.S. debt from rising further.

A final worrisome thought. The defense accounts have already put up $460 billion to $480 billion over 10 years. There is talk of more to come, with adjustments to military retired pay and health care benefits on the way as well. But so far, there has been no discussion of adjustments to entitlements. This process seems very unbalanced. Whatever leverage was to be had in even-handed spending reductions seems to have been lost.

A broken process continues, and the final bill for the “engine overhaul” promises to be soon, large and painful. As Walker said, “We have grown too big, promised too much, waited too long.”

Topics: Defense Department, DOD Budget

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