I111111 lllllllllllllllIll11 11111 144362 Ill1 Ill1 , ‘I competitiveness: the Challenge of the Deficit r For the past 40 years, if anyone asked what was the primary issue facing the United States, the answer usually involved the cold war threat of the Soviet Union. Throughout the postwar period, both U.S. foreign and domestic policy revolved largely around the ups and downs of our relations with the Russian bear. How quickly times change! Events in Eastern Europe and in the Soviet Union have, with astonishing speed, altered our view of the world. What had been a basic organizing principle of American policy-the Soviet threat-is suddenly gone. Where does that leave us in agreeing upon a new agenda of issues to focus upon? Many thoughtful people cite U.S. com- petitiveness-or a lack thereof-as the predominant issue facing America in the 1990s and beyond. Others would add such contentious problems as the war on drugs, the quality of U.S. education, the viability and soundness of our banking system, the high and rising cost of our health care system, the environment, or a crum- bling transportation infrastructure. Personally, I believe our ability to compete with other nations is the pri- mary issue facing the United States. But I would add one other problem: the deficit crisis and our growing Page 1 Competitiveness: theChdlengeof the Deficit national debt. Indeed, the issue of competitiveness is inseparable from our ability to deal with the deficit cri- sis and our growing national debt. Fur- thermore, our deficit and debt problems are an integral part of our ability to deal with the list of problems that others have mentioned and to which I just referred. To understand the challenges that will confront us in the future, it is impor- tant to understand where we have come from, and that means we need to consider-at least briefly-how big a role our confrontation with the Soviet Union has played in setting the stage for where we find ourselves today. Three times during the 20th century, the United States and the Soviet Union have faced great challenges. The first of these occurred at the time of World War I. Russia, an exhausted and politically bankrupt state of the old order, experienced a revolution. The United States, a young country with considerably more promise than experience, played its first pivotal role in European politics that then doml- nated our world. The Soviets emerged after the 1917 Revolution as a country isolated and shunned by most of the rest of the world, its economy in tat- ters. The United States emerged from World War I with its economy intact and still growing. But we elected to pull back, to retreat to our distant shores, and to largely isolate ourselves Page2 Competitiveness: the Challenge of the Deficit from the tangled politics of Europe. Our rejection of membership in the League of Nations was symbolic of our distrust of foreign entanglements. The second event that shaped both Americans and the Soviets was World War II. With very different political and economic systems, both nations emerged from the war as great mili- tary powers capable of dominating Europe from the Ural Mountains to the Atlantic. It was this rise of two superpowers that set the stage for the expensive and protracted conflict of the cold war of that past 45 years. Since 1950, the United States has spent a cumulative total of more than $4 trillion on national defense. Mea- sured in 1989 dollars, this comes to nearly $10 trillion. We have averaged 7.8 percent of the U.S. gross national product (GNP) for this purpose. The North Atlantic Treaty Organization allies have paid substantial, if smaller, costs. Japan paid very little, enjoying the luxury of the American nuclear shield as a greater share of its resources went into economic growth. Determining whether the Soviets have spent more or less than we have on the arms race would involve such difficult conceptual and technical problems that they are probably not worth solv- ing, if ever they could be. But we need no fancy analysis to tell us that the people of the Soviet Union and the Page 3 C!ampetitiveness: the Challenge of the Deficit other Warsaw Pact nations paid a tre- mendous price in terms of foregone economic growth and their own stan- dards of living. What is important to recognize, how- ever, is that the race for military supe- riority in the postwar era between the Soviet Union and the United States- and the price we each paid-is in large part responsible for the position in which each nation now finds itself. I am convinced that today, both coun- tries are facing their third-and last-great challenge of this century: Both superpowers must now compete on the economic front with the rest of the world, rather than on the military front with each other. Whether that is because the arms race has become pointless or because it has become too expensive is almost beside the point. The fact is that there are other players on the scene-an economically inte- grated Europe; Japan, with an econ- omy dominating the Pacific basin; and the growing number of fast-developing nations in Asia. With these other influ- ential players at the table, the new competition is far more complex than the old. The problems faced by the Soviet Union are much greater than our own. The Soviet economy, which has never been able to satisfy consumer demands for food and manufactured goods, is stagnating. The Soviet empire Page 4 Competitiveness: the Chdlenge of the Deficit is in danger of collapse as the non- Russian republics assert newfound voices of autonomy, and even outright independence, from Moscow. The sat- ellite nations of Eastern Europe have, one after another, rejected the Soviet model and have begun the exhilarat- ing, if painful, transition to democra- cies driven by market forces. Massive as are the problems facing the Soviets, however, we would be wise to remember that they possess enormous potential and a rich treasury of natu- ral resources. There was a time in our recent history when the United States tended to overstate Soviet advances in science and in military proficiency. It would be equally unwise, now, to understate Soviet capabilities. Freed of the smothering inefficiency and cor- ruption of central planning and a sti- fling Marxist ideology, the Soviets could well surprise the world at some point in the future, especially if West- ern technology becomes readily availa- ble, if they are able to adapt to a market-driven economy, and if their leaders are flexible enough politically to adapt their system to democratic reforms. Competitiveness: If the Soviet Union, in dealing with its The American political crisis, is being forced to turn inward and scale back its international Challenge commitments, at least temporarily, the United States ls being forced to con- front challenges on both the foreign Page 6 Competitiveness: the Challenge of the Deficit and domestic fronts. They are not insubstantial. Abroad, we face no letup in the increasingly stiff competition we’ve encountered in recent years: 9 In Europe we will face, by 1992, a uni- fied market, a productive system, and a set of financial institutions larger than our own-and this does not include the long-term potential of Eastern Europe. It should come as no surprise to us that what Western Europe has been able to accomplish in the past 45 years is more than com- parable to the economic growth of the United States in the first 45 years of this century. l In Asia in general, and particularly in the Pacific rim countries of Japan, Tai- wan, Singapore, Hong Kong, and Korea, economic growth has been astonishing. Inflation-adjusted rates of 7 to 12 percent are typical. This growth has been baaed upon superbly competitive export strategies, which in turn have relied upon long-term domestic policies emphasizing savings, investment, and education. Korea-to take one example-has an industrial base that produced one-third of the world’s shipping in 1988 and a domes- tic economy that has improved nutri- tion by 50 percent in 25 years and provides virtually all families with TV sets. Taiwan, to take another example, now equals Canada and Holland in exports of manufactured goods. Page 6 Competitiveness: the Challenge of the Deficit For the United States, the massive trade deficit that we have accumu- lated over the past decade offers explicit evidence of how complacent we have become in the face of compet- itive forces building during the post- war era and how ill-prepared we were to deal with them. Yet even if we’ve come to recognize the seriousness of the challenge we face-and I believe we now have-we will still fiid it difficult to rebuild our competitive position in the world and to meet the additional challenges posed by such events as the integra- tion of European economies if we are unprepared to deal with our budget deficit and our growing level of debt. The General Accounting Office has long taken the position that the deficit is a major impediment to our own com- petitive position in the world. In the first of our 26 transition reports sent to President Bush and to the Congress in November 1988, for example, we identified the deficit as the primary problem facing the new administration. But we have hardly been alone in this assessment. Other organizations reach- ing the same conclusion have included the Council for Competitiveness, chaired by Jack Young, the Chief Executive Officer of Hewlett-Packard; the Committee for Economic Develop- ment, whose 250 trustees are mostly presidents or board chairpersons of Page 7 competitiveness: the Challenge of the Deficit corporations or presidents of universi- ties; and the American Agenda, chaired by former Presidents Ford and Carter. The Worsening Conventional wisdom held, at least until recently, that the deficit crisis Deficit Crisis was easing, thanks to the Gramm- Rudman-Hollings law that is supposed to force yearly reductions in the deficit. In fact, the deficit is a worsening cri- sis. There are a number of reasons why this is so: l First, the operating part of the govern- ment is underfunded, and this problem is growing worse. The unified budget deficit, which includes the surpluses of the social security and other trust funds and is used to calculate the Gramm-Rudman-Hollings deficit lim- its, has declined from its high of $221 billion in 1986 but seems to be stuck at about $150 billion. However, if you take out social security and the other trust fund surpluses that mask the true operating deficit, there is no improvement; things are only getting worse. Last year the operating deficit was $275 billion, and the Congres- sional Budget Office (CBO) projects it may approach $300 billion by 1995 if current policies are not changed. l Second, the cost of solving problems the federal government must pay for, but has not, is becoming larger. That means even CBO projections-usually Page 8 Competitiveness: the Challenge of the Deficit considered realistic-are too low. In 1988, for example, GAO estimated the huge costs of cleaning up the nuclear weapons complex would reach between $100 and $150 billion. Now the administration acknowledges the problem but has requested an increase of only $800 million in its 1991 budget request. Meanwhile, to take another example, the costs of resolving the savings and loan (S&L) crisis continue to escalate by billions of dollars. l Third, the Gramm-Rudman-Hollings process is missing its targets by ever- larger amounts. We now know that formula budgeting is a very poor sub- stitute for political responsibility. As I just mentioned, the targets include the social security and other trust fund surpluses that mask the true deficit. Even so the record is dismal. The origi- nal deficit target for 1989 (later revised) was $72 billion. The actual deficit was $152 billion, $16 billion over the revised target. For the cur- rent fiscal year, 1990, the deficit tar- get is $100 billion. CBO projects the actual deficit will reach $159 billion and even the Office of Management and Budget (OMB) admits to $124 bll- lion-and the OMB estimate was made only a few weeks after completing leg- islative action on the budget that was supposed to ensure that we would meet the target. If you add off-budget borrowing for the S&L bailout and trust fund surpluses, you get $310 bil- lion. David Stockman’s statement about $200 billion deficits as far as the Page 9 Competitiveness: the Chdlenge of the Deficit Masking the Federal Deficits With Trust Funds Actual FY 1985 FY 1986 FY 1989 Revenues $734 $769 $991 Outlays 946 990 1,143 Total deficit $-212 $-221 $-152 Federal funds deflclt -266 -283 -276 Trust fund surtAuses: Social Secunty 9 17 52 Other trust funds 45 45 71 Subtotal, trust fund surpluses 54 62 123 Total deficit $-212 $-221 $-152 Total federal debt $1,817 $2,120 $2,866 Note Totals may not add due to rounding eye can see is now out of date. It’s $300 billion! l Fourth, our national savings rate con- tinues to be the lowest of the large industrial democracies and is too small to sustain the investment we need for a strong and healthy economy in the next century. This problem is exacer- bated by the fact that federal budget deficits have taken an average of three-quarters of net private savings over the past 8 years. Very recently there have been some hopeful signs that the domestic savings rate may be picking up, but these trends, such as they are, could be dwarfed by the pos- sible shifts in capital from the high savings nations (principally Japan and Page 10 Competitiveness: the Challenge of the De&it CBO estimate FY 1990 FY 1991 FY 1993 FY 1995 $1,067 $1,137 $1,277 $1,438 1,226 1,298 1,409 1,548 $-I59 $-161 $-132 $-110 -290 -298 -289 -298 66 74 98 128 65 64 60 60 131 136 156 188 S-159 S-161 S-132 $-I10 $3,156 $3,454 $4,012 $4,603 Germany) away from the United States into Eastern Europe and other parts of the world. It has been this for- eign capital that has allowed us to sus- tain domestic investment despite our low savings rates, but we cannot con- tinue to count on the rest of the world supplying the capital to support our investment needs. l Fifth, the peace dividend, while impor- tant and reflecting major changes in world politics, is not going to ball us out of the deficit problem any time in the near future. We cannot reverse our military commitments overnight, and we need to take the time to select pru- dently the force structure and weap- ons systems that will serve us best Page 11 Competitiveness: the Challenge of the Deficit given new world political relation- ships. The Pentagon is only beginning to adjust its planning to the new reali- ties, and changes in spending patterns will lag well behind the decision process. l Finally, in addition to the obligations the federal government must face, there is a long list of unmet national needs awaiting action, many of which are likely to involve calls on the Trea- sury. These issues include the drug Figure 1: Budget Outlays for Major Programs, 1970-I 993* 340 Dollars In Bllllons 320 300 - Defense ---- Social Sacurlty ------ Medwre -..a Gross Interest *Figures br 1970-l 989 are actual Figures for 1990 and 1993 are CBO estimates. Page 12 Competitiveness: theChallengeof the Deficit war, education, health care, the envi- ronment, transportation, and a grow- ing concern over the U.S. financial services sector. There are different views of what is important and what is not and what is a federal responsi- bility and what is not. But the notion that our democratic process will reject all of them as either not critical or not a federal responsibility is inconsistent with history. Facing up to the facts of these prob- lems is crucial to any understanding of the future implications of the deficit, for this is where foreign and domestic policy considerations meet. These are issues that not only have a bearing, large or small, on our ability to com- pete effectively in world markets but that also go to the heart of our ability to satisfy expectations of the Ameri- can public. Alice Rivlin, the former head of CBO and cochair of the economic panel put together by former Presidents Ford and Carter as part of their group, the American Agenda, put it this way: “We cannot address the other issues facing the country effectively unless and until we get the budget deficit under control. The budget deficit has become a defense issue, a foreign policy issue, a health care issue, an education issue. We must put our fiscal house in order so that we can address the other problems Page 13 competitiveness: theChalkngeof the Deficit which are important to us as a nation. Getting the budget deficit under control is a test of our ability to govern.“’ Traditionally, in times of need, the federal government has been able to respond. It found the resources for the recovery of Western Europe through the Marshall Plan. It financed the interstate highway system beginning in the 1950s. It has supported the National Institutes of Health in a quest for the cure of disease. It implemented Medicare and Medicaid to meet the health care needs of the elderly and the poor. It built an air traffic control system, sent astronauts to the moon, and funded the National Science Foun- dation when we deemed such expendi- tures essential to the national agenda. Today, however, it has become increasingly difficult, thanks to the deficit, to undertake new efforts as they come to the fore. It is worth considering some of these issues and the challenges they pose for our future. Education It is increasingly evident that we are falling behind other nations in the quality of the education provided to our future work force and that this will have profound implications for Page I4 chnpetitiveness: the challenge of the Deficit our productivity and international competitiveness. In considering this problem, we need to look beyond school systems, and how much we spend on them, for two reasons. First, it is not just performance in schools that is important; we need also to be concerned about students’ transition into the labor force. Second, successful school performance is not just a mat- ter of formal schooling. Many fac- tors-social, cultural, and economic- are involved. Such problems as teen- age pregnancy, welfare dependency, crime, and drug abuse both hamper students and reflect the consequences of poor schooling. Albert Shanker, president of the American Federation of Teachers, points out that the educa- tion of poor children is often affected by housing, transportation, and health care. Shanker also notes that schools restructured to be run by teams of teachers, administrators, parents, and other community representatives would make them more responsive to student needs and would foster com- munity support. The question of technology also enters the equation. How well we adapt com- puters to the classroom (and ensure that such technology is available to poor as well as wealthy schools) will certainly play a role in improving edu- cation and preparing young people for better performance in the work force. Page 16 Competitiveness: theChallengeof the Deficit These factors, as well as the quality of teaching itself, are all part of the edu- cational context. We can also learn from others. GAO has been studying education and train- ing in four countries: England, Japan, Sweden, and Germany. We have found that young adults in foreign countries have higher literacy rates than we do. Foreign countries also emphasize the obligation of educating all students, rather than accepting the notion that many will lag behind. In Japan, for example, schools stress student effort for all rather than only for the gifted. The United States tends to tilt its edu- cational expenditures toward college, investing more than twice as much in those who go to college than those who do not. The four foreign countries we reviewed invest a higher propor- tion of their national income in precol- lege education and spend more to help young people enter the work force. The foreign countries we’ve studied also seek to systematically guide a stu- dent’s transition from school to work, while many young people in our coun- try drift aimlessly from job to job-or from job to unemployment-after leaving school. For a variety of reasons reflecting dif- ferent cultures and traditions, approaches that work in another nation may not be directly transfer- able to our own educational systems. But these are the nations with which Page16 Competitiveness: theChallengeof the Deficit we must compete. If they succeed where we fall, as they do in achieving near universal literacy and a success- ful transition from school to work, it will affect our ability to compete. If we are to be competitive, we must identify those differences and search out our own ways to match the suc- cessesof our competitors. The quality of American education and the utilization of our work force have a tremendous impact upon our ability to meet the competitive chal- lenges we face. What is important for the future, however, is to build on our strengths and successesand to over- come our failures. Head Start, for example, has been a demonstrated success. But we have yet to implement this program on a nationwide basis, an effort that would cost about $12 billion. The Drug War Drug use continues to be a national crisis, one that must be dealt with cooperatively at all levels of govern- ment. The cost of drug dependency in terms of lost productivity, health care, . and law enforcement resources that could be better devoted to other prob- lems is staggering. At the federal level, top priority has been given to law enforcement. Yet, many experts believe that treatment and prevention are of equal or greater importance. With a whole generation of children at risk of growing up in Page 17 Competitiveness: theChdlengeof the Deficit drug-filled environments, we cannot afford a lengthy debate on who should , do what. Without adequate federal support now, the future cost of deal- ing with this generation will be enor- mous. Moreover, the related cost associated with the spread of AIDS (acquired immune deficiency syn- drone) is similarly disturbing. Health Care The United States spends over half a trillion dollars in health care-almost 12 percent of GNP and more than any other country. Over 41 percent is pub- licly financed. For this, many of us get the world’s best medical care, but still the U.S. infant mortality rate is much higher than that in most industrialized societies, and our average life expec- tancy ranks 13th among these coun- tries. Furthermore, more than 30 million Americans lack health insur- ance, public or private. It is very hard to deal with these issues of quality and accessbecause costs continue to escalate. By the year 2000, they are projected to absorb roughly 15 percent of GNP. Health care expenditures have grown at more than double the general inflation rate for nearly three decades. Some of the expenditures reflect an ” aging population and advances in technology, but much of the increase reflects incentives for inefficiency that are built into the ways we pay for and deliver health care. If changes in our Page 18 Competitiveness: the Challenge of the Deficit health care system could, by the year 2000, reduce the share of GNP spent on health from 15 percent to 14 per- cent, we would save nearly $70 billion a year, of which the Treasury could save about $15 billion a year. Much has been tried to moderate these cost trends, but piecemeal efforts have failed. We need strong national leader- ship to achieve comprehensive reform. The Gridlock has threatened progress in Transportation the skies and highways. Airline pas- Infrastructure senger travel has nearly doubled in the past decade. According to Federal Aviation Administration (FAA) esti- mates, airline travel delays in 1986 created $1.8 billion in extra operating expenses for airlines and cost passen- gers $3.2 billion in lost time. U.S. motor vehicle travel reached nearly 2 trillion miles last year, racking up 722 million hours in delays. All this is cost- ing the U.S. billions of dollars in lost productivity and wasted fuel. CBO estimates that total federal spending on the transportation infra- structure amounted to $26.5 billion in 1988-yet we are falling far short of the needed investment. The Depart- ment of Transportation has estimated that between $25 billion and $39 bil- lion is needed annually to restore and maintain the current federal-aid high- way system through the year 2005. And at least $27 billion will be needed through the year 2000 to fund FAA’s Page 19 COlIl@itiV~S?Ss: the Challenge of the Deficit air traffic control modernization program. The Environment The federal government seemsto have less capacity to deal with the environ- ment than it did 20 years ago. We decided then, for example, to clean up the nation’s waterways, and since 1973, the federal government has invested $50 billion in grants to states and localities to build sewage treat- ment plants. But although the Envi- ronmental Protection Agency has estimated that the country has addi- tional water treatment needs that will cost $75 billion to meet, the federal government is now turning the pro- gram over to states and local govern- ments, hoping that they will somehow find the money. The Congress also enacted additional requirements for safe drinking water supplies, but the costs will be borne by local government. Some costs simply cannot be shifted to other levels of govenunent. The fed- eral goverument will be forced to bear the costs of cleaning scores of feder- ally owned facilities, where toxic and radioactive wastes have seeped into soil and groundwater. Cleaning up these facilities, including the nuclear weapons plants, and bringing them into compliance with environmental laws could cost some $200 billion. Even if we could continue to devote Page 20 Competitiveness: theChdlengeof the Deficit $4.5 billion a year toward these prob- lems, as the administration has pro- posed for next year, it would take at least 40 years to correct existing prob- lems at this rate of expenditure. Banking and From the Great Depression until the Capital Markets 198Os,we had a strong and growing financial system. The flexibility of that system and the efficiency and sta- bility of our capital markets were the envy of the rest of the world. The fed- eral government has traditionally been an important player in this sector of our economy. Not only has it provided deposit insurance for banking and thrift institutions and ensured the integrity of our financial markets, but it has also promoted all kinds of finan- cial innovations through such devices as loan guarantees, secondary mar- kets, and the establishment of autono- mous government-sponsored enterprises. Generally, federal partici- pation in financial markets was either self-sustaining or profitable. But deregulation, combined with the 1982 recession and the collapse of oil prices, changed the equation. The first visible patient was the farm credit system, which required several billion dollars in assistance to keep alive. This was, of course, merely spring training for the savings and loan crisis, which will take years to accomplish. The $50 billion provided by the Congress is just the begin- ning-we really do not yet know the page21 Competitiveness: theChallengeof the Lkfieit full price tag. The latest estimates of the total cost is over $300 billion. What happened? Well, we learned one basic lesson: deregulation permits peo- ple to take risks. In the case of the S&L crisis, many thrift owners, faced with insolvency, gambled with tax- payers’ dollars-not their own-and lost! More generally, the 1980s marked a period of financial excess. Computer technology combined with the ingenu- ity of money managers to create an endless variety of marketable finan- cial instruments. From mortgage- backed securities to zero coupon trea- sury bonds (that the Treasury itself never issued), it seemed that anything with a dollar value could be turned into a security and sold. Junk bonds were only the most dramatic manifes- tation of this, and even the govem- ment got involved. The Navy leased ships to avoid paying the full costs up front. The National Aeronautics and Space Administration guaranteed lease payments for a Western Union communications satellite. Most recently one investment banking firm t floated a special security on behalf of the National Archives to finance a new building at the University of I Maryland. Of course, I recognize that there is value in having sophisticated, effi- cient, and innovative financial mar- kets. But I worry that we have put so page22 competitiveness: the Challenge of the Deficit much of our creative energy into lnno- vative financing mechanisms that we are neglecting production innovations. No matter how efficient we are at rais- ing capital, our wealth depends on the value of what we produce. Leveraged buyouts financed with high cost money may keep managers on their toes, but surely we need to worry when vast sums are made from purely financial manipulation and corporate leaders worry more about hostile take- overs than they do about technology and the productivity of their work forces. These are issues that go to the heart of our ability to compete in world markets. Conclusion The long-term opportunities for the United States and the Soviet Union are potentially enormous. But just recog- nizing these opportunities does not mean that either country will auto- matically be able to deal with the chal- lenges that each must confront. The future of the Soviet Union is prob- lematic. It is still very much uncertain whether the Soviet empire will dis- integrate in the chaos of civil strife as individual republics seek to break away from Moscow’s rule or whether it will manage to find unity in a new or modified form of confederation based upon democratic principles. What is clear is that if the Soviet Union ceasesto challenge the United States for military superiority, it is Page 23 Competitiveness: the Challenge of the Deficit hardly in a position to challenge us economically-yet. But other nations-notably Japan and an economically unified Europe lncor- porating the enormously productive German economy-are in such a posi- tion, or soon will be. The question is whether we are willing, and able, to put our own financial house in order in such a way that we can sustain the political and economic leadership we’ve come to exercise within the non- Communist world for the past 45 years and to extend that leadership to encompass those nations that have traditionally been our adversaries. Thus, the challenge we confront is much easier to spell out than is that of the Soviet Union. Internationally, we must be able to compete. Internally, we must be able to provide the ser- vices and meet all the other needs that Americans expect of their national government. Both challenges are inevi- tably linked to the folly of continued reliance upon huge deficits. We need action. To begin with, we must ceasecompet- ing with the future. By continuing to borrow money to meet present obliga- tions, we are robbing the future of the resources that our children and grandchildren will need in their gener- ations to sustain a position of Arneri- can leadership. Page 24 Competitiveness: the Challenge of the Deiictt In 1980, our gross federal debt, which includes the debt held by the social security and other trust funds, was $800 billion. This year, it will top $3 trillion, and CBO projects that by 1993, without policy changes, it will reach $4 trillion. Interest on that debt is now costing us $260 billion a year and has become the second largest item in the federal budget. It has now surpassed social security and is gain- ing steadily on defense for the largest annual expenditure of the federal gov- ernment. Debt service buys us nothing except the right to pay even more next year. Figure 2: Total Gross Public Debt, 1970-1993’ 4909 Dollars in Bllllons 1 3800 3600 3400 3200 / 3000 2800 2600 2400 2200 2000 1800 1600 1400 1200 1000 800 600 400 200 \ 1970 1980 1990 1993 *Figures for 1970-1989 are actual. Figures for 1990-1993 areCEKIestimates. Page 26 Competitiveness: the Challenge of the Deficit Fundamentally, the debt and deficit crisis is as much a political issue as it is an economic problem. But however defined, it is a solvable problem. It will take bipartisan compromise and a sus- tained, multiyear commitment to get the job done. That compromise-as a matter of politics, equity, and simple arithmetic-must involve both sides of the ledger, revenues as well as expenditures; both sides of the aisle in the Congress; and both ends of Penn- sylvania Avenue-the Congress and the White House. Despite the severity of the numbers- and perhaps because of them-1 remain optimistic. When all is said and done, Americans have traditionally risen to great chal- lenges. We undertook vast reforms to cope with the Great Depression of the 1930s We shook off our innate isola- tionism and built the greatest military force in the history of the world to fight World War II-and sustained that military superiority at great cost through the depths of the cold war. We rejected the notion of revenge and dealt fairly with Japan and Germany after the war, setting each on the road to recovery as the democratically gov- erned economic powerhouses they are today. If we could deal with the politi- cal and economic ramifications of such trials, we can surely deal with this one. Page 26 Competitiveness: the Challenge of the Jleficit L Indeed, there are signs that attention is being refocused on the budget debate. Senator Moynihan focused the debate with his proposal to roll back social security payroll taxes rather than continuing to allow the social security surplus to cover spending on other government operations. Even the press, which has appeared bored over the deficit debate, paid attention. There are also signs of recognition that there is not an inexhaustible source of foreign money to continue borrowing to fund the deficit. The Europeans, especially the West Germans, may find it lucrative to begin shifting investment toward East- ern Europe and away from the United States. But ultimately, I think we’ll find the will and the way to work our way out of this crisis simply because Ameri- cans know that it is a problem they must confront. Average citizens may not understand the intricacies of the debate, but they do sense that some- thing is amiss when suddenly the most popular car sold in America bears a Japanese nameplate or when they read about highly publicized foreign purchases of American corporations or of symbolic structures, such as Rockefeller Center. The merits of these events aside, they are sympto- matic of the fact that our fiscal house is not in order. They strike a respon- sive chord among Americans who Page 27 Competitiveness: the Chdlenge of the Deficit sense that our debt and deficit crisis is at the heart of the problem. So in the fiial analysis, I believe we’ll devise the political compromises that are needed to deal with the budget deficit. It may yet take time and it will not be easy, but we’ll get there if only because we must. We have little other choice if we want to enter the 21st century enjoying the same position of leadership in the world we’ve exercised for the past 45 years. Page 28
Competitiveness: The Challenge of the Deficit
Published by the Government Accountability Office on 1990-04-01.
Below is a raw (and likely hideous) rendition of the original report. (PDF)