Government Spending Will Kill U.S. Economy

Monday, June 9, 2008 5:30 PM

Investors who thought the subprime mortgage crisis was devastating may soon be assailed by an even more potent predator — all that money the U.S. owes its own citizens in unfunded medical and retirement benefits.

"The bottom line is we have $40 trillion in debt right now, and it grows by $2 trillion a year because of the power of compounding," says David M. Walker, CEO and president, Peterson Foundation, a non-profit, launched recently by the founder of the Blackstone Group.

A former U.S. comptroller general and head of the Government Accountability Office (GAO) calls the entitlement mess and its trillions of unbudgeted costs a "super subprime crisis."

In an interview, Walker pointed out that the current deficit is simply not comparable to the future costs piling up. "Right now, we're in the hole. But, we're talking about unfunded promises for military benefits and pensions. And the really big numbers are from Social Security and Medicare," he says.

Walker retired earlier this year from the position of comptroller general, which he had held for nine years and was previously a trustee for the U.S. Social Security system and for Medicare. He called on Congress to be more forthcoming with the public about the burgeoning debt problem, which he says could damage the investment climate in the U.S. if not addressed soon.

"We have to be more truthful and transparent with the American people," Walker told Forbes.

"Washington hasn't learned the first rule — when you are in the hole, stop digging."

Walker adds that Social Security spending and tax collection needed to be reformed first. Then health care spending — the federal Medicare program — could be tackled next.

"We have to separate the wheat from the chaff in terms of what federal programs are working," said Walker.

Spending constraints on the federal budget were removed in 2002, and federal government spending has been getting out of control since then, he says.

Other federal budget experts agreed with Walker's dire assessment.

Veronique de Rugy, a budget scholar at the Mercatus Center at George Mason University, tells Moneynews that part of the problem is that the government is funding many routine, day-to-day programs with "emergency spending" bills — the budgetary equivalent of paying the power bill with a credit card.

These supplemental spending bills were originally created to enable Congress to cover unanticipated emergencies, like disaster relief for Hurricane Katrina. But these emergency spending measures have been used in recent years to fund the War on Terror, as well as the military campaigns in Iraq and Afghanistan.

"This supplemental epitomizes what has gone terribly wrong with the way this war has been funded," de Rugy tells Moneynews. "Not only are we still funding a war that started more than five years ago as an emergency, we are adding billions in unrelated domestic spending to the largest supplemental bill ever. And no one cares."

Comparing the unfunded trillions in federal spending to the mortgage market mess is not a stretch.

Timothy A. Canova, associate dean at the Chapman University School of Law, tells Moneynews that the unfunded liabilities may be even greater than expected. "The solution to Social Security and other entitlements is to bring more citizens into the program as paying contributors," says Canova.

"When the officially unemployed are added to others who are not presently paying into the system —part-time workers, discouraged workers, those who have dropped out of the labor force — probably 15 to 20 percent of the population is not paying into the system."

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