My Interview with Former US Comptroller General David Walker (Part 1)
David Walker is a certified public accountant and has spent many years in public accounting. He’s run three federal agencies, two in the executive branch and one in the legislative branch. As the Comptroller General of the United States he was the chief performance and accountability auditor of the US. More recently, David Walker has run two non-profit companies and been a distinguished visiting professor at the US Naval Academy and has been on a number of boards and advisors groups dealing with a number of issues facing the US.
Historically, there have been four things that have defined a superpower and the question is whether the US will still be a world superpower by the year 2040.
The four main things are global economic, diplomatic, and military power, and global cultural influence.
Under these definitions, in the years after World War 2 the US was the only country to qualify as a superpower, but in modern times China is beginning to overtake the US in many of those areas.
China has already passed the US in terms of GDP on a Purchasing Power Parity basis. They have more embassies around the world than the US does. China is currently the #2 military power in the world today but they are dedicated to becoming #1, and they are spending a lot of money on it. Culturally, Chinese investors own the largest movie chain in the United States as part of their effort to have a cultural impact.
Economics, demographics, and foreign alliances are starting to work against us instead of for us. It’s important that we wake up, learn from history, and heed the lessons from our nation’s founders, and that we start to change course so that we can remain a superpower and make sure our future is better than our past.
The reasons that we are currently having problems today is because we have strayed from the values on which the US was founded. We have also not heeded the prescient warnings of George Washington: to avoid foreign wars, not have excessive debt, to avoid regionalism and factionalism. We are actually experiencing the same challenges as the Roman Empire did before it fell.
It’s important that we learn the lessons of history so that we can do what is necessary to stay great and ensure greater opportunities for future generations.
We were on an unsustainable fiscal path before Covid-19, and now we are in much worse shape. Debt-to-GDP in 2020 increased by 20% which is the most important metric we need to be paying attention to.
It’s clear that additional legislation will be passed now that Biden will be President and the democrats control the House and the Senate. We will defeat Covid-19 but once we do, we need to put a mechanism in place that will allow us to make the tough choices that will get the debt-to-GDP ratio to a reasonable and sustainable level over the next 10 to 20 years.
Prior to Covid-19, the Social Security and Medicare trustees estimated that the trust funds were supposed to go to 0 by 2035 and 2026, respectfully, but because of the economic effects of Covid-19, the years are now 2031 and 2023, respectfully.
This means that revenue will still be coming in but any bills would have to be paid out of those funds. In the case of hospital insurance, payments will have to be cut 10-15% immediately and across the board, with cuts of 20-25% to Social Security benefits. All the more reason we need to recognize reality and start making the tough choices now.
What are the implications of having debt balloon out of control? We have passed the all-time record for Debt-to-GDP which was previously set after World War 2. Unlike then though where we rapidly decreased Debt-to-GDP dramatically after the war, we are now adding Debt-to-GDP and plan to add more.
Currently, our interest expense is not increasing because we are not experiencing regular market conditions. The Federal Reserve is buying significant portions of US debt and artificially holding down interest rates, which isn’t sustainable.
The other problems stem from the proponents of Modern Monetary Theory, a theory that runs contrary to history and long established economic history. Politicians are already fiscally irresponsible, the last thing you want to do is give them an excuse to be even more fiscally irresponsible.
History has shown that when debt as a percentage of the economy reaches unsustainable levels, it has an adverse effect on economic growth and this has a knock on effect on personal opportunity.
Over 70% of the national budget is already on autopilot, the remaining 30% covers all the governmental responsibilities envisioned by the founding fathers.
Modern Monetary Theory is dangerous and fundamentally flawed. The Biden administration will probably not adopt the theory, but even if that’s true we still need to make tough choices on spending and revenue.
The problem can not be solved solely by controlling spending and economic growth, revenue will have to go up because of the reality of compounding and math. A wealth tax will enter the conversation, but it’s not possible to solve the issue only by taxing the rich. There is no question that the tax base will have to be broadened and that most individuals will have to pay higher taxes.
One of the most important things to understand is that tax rates will never be lower than they are now. Assuming you will pay lower tax rates in retirement is no longer a viable plan.
Tax rates may still have to double in the future, the longer we wait to make changes the more likely that’s going to be the case.