Also See: The Diplomatic Pouch Economic Primer

Warner Offers Straight Talk on Economy, Political Dysfunction

by Anna Gawel

D.C., Maryland and Virginia — the three are inextricably linked yet sometimes feel so far apart that the only thing they have in common is complaining about the other. You can’t even get into D.C. from Virginia by dry land — you have to cross the Potomac River. For some, that’s like crossing into a new country.

That sense of division in many ways parallels the political gridlock rampant inside the Beltway. But every once in a while, the divide is bridged.

A microcosm of this rare unity was on display at the Indonesian Embassy, where former D.C. Mayor Anthony Williams, former Maryland Gov. Bob Ehrlich, and Mark Warner, Virginia’s ex-governor and its current senator, gathered for a DMV reunion of sorts.

Williams and Ehrlich were actually on hand to watch their former colleague headline a Jan. 16 salon-style roundtable hosted by the Institute for Education (IFE). Since 1990, these IFE-INFO roundtables have brought together influential leaders to speak on public policy issues as part of the group’s mission to promote civility and build common ground.

To that end, IFE organized a regional leaders summit in 2002 with Williams (a Democrat), Ehrlich (a Republican) and Warner (Democrat) when the three were in office — the first gathering of its kind in 26 years and one that continues today on a quarterly basis.

As the evening’s keynote speaker, Warner embodies the sense of bipartisanship that IFE seeks to cultivate. Widely seen as a pragmatic centrist on fiscal matters, the Democratic senator was as a member of the so-called “gang of six” that tried to find bipartisan consensus on reducing the country’s debt.

Warner joked that if he, Ehrlich and Williams were able to get together, there’s hope for Democrats and Republicans on Capitol Hill.

“Here we are in the nation’s capital [and] even though we’ve got this river that seems to divide us in many ways outsiders can’t understand … your leadership brought us together,” he told Kathy Kemper, founder and CEO of the Institute for Education. “If we can get the mayors and governors of Maryland, D.C. and Virginia together, then Democrats and Republicans should be able to get together [to overcome] the bad blood between them that is much worse.”

And Warner focused his speech on one of the biggest issues that have split Democrats and Republicans apart: the economy. Warner, a member of the Senate Banking, Budget, Commerce and Intelligence committees, said that the nation’s $16.5 trillion in debt must be tackled before guns, immigration, health care and many other pressing legislative challenges can be addressed.

“Until our nation gets its balance sheet straight, we’re not going to get to a host of other issues we need to confront,” he warned, noting that $3 billion is tacked onto the debt every 24 hours.

“[To not] summon the will to knock the debt off in 10 years is almost un-American,” he declared.

True to his bipartisan nature, Warner said both Republicans and Democrats share the blame for the current fiscal mess. And he outlined in stark, simple terms how exactly we got here (also see the Diplomatic Pouch’s economic primer below).

Warner, an investor who made his wealth in the cell phone industry and hundreds of start-up tech companies, called it “business 101” that the government dug a hole by spending more than it was bringing in.

He said successive tax cuts starting in 2001 have sucked $4.5 trillion in revenue out of government coffers over a 10-year period. “If we hadn’t of done five or six major things on the spending side, we could’ve gotten away with it,” he said of the tax cuts.

But first, after 9/11, defense spending doubled on a year-to-year basis.

Second, Warner said, a whole new category of government spending called Homeland Security was created. “It’s expensive to take your shoes off at the airport,” he quipped.

Third, “the nation went to war not once but twice on borrowed money.” In fact, at no other point in U.S. history has the government gone to war and cut taxes at the same time.

Fourth, unchecked growth in entitlement spending, including the Medicare prescription drug benefit that passed in 2003, have strained resources.

And fifth, on a related note, “we’re all living a lot longer” — meaning that entitlement spending on the baby-boomer generation will only continue to balloon in the future.

Warner said the country can’t move forward without being honest about the so-called third rail of entitlement spending. He called Social Security and Medicare a “blessing” and “some of the most successful programs of all time,” but he also conceded that “the math no longer works.”

For instance, he pointed out that when Medicare began in 1965, there were 16 people working for every one person on the government health program. Today, there are three people working for every person on Medicare, and by 2030, that will be down to two people.

Warner also noted that the first person to set the retirement age at 65 was, contrary to popular opinion, not U.S. President Franklin D. Roosevelt but rather German Chancellor Otto von Bismarck — back in the 1870s, when life expectancy was in the mid-50s.

As such, Warner embraces raising the retirement age to reflect today’s longer life spans and other reforms, such as instituting the so-called chained CPI to ratchet down Social Security spending.

But he added that only modest reforms are needed to make Social Security, one of the government’s best-funded programs, financially viable. Warner also pointed out that not all spending is bad — government investments in education, defense, technology (the Internet in the 1990s and biotech today) and social safety-net programs have fueled unprecedented economic progress over the years.

To that end, he criticized Paul Ryan, the Republican vice presidential candidate and House Budget Committee chairman, for proposing drastic cuts to education, infrastructure and other areas because Warner said that as a tech entrepreneur and venture capitalist, “I fundamentally believe in the power of innovation and growth to provide better qualities of life.”

So how can Republicans and Democrats reconcile their vastly different visions for tackling the debt? Warner admits it won’t be easy — something he learned when the “gang of six” began meeting regularly.

“The thing I didn’t appreciate until I got here [in the Senate] was how little institutional support there is in this town for people putting country over party,” he lamented. “Only in Washington if you try to work together and put together substantive policy proposals are you called a ‘gang.’”

Nevertheless, Warner said he has hope that the political paralysis won’t last forever. For one thing, “the majority of the Senate knows something must be done and that its approval ratings are lower than the Kardashian family,” he quipped.

But on a more serious note, he said the American political system was built to be slightly dysfunctional — to force compromise among the three branches of government. He also noted that he’s been quietly holding dinners with Republican colleagues to build the kind of trust that’s been sorely lacking in Congress (although he pointedly didn’t mention the House in those remarks).

Moreover, Warner says the American public understands that the national debt is the greatest threat to national security, echoing a warning made famous by former Joint Chiefs of Staff Adm. Mike Mullen.

But what if none of this is enough to budge intransigent politicians and polarized voters?

Warner is unfazed. For one thing, he believes America’s economic troubles are not as insurmountable as they seem. He points out that just a little over a decade ago, the United States was running massive budget surpluses. In yet another decade, it has all the fiscal tools at its disposal to reverse, if not erase, the debt.

After all, Warner said, in the 1980s, “doomsdayers” were predicting the end of American dominance with Japan’s economic rise.

Today, the United States remains the world’s most powerful economy — whose problems, Warner argues, pale in comparison to the tremendous structural challenges the European Union and other economies face.

“With all our problems, I wouldn’t trade our position with anyone else in the world,” he said, adding that the United States is home to some of the best-educated, most innovative people in the world.

But what if that’s still not enough? Warner says the United States can always fall back on Winston Churchill’s famous quote: “You can always count on Americans to do the right thing — after they’ve tried everything else.”

The Diplomatic Pouch Economic Primer:
At the start of 2013, the government managed to avoid another market-rattling battle over the country’s finances with the last-minute fiscal cliff deal that averted across-the-board tax hikes for all Americans and delayed sharp spending cuts known as the sequestration. Shortly afterward, Republicans agreed to extend the nation’s borrowing authority through mid-May, avoiding another bruising fight over the debt ceiling.

But the war is far from over. Both sides must now come together to pass a budget, something they’ve been unable to do for years. Instead, they’ve relied on stop-gap Continuing Resolution (CR) budgets, the latest of which expires on March 27. If there’s no budget or stop-gap measure by then, the government shuts down.

Before that, on March 2, the automatic cuts known as the sequestration will take effect, slashing $85 billion from defense and domestic programs unless Congress acts.

The sequestration is itself a strange byproduct of today’s perpetual political brinkmanship. In 2011, Republicans refused to raise the nation’s debt ceiling without spending cuts. So Congress passed the Budget Control Act that set up a supercommittee to agree on $1.2 trillion in deficit reduction over 10 years. The sequestration was the punishment meant to ensure that the committee would reach an agreement. It didn’t, and now, cuts that were once considered unfathomable are very real.

Then there’s the matter of the debt ceiling, which used to be a routine congressional procedure but has become a powerful cudgel in the budget battles. That still needs to be raised by May 18.

All the political maneuvering boils down to the very different strategies Democrats and Republicans have for taming a debt that threatens the nation’s fiscal future.

But while “debt” is lobbed around as political ammo, it’s important to take a clear look at how the debt began, and what keeps feeding it.

In 2000, following the Clinton administration, the government had a sizeable surplus. The nonpartisan Congressional Budget Office (CBO) predicted that between 2001 and 2011, the United States would run budget surpluses adding up to a whopping $5.6 trillion.

Obviously, those rosy surpluses never materialized. Instead, the national debt today stands at more than $16 trillion. This “gross” debt consists of both publicly held debt (roughly $11.2 trillion) and money the government owes itself, known as intragovernmental debt ($4.7 trillion). Economists say the distinction is important because the $11.2 trillion is the amount the government actually had to borrow from outsiders to make up for spending more than it took in from tax revenues (the Daily Beast has a good breakdown of the two types of debt: http://www.thedailybeast.com/articles/2012/09/05/the-u-s-government-doesn-t-really-owe-16-trillion-in-debt.html).

Regardless, that’s a lot of debt (more than 70 percent of the nation’s annual GDP, a percentage not seen since 1950, warns the CBO). Where did the debt come from? According to the Treasury Department, President George W. Bush racked up $10.6 trillion in gross debt, while President Barack Obama has piled on another $5.8 trillion to the tab.

Breaking it down, the 2001/2003 Bush tax cuts were a major contributor to the debt, estimated at the time by the nonpartisan Joint Committee on Taxation to reduce tax revenue by around $1.5 trillion over 10 years (some economists have put the figure higher; others slightly lower). Then came the wars in Afghanistan in Iraq, the Medicare drug benefit (part D) legislation, and the Troubled Asset Relief Program (TARP) toward the tail end of Bush’s presidency when the economy tanked.

According to the Pew Charitable Trusts, all of this accounted for about two-thirds of the debt incurred under Bush. The rest came from spending increases and, later, an economic downturn that diminished tax revenue.

The 2009 stimulus, a December 2010 tax cut extension and a payroll tax holiday added to Obama’s side of the ledger, but most of the debt in recent years has been the result of a weak economy starving tax revenues combined with steady or increased spending.

And what exactly is the government spending taxpayer money on? This is where a lot of misperceptions come into play.

Total federal spending for fiscal 2012 reached about $3.5 trillion. Of that, roughly 20 percent goes toward defense, 20 percent to Social Security, 20 percent on Medicare and Medicaid, 12 percent on safety net programs (unemployment, housing assistance), and 6 percent on interest.

The rest, approximately 15 percent, is called nondefense discretionary spending — i.e. “everything else,” including education, energy, health, transportation, international affairs, the environment and so on. Nondefense discretionary spending bankrolls many of the programs Americans typically associate with the government, from NASA to federal student loans to the Federal Highway Administration to the FBI.

The problem is that when it comes to cuts, lawmakers prefer to target this low-hanging fruit, because discretionary spending must be reappropriated each year, but they ignore the real drivers of spending: defense, which has doubled since 9/11, and, to a much larger degree, entitlement spending, which is set to explode as the baby-boomer generation retires. Although Social Security is on far sounder financial footing than Medicare or Medicaid, the CBO projects that together, these three mandatory spending programs — the government’s largest — will consume 55 percent of all federal spending by 2022, squeezing out other vital programs.

Democrats are loath to touch popular entitlement programs and have insisted on tax hikes for the wealthy to offset spending cuts. Given the nation’s yawning income disparities, raising taxes on the rich may be an issue of fairness, but it won’t come close to generating the kind of revenue needed to make a serious dent in the debt. What few politicians want to admit is that sustaining popular “safety net” programs like Medicare may require all Americans to sacrifice more — both in higher taxes and taken-for-granted tax breaks like the home mortgage deduction.

The recent fiscal cliff deal, for instance, raised tax rates for families with incomes above $450,000 and individuals above $400,000 back to Clinton-era rates of 39.6 percent rate, up from the current 35 percent (taxes on capital gains were also raised). But many economists say a return to Clinton-era tax rates not just for the wealthy but for all income levels may be necessary to substantially reduce the long-term debt, because spending cuts alone aren’t going to cut it.

On the flip side, conservatives believe tax cuts, which further depress revenues, will stimulate economic growth, although many economists question this trickle-down dogma, especially given the country’s economic trajectory over the last decade. Republicans have offered to raise revenue by closing tax loopholes, but haven’t specified which loopholes, and by tackling government waste. Again, though, both measures won’t be enough to take a real bite out of the debt.

In truth, both sides are avoiding the real pain and hard questions about how to pay for the services Americans want — which means many Americans could be feeling a lot more pain down the road.

---

About the Author

Anna Gawel is the managing editor for The Washington Diplomat and a contributing writer for the Diplomatic Pouch.