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Wednesday, March 2

Is America going broke?

Is America going broke?

Record deficits, colossal debt and no clear plan for digging itself out. If the U.S. sinks, it will take Canada down with it.

STEVE MAICH, Macleans.ca

David Walker can see the future, and it scares the hell out of him.

That wouldn't be terribly unusual if he were one of the thousands of lobbyists, legislators and activists crawling all over Washington on any given day, pontificating about the urgency of their pet issues. There is a thriving industry here built on pushing policy prescriptions for every ailment, real or imagined. But Walker isn't a lobbyist or an activist, he's an accountant. His title is comptroller general of the United States, which makes him the head auditor for the most important and powerful government in the world. And he's desperately trying to get a message out to anyone who'll listen: the United States of America's public finances are a shambles. They're getting rapidly worse. And if something major isn't done soon to solve the country's intractable budget problems, the world will face an economic shakeup unlike anything ever seen before.

Seated in his wood-panelled office in downtown Washington, Walker measures his words, trying to walk the fine line between raising an alarm and fostering panic. He cringes when he hears prominent economists warning about a financial "Armageddon," but he makes no bones about the fact the situation is dire. "I don't like using words that are overly inflammatory," he says, leaning forward in his chair. "At the same time, I think it is critically important that the American people, as well as their elected representatives, get a better understanding of just how serious our situation is."

THE NUMBERS are staggering -- a US$43-trillion hole in America's public finances that's getting worse every day. And the stakes are almost inconceivable for a generation of politicians and voters raised in relative prosperity, who've never known severe economic hardship. But that plush North American lifestyle to which we've all grown accustomed has been bought on credit, and the bill is rapidly nearing its due date. If the United States can't find a way to pay up, the results will spill beyond national borders, spreading economic misery far and wide. In Canada, the country whose financial well-being is most tightly tied to trade with the U.S., there wouldn't be a single region or industry left untouched by a fiscal shock south of the border.

It's the looming presence of this potential crisis that brings Walker to this office every day, through the doorway with the words "Honesty Accountability Reliability" inscribed above, in hopes that someone will listen and take up the challenge before it's too late. "The sooner we start fixing this, the better," he says, "because right now the miracle of compounding is working against us. Debt on debt is not good. We have to first stop digging, and then figure out how we're going to fill the hole."

In January 2001, George W. Bush took over leadership of a nation that was on its most solid financial footing in decades, thanks to years of strong economic growth and a booming stock market. That very month, the Congressional Budget Office projected that the federal government could expect US$5.6 trillion in surpluses over the coming 10 years. The key political issue of the day was how to spend the windfall. Bush's team was determined to return the money to the voters in the form of massive and widespread tax relief. What the world didn't know was that this surplus cash was largely illusory, the result of faulty bookkeeping.

The CBO's rosy outlook was based on a few deeply flawed assumptions, in particular that most government spending would not exceed the pace of inflation over the following decade, even though the rest of the economy and tax revenues were projected to grow much faster. Laurence Kotlikoff, a professor of economics at Boston University and a prominent critic of U.S. budgetary planning, released a paper that year drawing attention to what he called the CBO's "fiscal fantasy." But his was a single, lonely voice, and few on Capitol Hill were listening. The tax-cut agenda had taken hold, and there would be no stopping it.

The CBO and other agencies have since gone back and found that a more realistic surplus projection would have been US$2.2 trillion -- over 60 per cent less than initially thought. And that cushion quickly disappeared as Bush whittled or eliminated one tax provision after another, from the marriage tax and personal income tax rates to capital gains, gifts and dividends. The Center for Budget and Policy Priorities, a Washington think tank, estimates that between 2001 and 2004, federal tax revenue dropped by some US$600 billion. Most of the tax cuts introduced so far are temporary, but the Republicans have made it clear they intend to make the reductions permanent before the end of the current term.

In the midst of this tax-relief bonanza, and nine months into the new President's first mandate, came Sept. 11. The horror of the terrorist attacks profoundly changed the American public's attitude toward security and defence almost overnight. Within months, the U.S. military was on the ground in Afghanistan attacking terrorist camps and overthrowing the Taliban regime. From there, the troops moved on to Iraq. Between 2001 and 2004, the annual budget for the Pentagon and domestic security rose by US$87.1 billion, an increase of 27.5 per cent in four years. In the process, a budget that had a surplus of US$128 billion in 2001 crumbled into a deficit of US$412 billion last year -- the biggest annual shortfall in United States history.

But that's just one symptom of a much deeper fiscal problem. The U.S. is heading for a massive demographic shift as baby boomers start retiring in three years. As they do, the costs of providing social programs and health care are going to soar. "It's not the deficits of today that are the big problem," says Josh Bivens, an economist with the non-partisan Economic Policy Institute in D.C. "It's that, if you make the Bush tax cuts permanent, you're going to have deficits as far as the eye can see."

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