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TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross. Try wrapping your mind around this number: $12,544,703,929,352.55. That was the estimate of our national debt when I checked earlier today. I have no idea how they calculated the 55 cents part.

You can follow the national debt clock on the Twitter feed of the Peter G. Peterson Foundation. My guest, David Walker, is the foundation's president and CEO. Its goal is finding bipartisan solutions for how to decrease our debt.

You may know Walker from his appearance in the documentary film "I.O.U.S.A." Walker had a front-row seat as America sank into debt. He was assistant secretary of labor for pension and welfare benefits under President Reagan. Under President George H.W. Bush he served as one of two public trustees for the Social Security and Medicare systems, and under Presidents Clinton and George W. Bush he was the head of the Government Accountability Office. Walker is also the author of the book "Comeback America: Turning the Country Around and Restoring Fiscal Responsibility."

David Walker, welcome to FRESH AIR. Now, how has the recession that we're in now contributed to our debt?

Mr. DAVID WALKER (Peter G. Peterson Foundation): People need to understand that there's a fundamental difference between the short-term deficits that we currently face and the structural deficits that represent the real threat.

The current deficits are very large: in 2009, 1.42 trillion; for the current year, 2010, an estimated 1.5 to 1.6 trillion. But those were caused largely due to significant declines in revenues because of the recession, because of additional expenditures for social safety-net programs, because of two undeclared and unfinanced wars, and a variety of other factors, including bailouts.

Those are troubling, and they are adding to our debt, you know, at record rates, but that's not what threatens our ship of state. What threatens our ship of state is the structural deficits that will exist after we are out of the recession, after unemployment is down, after the wars are over, and after we get past the current crises.

GROSS: So when you're talking about the structural deficits, you mean programs like Medicare, Medicaid, Social Security. Is that what you're talking about?

Mr. WALKER: Well, they're driving the structural deficits, but basically you've got to look at both sides of the ledger. You have to look at the spending side, and the thing that's growing the fastest are health care costs, which would be Medicare, Medicaid and other federal health care programs. Social Security is growing, but not as fast. But you also have to look at the fact that before we even entered the recession, we were spending more money that we took in, and so we had an imbalance between our revenues and our expenditures even before we had a recession, even before we had these financial institution and housing bailout bills and things of that nature.

GROSS: I want to get back to those structural deficits a little bit later. Washington is very divided now about how much money to spend on, say, the stimulus program. A lot of people say we haven't spent enough on stimulus and we need to spend more to get the economy going. On the other hand, Republicans seem opposed to spending for stimulus programs.

And so I'm wondering, knowing what you know about debt, caring as you do about debt, do you think that a stimulus program in a time like this is something we need to be spending on, or are you just opposed to any more spending because we're already in such debt?

Mr. WALKER: Not all spending is equal. Not all deficits are equal. I think it's understandable to be able to provide some additional unemployment benefits, given the fact that unemployment is so high right now.

I think it's also potentially acceptable to be able to take some additional steps to try to get unemployment down through timely, targeted and temporary infrastructure projects that actually will help grow the economy and improve our environmental and other situations and through targeted tax incentives that will encourage small business and other employers in the private sector to be able to hire people.

Those are the kinds of things that might be meritorious, but just spending without targeting or spending to try to be able to prop up unsustainable situations, such as the current problems with the states, doesn't make sense.

GROSS: What are you referring to when you say spending on the current problems with the states?

Mr. WALKER: The states have their own fiscal problems, and they're going to need to restructure what they do and how they do business, and in many cases the states have also grown larger in government employment levels than they should be, and they've also made promises with regard to their pension and health care programs that are much more lucrative than people get in the private sector, and taxpayers are not going to stand for higher and higher taxes to be able to pay for benefit programs that are much better than the average American gets.

GROSS: I'm interested in your take on the Obama health care reform plan, and I know the plan isn't completely formulated yet, but from what you know, from what's been proposed so far, how do you think it does in terms of cutting costs?

Mr. WALKER: It doesn't do nearly enough to cut cost. There's absolutely no question that we need comprehensive health care reform. There's also no question in my mind that we need some level of universal coverage in this country that's appropriate, affordable and sustainable.

I would not vote for any health care reform plan unless it meets four tests: It pays for itself over 10 years. It does not add to deficits beyond 10 years. It results in a significant reduction in the tens of trillions of unfunded obligations we already have, and it results in lower health care cost as a percentage of the economy after the passage of the bill than we would have with no bill.

The legislation does not meet those four tests.

GROSS: Now, Republicans passed tax cuts under President Bush. What did those tax cuts do to America's debt?

Mr. WALKER: There were several rounds of tax cuts that were enacted under George W. Bush's administration. The first one arguably might have been affordable and sustainable, but the two that occurred after that clearly were not.

They obviously resulted in lower revenues as compared to what would have been the case had they not been enacted into law and set us off on a glide path where even before the recession, even before the bailouts, we had a gap between current revenues and current expenditures, and that gap has grown widely after the recession and after the bailouts.

GROSS: One more spending issue about the Bush administration. The wars in Iraq and Afghanistan were not only still are not only very expensive, but when they were first budgeted for, they werent really in the budget. How was that done?

Mr. WALKER: When the Bush administration first started budgeting for Iraq and Afghanistan, they did so through supplementals, which meant that it wasn't in the base of the budget, and therefore it was something that had to be debated and considered every year, passed separately. Now it is in the base budget.

George W. Bush was the biggest spending president in the history of the republic, but his record is now threatened. George W. Bush almost doubled the national debt during his eight years as president, but it could double again in the next eight to 10 years on the current path that we're on.

We are clearly on an imprudent and unsustainable path, and we need to change course very soon if we want to recapture our future.

GROSS: There is an ideology among many Republicans that taxes are bad, that all taxes are bad and that taxes should just be cut and you let, you know, you let business and bankers do their thing, no regulations, no taxes.

So having witnessed the Great Recession right after all of President George W. Bush's tax cuts, what has become of this theory that taxes are bad, they should just be cut, and that will make us healthier?

Mr. WALKER: Taxes and other forms of revenue are the price of funding government. Government has important roles to play. Some degree of regulation is necessary in order to protect the public interest and to prevent abuse. Reasonable people can and will differ about how they ought to be done, but it clearly needs to be done.

With regard to taxes, not all tax cuts stimulate the economy. Very few tax cuts pay for themselves. By that I mean you generate more total revenues after the tax cut than you would have had had you not had the tax cut. The only two that typically do that are dramatic reductions in marginal tax rates and dramatic reductions in tariffs. That's not what we're talking about.

In the end, you have to have enough revenues to pay your bills and deliver on the promises that you intend to keep. We're short now, and we're going to get a lot shorter if we don't get our act together.

GROSS: As the head of the Government Accountability Office, what power, what kind of voice did you officially have in issues like the ones we just talked about?

Mr. WALKER: I could state the facts, speak the truth, but it was not my job, ultimately, to decide what should be done. I advised the Congress. I advised the president on what I felt was prudent and what was not prudent, but ultimately, elected officials are the ones that have to make those decisions, and quite frankly, they made some bad ones.

GROSS: So when you advised President Bush, did you talk to him directly?

Mr. WALKER: No, I spoke with a number of Cabinet-level officials in the Bush administration. Frankly, I did seek a meeting with President Bush when I saw things were totally out of control, but that meeting was not granted.

The ultimate irony is that I've met with the current premier of China and the former premier of China at their request. I didn't say anything to them that I hadn't said publicly because it wouldn't have been appropriate, but it's more than a little bit ironic that the Chinese get it more than we do.

GROSS: What did the Chinese want to talk with you about?

Mr. WALKER: They wanted to talk to me about two issues: the true financial condition of the United States and how to go about transforming government, because I've got a lot of experience in both.

GROSS: This is a little scary because we need the Chinese to buy our debt, and you're basically saying, oh my God, America's collapsing financially; we're so deep in debt, we're never going to pull out of it. Is that what you told the Chinese?

Mr. WALKER: No, I didn't tell the Chinese anything that I hadn't said publicly. Look...

GROSS: But you said all what I said is what you've been saying publicly.

Mr. WALKER: No, no. What I've said is this: We're on an imprudent and irresponsible path. We must start making tough choices sooner rather than later and before we pass a tipping point. Yes, we can do what is necessary in order to help create a better future.

GROSS: My guest is David Walker, the president of the Peter G. Peterson Foundation and author of the book "Comeback America: Turning the Country Around and Restoring Fiscal Responsibility." We'll talk more after a break. This is FRESH AIR.

(Soundbite of music)

GROSS: If you're just joining us, my guest is David Walker. He's the president and CEO of the Peter Peterson Foundation. He's a former controller general of the U.S., and he's the author of the book "Comeback America: Turning the Country Around and Restoring Fiscal Responsibility." And his big concern is the American debt.

Now, you write that when you were the head of the Government Accountability Office during the Bush administration, that the trick was to, quote, "turn up my rhetoric without going so far that I sounded crazy."

(Soundbite of laughter)

GROSS: Now, some people say that there's actually deficit hysteria today, that people and they might put you in that category - that people are just so obsessed with the deficit that it's standing in the way of programs, reform programs that we need to make, like making a start with health care. So I wonder what your reaction to that term deficit hysteria is.

Mr. WALKER: Well, I've made it very clear that not all deficits are equal, that the short-term deficits that we face today are largely explainable because of the recession, two undeclared and two unfinanced wars, a number of extraordinary, non-business-cycle challenges dealing with the financial institutions, insurance concerns, automotive companies, et cetera, and therefore that's understandable.

I've also made it clear that those deficits may have to go up somewhat in the short term in order to be able to get unemployment down, and if that's the case, so be it.

At the same point in time, we need to recognize that what threatens this ship of state is the ice that's below the water in the iceberg. It's not today's $12.4 trillion in debt. It's the $50 trillion in unfunded obligations for Medicare, Social Security, other commitments and contingencies that we don't know how we're going to keep, and it's time to start recognizing that reality and taking steps to make sure that we can deliver on the promises that we intend to keep.

GROSS: So let's get to the structural changes that you'd like to see, and this has to do with Medicare, Medicaid, Social Security. You're not arguing that we do away with any of those programs, right?

Mr. WALKER: Oh, absolutely not. I think it's very important that a country like ours have a strong, sustainable and secure social safety net. Take Social Security. I think that's critically important for retirement income security in America. While it wasn't intended to be this way, 22 percent of Americans rely solely on Social Security for their retirement income, and a majority of Americans rely on it primarily for their retirement income.

So I think we need to reform that program to maintain a base-defined benefit system, to provide a stronger benefit or a higher-level benefit for people near the poverty level, somewhat less of a benefit than currently promised for middle and upper income.

We need to encourage people to work longer, and we also need to add, on top of a solvent, sustainable and secure base-defined benefit program, a supplemental savings account that can help to generate additional savings, reduce our reliance on foreign lenders, provide a pre-retirement death benefit, and a supplemental retirement benefit for Americans.

GROSS: So you're not describing what President Bush wanted, which is transforming Social Security into private savings accounts.

Mr. WALKER: I did not agree with President Bush 43 with regard to his proposed approach to Social Security reform. He was basically trying to convert it from a defined-benefit system to a defined-contribution system. I do not think that makes sense.

You know, he forgot what the second word in Social Security is. It's security, not opportunity.

GROSS: I keep thinking if our Social Security money was invested in the stock market, what would we have right now?

Mr. WALKER: Well, you know, the other debate that we've had in Social Security is, you know, what do we do with the money in the trust fund, and what about this lockbox concept? Frankly, the lockbox was picked a long time ago.

GROSS: How so?

Mr. WALKER: The government spends every dime of the Social Security surplus on other government operating expenses, every single dime. There's no savings for Social Security. We've issued additional debt that ultimately what happens is we'll have to exchange one form of debt for public debt.

And by the way, the government doesn't even want to call the trillions of dollars that it owes Social Security and Medicare a liability. It doesn't want it counted as far as our debt to as a percentage of the economy. It wants to make our deficits look smaller than they are because of these funds, and these are all wrong things. This is creative accounting and self-dealing that doesn't make sense.

GROSS: Do you think Al Gore had it right, there should have been a lockbox?

Mr. WALKER: I think that we should've saved the Social Security surplus and invested it in a responsible manner in order to provide real security for the Social Security promised benefits. But it's too late now because Social Security is now running a negative cash flow. It is paying out more than it takes in.

You know, for many years that was not the case, but 2010 is the first year that it is the case, and so it's too late to have that debate.

GROSS: Now, since we're in such debt, and we need money for Medicare and Medicaid, Social Security, do you think that the President George W. Bush tax cuts should be ended, and those taxes should be reinstated?

Mr. WALKER: In my view, the ones that you want to retain are the ones that helped to promote savings and investment that can help grow the economy and try to help create a better future.

At the same point in time, we have to recognize the reality that taxes are going to go up, and they're going to go up on a lot more people than those making $250,000 or more. Why? Because of a very simple four-letter word. It's called math. The numbers don't come close to working.

My concern is, is there's two kinds of taxes. There's current taxes, and there's deferred taxes, and when you face large, known and growing deficits, the difference they basically represent deferred taxes with interest that our kids and grandkids are going to have to pay - absent meaningful and fundamental reforms.

GROSS: Let's talk about Medicare and Medicaid. What changes would you like to see made in those plans?

Mr. WALKER: Well, in Medicare, I think we have to recognize that it's a very important program geared towards senior citizens, but that there are actually three Medicare programs. There's Medicare Part A, which is hospital insurance, which is funded with a payroll tax, and there's B and D, which are physician and out-payment and prescription drugs, which are voluntary programs funded with a combination of premiums and general revenues and state contributions.

The first thing we have to do is recognize that under Medicare Part B and Medicare Part D, billionaires receive subsidies for voluntarily signing up for those programs. That makes no sense. We should have universal opportunity to purchase Medicare Part B and D, if you want, but we should have more means-tested premiums than we do right now. There's some means-tested premiums for Medicare Part B. There's not for Part D. We need to have more means-tested for both.

We need to also be able to have more competitive bidding with regard to Medicare. We need to move away from the fee-for-service payment system. We need to move more towards evidence-based medicine. We need to do something with regard to malpractice. We need to move to electronic records, more integrated-care systems, a number of things that not only apply to Medicare but also have to apply to our overall health care system.

And last, but certainly not least, we need to learn the lessons of every major industrialized nation. We need a budget for how much taxpayer resources we'll allocate for health care. We're the only major industrialized nation that doesn't do that. Every other country has recognized that it'll bankrupt you if you don't.

GROSS: David Walker will be back in the second half of the show. He's the president of the Peter G. Peterson Foundation and author of the book "Comeback America: Turning the Country Around and Restoring Fiscal Responsibility." I'm Terry Gross, and this is FRESH AIR.

(Soundbite of music)

GROSS: This is FRESH AIR. I'm Terry Gross back with David Walker. His book "Come Back America" is about the threats caused by America's deteriorating financial condition and what we can do to reverse our nation's huge debt. Walker is the president of the Peter G. Peterson Foundation. He served as the head of the Government Accountability Office under presidents Clinton and George W. Bush.

Do you sometimes feel like we're becoming a third world country? We have this huge debt. We're dependent on other countries to buy our debt. Our infrastructure is really old and outdated, especially like, if you compare some of our infrastructure and some of our transportation system to China's. Do you feel like we're really falling behind? And I dont even mean, you know, just financially, but just looking at our infrastructure, looking at our education system, looking at our public transportation system.

Mr. WALKER: We are a great country, but we're not as great as we think we are. We have a number of people, especially elected officials, who have a false sense of security, who think that because we're currently the only sole super power on Earth, which by the way, is temporary, that we must be top three in about everything. That's not the case. We're below average with regard to public finance. We're below average with regard to education results. We're below average with regard to health care outcomes. We're below with regard to the status of our critical infrastructure. We're below average with regard to investments in basic research. All of these are critical elements that help to determine whether or not youre going to have a better future.

We need to stop looking in the rearview mirror. We need to look ahead, and we need to look at those leading indicators and start taking steps that will help make sure that we can make tough choices and help insure that our future will be better than our past.

GROSS: That's going to require spending, isn't it - on things like public transportation, education?

Mr. WALKER: Yeah. One of the things that we need to do is first, we have to take steps to avoid passing a tipping point. Which tipping point would be a loss of confidence on behalf of foreign lenders in our ability to put our federal financial house in order. Government has grown since 1789, much bigger than the founders intended, and in many cases, it just doesnt generate positive results, both on the spending side and on the tax preference side.

We lose a trillion dollars a year in revenues due to tax preferences, deductions, exemptions, exclusions, credits. It's not in the budget. It's not in the financial statements, and many of them frankly, just dont work. And so, yes, in some cases we're going to need to spend more money in order to be able to create a better future but we just can't layer it on top of what we're already doing, because what we're already doing is unaffordable and unsustainable over time. So we have to start making tough choices to reprioritize, to eliminate, to target, and to be able to give us the ability to do more in areas where it makes sense to do more.

GROSS: Let me quote you something by the economist James K. Galbraith, and this was in a column that was called "In Defense of Deficits." And he wrote: To focus obsessively on cutting future deficits is a path that will obstruct, not assist, what we need to do to re-establish strong growth and high employment.

Private borrowers can and do default. They go bankrupt. With government, the risk of non-payment does not exist. Government spends money simply by typing numbers into a computer. Unlike private debtors, government does not need to have cash on hand. Public debt isn't a burden on future generations. It does not have to be repaid, and in practice, it will never be repaid.

What do you think?

Mr. WALKER: I think he's out of touch with reality. You can't spend more money than you make, indefinitely, without having severe adverse consequences. Under our present path, within 12 years, without an increase in interest rates, the single largest line item in the federal budget is interest on the federal debt. If there is a two percent increase in prevailing interest costs, which many people believe is optimistic, its going to be worse than that. The only thing the federal government will be able to do in 2035 - which is only 25 years from now - based on historical tax levels, is to pay interest on the federal debt.

Let's recognize reality. They're three key points with regard to spending. Spending more money than you make on a recurring basis is irresponsible. Irresponsibly spending somebody else's money is unethical - and if youre a fiduciary, a fiduciary breech. And irresponsibly spending somebody else's money when they're too young to vote and not born yet is immoral. And all three of those things are going on right now and they threaten America's future.

The decisions that we make or that we fail to make within the next five years, will largely determine whether our future is better than our past. And in my view, I want it to be better - for the sake of my kids and my grandkids.

GROSS: Just one more thing, it seems to me everybody has words of criticism for Congress. But is it time to start criticizing Americans too, individuals. And here's...

Mr. WALKER: Great question.

GROSS: ...here's what I mean, it seems to me like Americans, they want health care, they want roads that work.

Mr. WALKER: Mm-hmm. Mm-hmm.

GROSS: They want schools that work. They want, you know, they want a country that works. And at the same time, people dont want to pay taxes; they certainly dont want their taxes raised. But isn't that the only way of funding a government that works - and creating highways and roads and public transportation, schools that work?

Mr. WALKER: There's no question that people are frustrated with their elected officials and they're complaining about their elected officials, but we also have a societal problem. People are very short-term oriented. They want what they want, they want it now; they dont want to have to pay for it. That doesnt work. And so, as a result, we need to recognize the reality that if you want government to be able to do certain things, you have to be willing to pay for it. And that ultimately, if you dont pay for it today, your children and grandchildren are going to pay for it, with interest, tomorrow.

And so, we need to have an honest discussion and debate with the American people about how much government do they want and how much are they willing to pay for, and we have to reconcile the gap. And that hasnt been done, but it needs to be done.

GROSS: David Walker, thank you so much for talking with us.

Mr. WALKER: My pleasure.

GROSS: David Walker is president of the Peter G. Peterson Foundation and author of the book "Come Back America."

Coming up, we hear from the creator of the AMC series "Breaking Bad," which begins its third season this month.

This is FRESH AIR.

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