An Unbalanced Budget
Leon Panetta believes the nation is headed for a severe financial crisis--unless some discipline is exerted.
Thursday, May 29, 2003
Leon Panetta represented the Monterey Bay area in the House of Representatives for 16 years, and during much of that time served as the chair of the House Budget Committee. In that role he helped negotiate a number of balanced budget initiatives, and tried to deal with some of the ever-ballooning federal deficit problems.
During the Clinton administration, Panetta served as the director of the Office of Management and Budget, and then later as President Clinton''s chief of staff. Former Congressman Panetta is now the director of the Leon and Sylvia Panetta Institute at California State University Monterey Bay
Q: I hate to use a baseball analogy, but it''s kind of like Yogi Berra said: It''s dejà vu all over again. Here we are talking about federal deficits and nobody wanting to deal with a balanced budget. Could you just give a little bit of a background on how you came into this picture 20 years ago, when it was the same set of issues?
A: Yes--it''s kind of hard to believe that all of the mistakes of the past are about to be repeated again. From all the lessons we learned, you would think that somebody would realize that we really ought not to jeopardize our future again, and yet I think that''s exactly what''s going to take place.
In the ''70s, we began to realize that deficits were beginning to expand more and more. As we got into the early ''80s, what happened is that we were basically doing a lot of what we''re doing now. There was a large tax cut enacted by Congress; there were dramatic increases in defense [spending], and spending on entitlements--Social Security, Medicare, Medicaid, veterans benefits--were all expanding dramatically.
And suddenly, before we knew it, we were facing $150 billion deficits. And then they went up to 200, 250, and we were looking at $300 billion deficits in the early ''90s--probably going to about 600 billion by the middle of the ''90s, as we got into the new century. We were looking at deficits as far as the eye could see. I think realization at that time was that we just could not allow this to continue.
Especially when the stock market crashed in ''87, there was a sense--my God we''ve gotta deal with these deficits. They''re hurting our economy.
And eventually--I think as the result of several budget summits we had between the administration and the Congress, all of which I participated in, and then as OMB director--I had the honor of developing the economic plan that I think went a long way towards developing, finally, a balanced budget and a surplus.
So it was a success story that finally policy makers from all sides decided to do the steps that needed to be done, only to see, unfortunately, the whole surplus disappear. And we seem to be going back into the deficit hole.
It not only disappeared, it vanished in 24 months or something like that.
Yeah--less than that. I think we had about $5.7 trillion projected surplus, and I think it was within a matter of six to 10 months it was gone.
What do you think has changed the dialogue? Is it September 11? What do you think politically has caused Congress to just ignore what happened before?
Well there are several things. Obviously, number one, Sept. 11 created a sense of emergency that we had to do everything possible. People''s minds were focused more on confronting terrorism. We''ve had two wars in two years--in Afghanistan and Iraq--that focused the American people''s attention. In addition to that, we''ve got kind of an economic downturn. And then, I have to tell you that there is always a basic instinct in Washington--and I don''t care whether you''re a Republican or Democrat--I think that the bottom line is that both parties like to spend on their favorite priorities. And if they feel they have a license to spend, they''re not going to spend an awful lot of attention on the deficit. They''re basically going to try to spend money on their favorite programs, whether it''s tax cuts or whether it''s de-fense or whether it''s domestic spending.
I wonder, are we kind of reliving a saga of Pres. Bush and his father? His father dealt with the issue honestly and got tarred and feathered by the Republicans, lost his reelection, and now his son is avoiding everything and letting the deficit grow and isn''t being too straightforward with us.
Well I think the unfortunate thing is that when you''re president, you can''t afford to look at just the next six months or 12 months. What you have to do is look at the next five to 10 years, and what ultimately will happen in this country.
Politicians in Washington tend to look in the short term, because that''s how they read the political tea leaves. But the reality is that if we look out anywhere from five to 10 years, what''s developing is the perfect storm. And that''s going to seriously damage our economy.
First of all we are looking right now at projected $2 trillion deficits, and with that level of deficits it requires the federal government to borrow a great deal. It''s going to crowd out the capital market, so that any hope for businesses having capital to invest will disappear. Interest rates will clearly rise because of that.
In addition to that, you''ve got this problem with retirees. You''ve got the Baby Boom generation that''s going to start retiring beginning in 2006 or 2007. And if you have 70 million baby boomers retiring, they''re going to be using many more benefits in Social Security and Medicare, and that''s going to skyrocket the costs on entitlements.
So we are headed for a huge crisis. And if this president doesn''t deal with it, I''m afraid history is going to look back and say, you know, we were living in a time when everybody was drinking at the bar, and nobody''s thought of the consequence of the hangover.
You know in some ways though, when you read the polls, you read 60 percent don''t really think we need a tax cut. I think the public''s aware of it, but it doesn''t seem to really get through the system in Washington.
It doesn''t, because what drives Washington is basically bringing home either the pork, or the resources, or the funding, or the tax cuts that they feel we''re needing, and so it''s very difficult for our political leaders to kind of look at the American people and say, wait a minute, we''re facing some tough times, and it''s going to demand some sacrifice from all of us.
Frankly, it''s interesting, you''ve got this huge contradiction going on right now where the federal government is just spending the hell out of the treasury, and at the same time many of the state governments are facing these huge deficits--they''ve got balanced-budget requirements. So they''re involved with not only cutting spending dramatically but increasing taxes.
I think deep down the American people understand, because they have to deal with it in their families. They know they can''t suddenly spend a lot of money on a vacation to Hawaii only to put the debt on the backs of their kids, and mortgage the house. I mean you just don''t do that.
And so I think the American people do understand the problem, but I''m afraid that our policy-makers are caught up in trying to deliver as much as they can, with the hope that it''ll get them reelected. I''ve often said when it comes to deficit, political leaders hope that they can whistle their way past the cemetery.
It reminds me of Japan, which has had a slow economy after a boom. Do you think we could end up in the same boat as Japan, where they literally have zero interest rates, have a ballooning deficit, and have really used up all their options?
Well there is that danger out there, and I know our economy is different from Japan''s, but I think we have to be really careful that we don''t repeat some of the serious mistakes that they have made.
The Japanese basically did not want to confront these deficit issues. They kind of put their heads in a hole and hoped that, ultimately, because they''ve always had a strong economy, that the roller-coaster ride would turn around and the economy would go back up.
And what''s happened is, because of their failure to exercise the discipline that they had to exercise, they''ve got the worst of all worlds affecting their economy right now.
I think that we''re in danger of repeating many of those same mistakes. And the problem is, it isn''t popular for a president to stand up and say, look, we''ve got to discipline ourselves. It''s much easier to say we ought to have huge tax cuts. We ought to have big spending programs. And yeah, we have these deficits, but let''s not worry about it; it''s just a small percentage of our economy; ultimately things will turn around. It''s just living in a fantasy land, and I think it frankly is irresponsible when the leadership of this country isn''t honest about the problems that we''re going to face.
Switching to the personalities in this equation: budget director Mitchell Daniels just announced that he is leaving. If you were budget god, who would you pick? Maybe not a name, but what kind of person could deal in the type of position you were in?
Well anybody has to be tough, because you basically have to be the ''no'' person in the administration. And you''ve also got to be able to convince the president that the disciplining process needs a place. So he''s not only got to be tough, but he''s got to have a good relationship with the president.
But I have to tell you, in the end, in every administration, the ultimate responsibility rests with the president of the United States. And if the president makes the decision that he wants to be tough on dealing with the deficit, and try to get this country back to some kind of balanced budget, then to some extent, whoever is OMB director, that''ll happen.
But if, on the other hand, you have the strongest kind of anti-deficit OMB director in the world in that job, and the president of the United States basically is saying: ''I don''t want to pay attention to a deficit, I''m going to basically do what I want to do in these other areas,'' there isn''t much that person can do. He''s got to basically follow the direction of the president of the United States.
Yeah, it''s a tough job. And after you left it--you may not even want to answer this--but is there anything you ever thought ''I wish I had done that a little different or this a little different?'' Can you share some of your insights on your experience, which was kind of pivotal?
To be frank, I had an unusual experience. I was chairman of the House Budget Committee when the president asked me to become OMB director, and I had a long conversation with the president-elect at that time, and it was clear to me that the president wanted to do something about the deficits confronting the country.
And I thought for the first time we really had a chance to do something really significant that would get this country back on a path towards balance. And because of that, and because of his support and the support of the vice president and ultimately the support of the Congress, we were able to get it done.
So I happen to be very proud of having put together, during the time that I was back there, an economic plan that involved $500 billion in deficit reduction--$250 billion in spending cuts and $250 billion in tax increases--and the reality is that, as a result of passing that plan, I think that went a long way towards moving this country--not only towards a balanced budget. Having that discipline at the federal level sent a signal to the money markets, to the securities market, that Washington was not walking off a cliff--that it really was serious about trying to do the right thing in terms of the economy.
So I really feel pretty good about the time that I was there. I think if I have any regrets, it''s that the leaders that followed didn''t have the good sense to use the surplus that was developed in order to deal with some problems like Social Security and Medicare. Instead, that surplus has been virtually wiped out, and now we''re facing this year alone a record annual deficit projected to be over $400 billion. That is what angers me more than anything.
On a local level: do you have any thoughts on California''s situation?
Well, again, I think California''s situation is a kind of indication where political leadership in the state tries to basically dodge a bullet, and ultimately just winds up postponing the problem into the future.
I think California frankly knew where we were headed with this deficit beginning last year, and did not take what I think were sufficient steps to try to deal with it. Basically the state postponed the problem; they moved some numbers around and ultimately it made the problem even worse.
This year we''re facing a $35 billion deficit in the state, and to deal with it you can''t just use smoke and mirrors anymore. I think they''ve exhausted all their smoke and mirrors. What they''ve got to do is face the fact that when you''re facing those size deficits, there''s only two ways to deal with it--you''ve got to cut spending and you''ve got to raise taxes. And very frankly, with that size deficit, you''re gonna have to do both.
Joe Hall is a host of Talk of the Bay, which airs at 10am weekdays on KUSP radio. To listen to the complete text of this interview, go to KUSP.org.