[Congressional Record (Bound Edition), Volume 155 (2009), Part 1]
[Extensions of Remarks]
[Pages 206-209]
[From the U.S. Government Publishing Office, www.gpo.gov]




                       ``STORMS ON THE HORIZON''

                                 ______
                                 

                           HON. FRANK R. WOLF

                              of virginia

                    in the house of representatives

                        Tuesday, January 6, 2009

  Mr. WOLF. Madam Speaker, I have never been more concerned about the 
short- and long-term budget shortfalls we face as a Nation. We must 
work to address these issues simultaneously in a bipartisan way.
  Last October the Washington Post reported that China had replaced 
Japan as the United States' largest creditor, increasing its holding by 
42 percent over the past year. On December 15, the U.S. Department of 
the Treasury released the ``FY 2008 Financial Report of the Federal 
Government.'' Not only is America

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facing a projected $1 trillion in deficit spending for this fiscal 
year, there is now $56 trillion in unfunded mandates through Social 
Security, Medicare and Medicaid, a number which will only continue to 
grow and has increased by $3 trillion in the last year alone. Funding 
the deficit means that U.S. must attract approximately $2 billion a day 
from foreign countries or risk a drop in the value of the dollar.
  I believe that this is an economic, moral, and generational issue. Is 
it right for one generation to live very well knowing that its debts 
will be left to be paid by their children and grandchildren?
  In the past few days numerous sources have reported that the economic 
stimulus bill on the agenda of the soon to be Obama administration is 
expected to cost between $675 billion and $775 billion. Other reports 
say it could expand to as much as $1 trillion. Whatever package is 
passed, Congress has a historic opportunity to work in a bipartisan way 
to address the Nation's looming financial crisis by including a 
mechanism to deal with the underlying problem of autopilot spending. 
The bipartisan SAFE Commission I introduced with Rep. Jim Cooper in the 
110th Congress would create a national commission to review 
entitlements with everything--including tax policy--on the table. This 
idea garnered the support of over 100 members during the 110th 
Congress. Senate Budget Committee Chairman Kent Conrad and ranking 
member Judd Gregg introduced similar legislation, which has also gained 
momentum. The time is now.
  I share with our colleagues a speech by Richard W. Fisher, president 
of the Federal Reserve Bank of Dallas. ``Storms on the Horizon'' is a 
sobering account from a monetary policymaker's point of view on why 
deficits matter. Mr. Fisher calls the mathematics of doing nothing to 
change the long-term outlook for entitlements, ``nothing short of 
catastrophic.''
  The 111th Congress will have on its watch this unfolding reality. 
What will we do to make a difference for our country's--and our 
children's and grandchildren's--future?

    Storms on the Horizon: Remarks Before the Commonwealth Club of 
          California, San Francisco, California, May 28, 2008

                         (By Richard W. Fisher)

       Thank you, Bruce [Ericson]. I am honored to be here this 
     evening and am grateful for the invitation to speak to the 
     Commonwealth Club of California.
       Alan Greenspan and Paul Volcker, two of Ben Bernanke's 
     linear ancestors as chairmen of the Federal Reserve, have 
     been in the news quite a bit lately. Yet, we rarely hear 
     about William McChesney Martin, a magnificent public servant 
     who was Fed chairman during five presidencies and to this day 
     holds the record for the longest tenure: 19 years.
       Chairman Martin had a way with words. And he had a twinkle 
     in his eye. It was Bill Martin who wisely and succinctly 
     defined the Federal Reserve as having the unenviable task 
     ``to take away the punchbowl just as the party gets going.'' 
     He did himself one up when he received the Alfalfa Club's 
     nomination for the presidency of the United States. I suspect 
     many here tonight have been to the annual Alfalfa dinner. It 
     is one of the great institutions in Washington, D.C. Once a 
     year, it holds a dinner devoted solely to poking fun at the 
     political pretensions of the day. Tongue firmly in cheek, the 
     club nominates a candidate to run for the presidency on the 
     Alfalfa Party ticket. Of course, none of them ever win. 
     Nominees are thenceforth known for evermore as members of the 
     Stassen Society, named for Harold Stassen, who ran for 
     president nine times and lost every time, then ran a tenth 
     time on the Alfalfa ticket and lost again. The motto of the 
     group is Veni, Vidi, Defici--``I came, I saw, I lost.''
       Bill Martin was nominated to run and lose on the Alfalfa 
     Party ticket in 1966, while serving as Fed chairman during 
     Lyndon Johnson's term. In his acceptance speech, he announced 
     that, given his proclivities as a central banker, he would 
     take his cues from the German philosopher Goethe, ``who said 
     that people could endure anything except continual 
     prosperity.'' Therefore, Martin declared, he would adopt a 
     platform proclaiming that as a president he planned to ``make 
     life endurable again by stamping out prosperity.''
       ``I shall conduct the administration of the country,'' he 
     said, ``exactly as I have so successfully conducted the 
     affairs of the Federal Reserve. To that end, I shall assemble 
     the best brains that can be found . . . ask their advice on 
     all matters . . . and completely confound them by following 
     all their conflicting counsel.''
       It is true, Bruce, that as you said in your introduction, I 
     am one of the 17 people who participate in Federal Open 
     Market Committee (FOMC) deliberations and provide Ben 
     Bernanke with ``conflicting counsel'' as the committee 
     cobbles together a monetary policy that seeks to promote 
     America's economic prosperity, Goethe to the contrary. But 
     tonight I speak for neither the committee, nor the chairman, 
     nor any of the other good people that serve the Federal 
     Reserve System. I speak solely in my own capacity. I want to 
     speak to you tonight about an economic problem that we must 
     soon confront or else risk losing our primacy as the world's 
     most powerful and dynamic economy.
       Forty-three years ago this Sunday, Bill Martin delivered a 
     commencement address to Columbia University that was far more 
     sober than his Alfalfa Club speech. The opening lines of that 
     Columbia address were as follows: ``When economic prospects 
     are at their brightest, the dangers of complacency and 
     recklessness are greatest. As our prosperity proceeds on its 
     record-breaking path, it behooves every one of us to scan the 
     horizon of our national and international economy for danger 
     signals so as to be ready for any storm.''
       Today, our fellow citizens and financial markets are paying 
     the price for falling victim to the complacency and 
     recklessness Martin warned against. Few scanned the horizon 
     for trouble brewing as we proceeded along a path of 
     unparalleled prosperity fueled by an unsustainable housing 
     bubble and unbridled credit markets. Armchair or Monday 
     morning quarterbacks will long debate whether the Fed could 
     have/should have/would have taken away the punchbowl that 
     lubricated that blowout party. I have given my opinion on 
     that matter elsewhere and won't go near that subject tonight. 
     What counts now is what we have done more recently and where 
     we go from here. Whatever the sins of omission or commission 
     committed by our predecessors, the Bernanke FOMC's objective 
     is to use a new set of tools to calm the tempest in the 
     credit markets to get them back to functioning in a more 
     orderly fashion. We trust that the various term credit 
     facilities we have recently introduced are helping restore 
     confidence while the credit markets undertake self-corrective 
     initiatives and lawmakers consider new regulatory schemes.
       I am also not going to engage in a discussion of present 
     monetary policy tonight, except to say that if inflationary 
     developments and, more important, inflation expectations, 
     continue to worsen, I would expect a change of course in 
     monetary policy to occur sooner rather than later, even in 
     the face of an anemic economic scenario. Inflation is the 
     most insidious enemy of capitalism. No central banker can 
     countenance it, not least the men and women of the Federal 
     Reserve.
       Tonight, I want to talk about a different matter. In 
     keeping with Bill Martin's advice, I have been scanning the 
     horizon for danger signals even as we continue working to 
     recover from the recent turmoil. In the distance, I see a 
     frightful storm brewing in the form of untethered government 
     debt. I choose the words--``frightful storm''--deliberately 
     to avoid hyperbole. Unless we take steps to deal with it, the 
     long-term fiscal situation of the federal government will be 
     unimaginably more devastating to our economic prosperity than 
     the subprime debacle and the recent debauching of credit 
     markets that we are now working so hard to correct.
       You might wonder why a central banker would be concerned 
     with fiscal matters. Fiscal policy is, after all, the 
     responsibility of the Congress, not the Federal Reserve. 
     Congress, and Congress alone, has the power to tax and spend. 
     From this monetary policymaker's point of view, though, 
     deficits matter for what we do at the Fed. There are many 
     reasons why. Economists have found that structural deficits 
     raise long-run interest rates, complicating the Fed's dual 
     mandate to develop a monetary policy that promotes 
     sustainable, noninflationary growth. The even more disturbing 
     dark and dirty secret about deficits--especially when they 
     careen out of control--is that they create political pressure 
     on central bankers to adopt looser monetary policy down the 
     road. I will return to that shortly. First, let me give you 
     the unvarnished facts of our Nation's fiscal predicament.
       Eight years ago, our federal budget, crafted by a 
     Democratic president and enacted by a Republican Congress, 
     produced a fiscal surplus of $236 billion, the first surplus 
     in almost 40 years and the highest nominal-dollar surplus in 
     American history. While the Fed is scrupulously nonpartisan 
     and nonpolitical, I mention this to emphasize that the 
     deficit/debt issue knows no party and can be solved only by 
     both parties working together. For a brief time, with 
     surpluses projected into the future as far as the eye could 
     see, economists and policymakers alike began to contemplate a 
     bucolic future in which interest payments would form an ever-
     declining share of federal outlays, a future where Treasury 
     bonds and debt-ceiling legislation would become dusty relics 
     of a long-forgotten past. The Fed even had concerns about how 
     open market operations would be conducted in a marketplace 
     short of Treasury debt.
       That utopian scenario did not last for long. Over the next 
     7 years, federal spending grew at a 6.2 percent nominal 
     annual rate while receipts grew at only 3.5 percent. Of 
     course, certain areas of government, like national defense, 
     had to spend more in the wake of 9/11. But nondefense 
     discretionary spending actually rose 6.4 percent annually 
     during this timeframe, outpacing the growth in total 
     expenditures. Deficits soon returned, reaching an expected 
     $410 billion for 2008--a

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     $600 billion swing from where we were just 8 years ago. This 
     $410 billion estimate, by the way, was made before the 
     recently passed farm bill and supplemental defense 
     appropriation and without considering a proposed patch for 
     the Alternative Minimum Tax--all measures that will lead to a 
     further ballooning of government deficits.
       In keeping with the tradition of rosy scenarios, official 
     budget projections suggest this deficit will be relatively 
     short-lived. They almost always do. According to the official 
     calculus, following a second $400-billion-plus deficit in 
     2009, the red ink should fall to $160 billion in 2010 and $95 
     billion in 2011, and then the budget swings to a $48 billion 
     surplus in 2012.
       If you do the math, however, you might be forgiven for 
     sensing that these felicitous projections look a tad dodgy. 
     To reach the projected 2012 surplus, outlays are assumed to 
     rise at a 2.4 percent nominal annual rate over the next 4 
     years--less than half as fast as they rose the previous 7 
     years. Revenue is assumed to rise at a 6.7 percent nominal 
     annual rate over the next 4 years--almost double the rate of 
     the past 7 years. Using spending and revenue growth rates 
     that have actually prevailed in recent years, the 2012 
     surplus quickly evaporates and becomes a deficit, potentially 
     of several hundred billion dollars.
       Doing deficit math is always a sobering exercise. It 
     becomes an outright painful one when you apply your 
     calculator to the long-run fiscal challenge posed by 
     entitlement programs. Were I not a taciturn central banker, I 
     would say the mathematics of the long-term outlook for 
     entitlements, left unchanged, is nothing short of 
     catastrophic.
       Typically, critics ranging from the Concord Coalition to 
     Ross Perot begin by wringing their collective hands over the 
     unfunded liabilities of Social Security. A little history 
     gives you a view as to why. Franklin Roosevelt originally 
     conceived a social security system in which individuals would 
     fund their own retirements through payroll-tax contributions. 
     But Congress quickly realized that such a system could not 
     put much money into the pockets of indigent elderly citizens 
     ravaged by the Great Depression. Instead, a pay-as-you-go 
     funding system was embraced, making each generation's 
     retirement the responsibility of its children.
       Now, fast forward 70 or so years and ask this question: 
     What is the mathematical predicament of Social Security 
     today? Answer: The amount of money the Social Security system 
     would need today to cover all unfunded liabilities from now 
     on--what fiscal economists call the ``infinite horizon 
     discounted value'' of what has already been promised 
     recipients but has no funding mechanism currently in place--
     is $13.6 trillion, an amount slightly less than the annual 
     gross domestic product of the United States.
       Demographics explain why this is so. Birthrates have fallen 
     dramatically, reducing the worker-retiree ratio and leaving 
     today's workers pulling a bigger load than the system 
     designers ever envisioned. Life spans have lengthened without 
     a corresponding increase in the retirement age, leaving 
     retirees in a position to receive benefits far longer than 
     the system designers envisioned. Formulae for benefits and 
     cost-of-living adjustments have also contributed to the 
     growth in unfunded liabilities.
       The good news is this Social Security shortfall might be 
     manageable. While the issues regarding Social Security reform 
     are complex, it is at least possible to imagine how Congress 
     might find, within a $14 trillion economy, ways to wrestle 
     with a $13 trillion unfunded liability. The bad news is that 
     Social Security is the lesser of our entitlement worries. It 
     is but the tip of the unfunded liability iceberg. The much 
     bigger concern is Medicare, a program established in 1965, 
     the same prosperous year that Bill Martin cautioned his 
     Columbia University audience to be wary of complacency and 
     storms on the horizon.
       Medicare was a pay-as-you-go program from the very 
     beginning, despite warnings from some congressional leaders--
     Wilbur Mills was the most credible of them before he 
     succumbed to the pay-as-you-go wiles of Fanne Foxe, the 
     Argentine Firecracker--who foresaw some of the long-term 
     fiscal issues such a financing system could pose. 
     Unfortunately, they were right.
       Please sit tight while I walk you through the math of 
     Medicare. As you may know, the program comes in three parts: 
     Medicare Part A, which covers hospital stays; Medicare B, 
     which covers doctor visits; and Medicare D, the drug benefit 
     that went into effect just 29 months ago. The infinite-
     horizon present discounted value of the unfunded liability 
     for Medicare A is $34.4 trillion. The unfunded liability of 
     Medicare B is an additional $34 trillion. The shortfall for 
     Medicare D adds another $17.2 trillion. The total? If you 
     wanted to cover the unfunded liability of all three programs 
     today, you would be stuck with an $85.6 trillion bill. That 
     is more than six times as large as the bill for Social 
     Security. It is more than six times the annual output of the 
     entire U.S. economy.
       Why is the Medicare figure so large? There is a mix of 
     reasons, really. In part, it is due to the same birthrate and 
     life-expectancy issues that affect Social Security. In part, 
     it is due to ever-costlier advances in medical technology and 
     the willingness of Medicare to pay for them. And in part, it 
     is due to expanded benefits--the new drug benefit program's 
     unfunded liability is by itself one-third greater than all of 
     Social Security's.
       Add together the unfunded liabilities from Medicare and 
     Social Security, and it comes to $99.2 trillion over the 
     infinite horizon. Traditional Medicare composes about 69 
     percent, the new drug benefit roughly 17 percent and Social 
     Security the remaining 14 percent.
       I want to remind you that I am only talking about the 
     unfunded portions of Social Security and Medicare. It is what 
     the current payment scheme of Social Security payroll taxes, 
     Medicare payroll taxes, membership fees for Medicare B, 
     copays, deductibles and all other revenue currently channeled 
     to our entitlement system will not cover under current rules. 
     These existing revenue streams must remain in place in 
     perpetuity to handle the ``funded'' entitlement liabilities. 
     Reduce or eliminate this income and the unfunded liability 
     grows. Increase benefits and the liability grows as well.
       Let's say you and I and Bruce Ericson and every U.S. 
     citizen who is alive today decided to fully address this 
     unfunded liability through lump-sum payments from our own 
     pocketbooks, so that all of us and all future generations 
     could be secure in the knowledge that we and they would 
     receive promised benefits in perpetuity. How much would we 
     have to pay if we split the tab? Again, the math is painful. 
     With a total population of 304 million, from infants to the 
     elderly, the per-person payment to the federal treasury would 
     come to $330,000. This comes to $1.3 million per family of 
     four--over 25 times the average household's income.
       Clearly, once-and-for-all contributions would be an 
     unbearable burden. Alternatively, we could address the 
     entitlement shortfall through policy changes that would 
     affect ourselves and future generations. For example, a 
     permanent 68 percent increase in federal income tax revenue--
     from individual and corporate taxpayers--would suffice to 
     fully fund our entitlement programs. Or we could instead 
     divert 68 percent of current income-tax revenues from their 
     intended uses to the entitlement system, which would 
     accomplish the same thing.
       Suppose we decided to tackle the issue solely on the 
     spending side. It turns out that total discretionary spending 
     in the federal budget, if maintained at its current share of 
     GDP in perpetuity, is 3 percent larger than the entitlement 
     shortfall. So all we would have to do to fully fund our 
     Nation's entitlement programs would be to cut discretionary 
     spending by 97 percent. But hold on. That discretionary 
     spending includes defense and national security, education, 
     the environment and many other areas, not just those 
     controversial earmarks that make the evening news. All of 
     them would have to be cut--almost eliminated, really--to 
     tackle this problem through discretionary spending.
       I hope that gives you some idea of just how large the 
     problem is. And just to drive an important point home, these 
     spending cuts or tax increases would need to be made 
     immediately and maintained in perpetuity to solve the 
     entitlement deficit problem. Discretionary spending would 
     have to be reduced by 97 percent not only for our generation, 
     but for our children and their children and every generation 
     of children to come. And similarly on the taxation side, 
     income tax revenue would have to rise 68 percent and remain 
     that high forever. Remember, though, I said tax revenue, not 
     tax rates. Who knows how much individual and corporate tax 
     rates would have to change to increase revenue by 68 percent?
       If these possible solutions to the unfunded-liability 
     problem seem draconian, it's because they are draconian. But 
     they do serve to give you a sense of the severity of the 
     problem. To be sure, there are ways to lessen the reliance on 
     any single policy and the burden borne by any particular set 
     of citizens. Most proposals to address long-term entitlement 
     debt, for example, rely on a combination of tax increases, 
     benefit reductions and eligibility changes to find the 
     trillions necessary to safeguard the system over the long 
     term.
       No combination of tax hikes and spending cuts, though, will 
     change the total burden borne by current and future 
     generations. For the existing unfunded liabilities to be 
     covered in the end, someone must pay $99.2 trillion more or 
     receive $99.2 trillion less than they have been currently 
     promised. This is a cold, hard fact. The decision we must 
     make is whether to shoulder a substantial portion of that 
     burden today or compel future generations to bear its full 
     weight.
       Now that you are all thoroughly depressed, let me come back 
     to monetary policy and the Fed.
       It is only natural to cast about for a solution--any 
     solution--to avoid the fiscal pain we know is necessary 
     because we succumbed to complacency and put off dealing with 
     this looming fiscal disaster. Throughout history, many 
     nations, when confronted by sizable debts they were unable or 
     unwilling to repay, have seized upon an apparently painless 
     solution to this dilemma: monetization. Just have the 
     monetary authority run cash off the printing presses until 
     the debt is repaid, the story goes, then promise to be 
     responsible from that point on and hope your

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     sins will be forgiven by God and Milton Friedman and everyone 
     else.
       We know from centuries of evidence in countless economies, 
     from ancient Rome to today's Zimbabwe, that running the 
     printing press to pay off today's bills leads to much worse 
     problems later on. The inflation that results from the flood 
     of money into the economy turns out to be far worse than the 
     fiscal pain those countries hoped to avoid.
       Earlier I mentioned the Fed's dual mandate to manage growth 
     and inflation. In the long run, growth cannot be sustained if 
     markets are undermined by inflation. Stable prices go hand in 
     hand with achieving sustainable economic growth. I have said 
     many, many times that inflation is a sinister beast that, if 
     uncaged, devours savings, erodes consumers' purchasing power, 
     decimates returns on capital, undermines the reliability of 
     financial accounting, distracts the attention of corporate 
     management, undercuts employment growth and real wages, and 
     debases the currency.
       Purging rampant inflation and a debased currency requires 
     administering a harsh medicine. We have been there, and we 
     know the cure that was wrought by the FOMC under Paul 
     Volcker. Even the perception that the Fed is pursuing a 
     cheap-money strategy to accommodate fiscal burdens, should it 
     take root, is a paramount risk to the long-term welfare of 
     the U.S. economy. The Federal Reserve will never let this 
     happen. It is not an option. Ever. Period.
       The way we resolve these liabilities--and resolve them we 
     must--will affect our own well-being as well as the prospects 
     of future generations and the global economy. Failing to face 
     up to our responsibility will produce the mother of all 
     financial storms. The warning signals have been flashing for 
     years, but we find it easier to ignore them than to take 
     action. Will we take the painful fiscal steps necessary to 
     prevent the storm by reducing and eventually eliminating our 
     fiscal imbalances? That depends on you.
       I mean ``you'' literally. This situation is of your own 
     creation. When you berate your representatives or senators or 
     presidents for the mess we are in, you are really berating 
     yourself. You elect them. You are the ones who let them get 
     away with burdening your children and grandchildren rather 
     than yourselves with the bill for your entitlement programs.
       This issue transcends political affiliation. When George 
     Shultz, one of San Francisco's greatest Republican public 
     servants, was director of President Nixon's Office of 
     Management and Budget, he became worried about the amount of 
     money Congress was proposing to spend. After some nights of 
     tossing and turning, he called legendary staffer Sam Cohen 
     into his office. Cohen had a long memory of budget matters 
     and knew every zig and zag of budget history. ``Sam,'' Shultz 
     asked, ``tell me something just between you and me. Is there 
     any difference between Republicans and Democrats when it 
     comes to spending money?'' Cohen looked at him, furrowed his 
     brow and, after thinking about it, replied, ``Mr. Shultz, 
     there is only one difference: Democrats enjoy it more.''
       Yet no one, Democrat or Republican, enjoys placing our 
     children and grandchildren and their children and 
     grandchildren in harm's way. No one wants to see the 
     frightful storm of unfunded long-term liabilities destroy our 
     economy or threaten the independence and authority of our 
     central bank or tear our currency asunder.
       Of late, we have heard many complaints about the weakness 
     of the dollar against the euro and other currencies. It was 
     recently argued in the op-ed pages of the Financial Times 
     that one reason for the demise of the British pound was the 
     need to liquidate England's international reserves to pay off 
     the costs of the Great Wars. In the end, the pound, it was 
     essentially argued, was sunk by the kaiser's army and 
     Hitler's bombs. Right now, we--you and I--are launching 
     fiscal bombs against ourselves. You have it in your power as 
     the electors of our fiscal authorities to prevent this 
     destruction. Please do so.

                          ____________________