I.O.U.S.A E-Book

Addison Wiggin

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Agora Series
• Sprache: Englisch

Seitenzahl: 455

Veröffentlichungsjahr: 2008

Beschreibung

The United States has been spending its way deeper and deeper into the red, and saddling future generations with the mess-but who's paying attention? To answer that question, this companion book to the critically acclaimed documentary I.O.U.S.A. talks with some of the most revered voices in the nation, including Warren Buffett; former Treasury Secretaries Paul O'Neill and Robert Rubin; and Pete Peterson, CEO of The Blackstone Group. Defiantly non-partisan, the empowering solutions outlined in these pages are a must-read for any American concerned about the current state of affairs.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Foreword

I.O.U.S.A. Cast of Characters

CAST

CREW

Acknowledgements

Part One - THE MISSION

THE MISSION

Chapter 1 - THE REAL STATE OF THE UNION

The Fiscal Cancer

The Fiscal Wake-Up Tour

The National Conversation

Chapter 2 - THE BUDGET DEFICIT

Bixby Goes to Washington

The Silver Tsunami

What Is a Budget Deficit?

The Concerned Youth of America

Is Anyone Listening?

The Committee to Save the World

What Were They Thinking?

The Real Pain

Solutions

Chapter 3 - THE SAVINGS DEFICIT

What Americans Bought and Lost

The Federal Reserve

Money Supply and Inflation

The First Panacea

A Short Visit with the Maestro

Solutions

Chapter 4 - THE TRADE DEFICIT

The Road to Squanderville

Welcome to Thriftville

We Think, They Sweat

The Nuclear Option

Solutions

Chapter 5 - THE LEADERSHIP DEFICIT

What’s the Right Level of Government?

“Washington Is Badly Broken”

Wake Up, America!

The Mt. Rushmore Curtain Call

EPILOGUE

Part Two - THE INTERVIEWS

THE INTERVIEWS

Alice Rivlin

William Bonner

Robert Rubin

Peter G. Peterson

Ron Paul

Paul A. Volcker

Dr. Alan Greenspan

Warren Buffett

James Areddy

Paul O’Neill

Arthur Laffer

Steve Forbes

Additional Resources

Index

Copyright © 2008 by Addison Wiggin and Kate Incontrera. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

The opinions and views expressed in this book and its foreword are solely those of their respective authors, and not those of I.O.U.S.A., LLC or the Peter G. Peterson Foundation. The Peter G. Peterson Foundation and I.O.U.S.A., LLC did not write or edit any portion of this book, do not endorse it and are not receiving any compensation from its sales.

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eISBN : 978-0-470-44047-6

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For Jennifer, Meritt, August, and Elizabeth,who make all the late-night pacing worthwhile

Foreword

This book will provide you with information on two journeys based on the critically acclaimed documentary I.O.U.S.A. The first is a journey through time in which you learn about various key events relating to our country’s financial and other affairs since the beginning of the American republic in 1789. This journey also looks forward to what our future would look like in 2040 under a do-nothing or let-the-chips-ride scenario. During this journey you will also learn about four key deficits that threaten America’s and our families’ futures and what both Washington policy makers and you should do about them.

The second journey follows the efforts of various participants, including myself, in the Fiscal Wake-Up Tour across the United States. As of June 2008, the Tour had traveled to over half the states and about 40 cities. Participants in the Tour state the facts and speak the truth directly to the American people about our nation’s true financial condition and fiscal future. They also highlight the failure of Washington policy makers to address a range of large, known, and growing challenges that threaten our future.

The documentary is based in large part on a “Four Deficits” speech that I have given on a number of occasions on the Fiscal Wake-Up Tour, which also draws certain lessons from the fall of Rome, the longest-surviving republic in human history. These and the book Empire of Debt (Wiley, 2006), written by Bill Bonner and Addison Wiggin, provide a solid foundation for the documentary’s message. These messages are reinforced by a solid cast of bipartisan characters from the political arena. And we hear from three major sectors of the U.S. economy: those who save and invest; those who choose not to save; and those for whom saving is very difficult.

This Foreword, however, covers my own personal journey, including how it evolved during the shooting of the film over the past two years. My journey continues and will until leaders whom we’ve sent to Washington start focusing on the nation’s future rather than their own present need to get reelected and begin to make tough choices. Our leaders need to deliver some real results for the American people. The alternative is unthinkable for many people.

My personal journey started on October 2, 1951, in Birmingham, Alabama. I was the first of three sons of David S. Walker and Dorothy West Walker. As a child I grew up in several towns in Alabama and Florida. In my early years we rarely traveled outside our hometowns and never outside our home states.

I went to college at Jacksonville University in Jacksonville, Florida, where I met my wife Mary. We were married at the end of my sophomore year. In fact, at the early age of 19, we eloped to South Carolina. I subsequently graduated with a B.S. degree in accounting. Thirty-seven years and many moves later, which included homes in Florida, Georgia, Texas, and Virginia, Mary and I are still married. We now have two children and three grandchildren. So far we’ve beaten the odds associated with marrying at such a young age.

My professional career stated in public accounting with Price Waterhouse and Company. After earning my certified public accountant (CPA) certificate, I changed firms and joined Coopers and Lybrand. Later, I became involved in the recruiting and human resource consulting business before doing public service in the federal government. My career has included serving as head of a global service line for Arthur Andersen LLP before the firm experienced the problems that led to its downfall.

My federal government career started in 1983 with the Pension Benefit Guaranty Corporation and later the Labor Department. I’ve had the privilege to lead three federal government agencies, all professional services organizations. Most recently I served as Comptroller General of the United States and head of the U.S. Government Accountability Office (GAO) from 1998 to 2008. I also served as a Public Trustee for the Social Security and Medicare Trust Funds (1990-1995) while I was a partner with Arthur Andersen.

I have been fortunate to receive Presidential appointments from Ronald Reagan, George Herbert Walker Bush (41), and Bill Clinton, each time being confirmed unanimously by the United States Senate. There aren’t many people who can say that. In fact, I may be the only person who can.

During my more than 35-year professional career I have spent 20 years in the private sector and 15 years with the federal government. I have been a transformational change agent in many of these positions, so far with very positive results. Hopefully, that will continue.

Other than my professional background, there are things about me and interests that have had a strong influence on my career and actions. For example, my Walker line came to America in the 1600s and initially settled in Virginia. I have several ancestors who fought, and at least one who died, during the American Revolution. I am a student of history and a member of the Sons of the American Revolution. Mary and I live in Mt. Vernon Farms, Virginia, on land that was once owned by George Washington.

Despite my family’s long history in America, to my knowledge, I am only the second Walker in my direct line to graduate from college. Most of my ancestors prior to my father worked in the mines, in mills, on farms, or as ministers.

While we rarely traveled outside the state in my early years, I have been fortunate to travel to all 50 states and about 90 countries to date. And, while I am proud to be an American, I also realize that there are many issues that are global in nature and that we must partner for progress with other countries to help make the world a better and safer place. Furthermore, while the United States is number one in many things, my experience has caused me to realize that we are not number one in all things. In fact, we lag many other industrialized nations in connection with a range of key outcome-based indicators—public finance, education, health care, savings, and research and development, to name a few.

From a political perspective, early in life I was a southern Democrat. Later I was one of the first in Northern Florida who changed my party registration to become a Republican. In 1997, I officially became a political independent, reflecting my frustration with both parties. As a candidate for the position of Comptroller General of the United States, I believed I should be independent both in form and in substance.

I consider myself an American who is an internationalist. I was very involved in international policy and accountability issues during my tenure as Comptroller General. My interest in international issues continues and I was recently fortunate to be elected as the first chairman of the Independent Audit Advisory Committee (IAAC) of the United Nations.

Enough about my background—what about my involvement in the documentary? My involvement began with reading a book. As a history buff and a person interested in financial matters, I decided to buy the book Empire of Debt on one of my many trips into a bookstore before boarding a flight. On this occasion, Mary and I were flying to Phoenix to visit our son Andy, our daughter-in-law Meghan, and their family.

During my career, I have become a fast reader and prolific writer. As a result, I was able to speed-read the book on the long flight west. I enjoyed the book, especially the analogies to past history. I have used the analogies in many of my speeches, including frequent references to the challenges that we now face that led to Rome’s downfall. At the same time, while I enjoyed the book, I did not agree with everything in it.

When Mary and I arrived at Andy and Meghan’s home we had the opportunity to engage in a time-honored tradition for grandparents: reading to our then granddaughter, Grace. She is a very bright young girl. While I took my turn and read her a children’s book, as somewhat of a joke, I also read her a single paragraph out of Empire of Debt. The paragraph discussed how our current federal policies were mortgaging our future. When I was done, I asked Grace what she thought. To my shock and amazement she said, “Devastating, Granddaddy!” She was only four years old at the time!

If a four-year-old can get it, then why is so hard for a vast majority of current federal elected officials? Are they in denial or just happy to kick the can down the road while they leave key sustainability challenges for someone else?

In large part, I believe the greatest deficit that the United States has right now is a leadership deficit. You’ll hear more about this and our nation’s other deficits in this book and in the film.

Subsequent to our Phoenix trip, my office at the GAO was contacted by the film crew who requested to meet with me about a documentary they were planning to do on federal deficits and debt. Since I had done a number of electronic interviews and was obviously interested in the topic, I agreed.

The meeting was attended by Patrick Creadon, Addison Wiggin, Kate Incontrera, and others from Agora Financial. They provided an overview of the planned documentary, and when they had finished I said, “Does this have anything to do with the book Empire of Debt?” Addison and Patrick looked at each other and hesitated to speak. Evidently, they didn’t know whether I liked the book or not. Once they acknowledge that it did, I noted that I had read it and liked it. After that point, things went well and it was the beginning of a great adventure.

While the book was the initial basis for the documentary, over time it evolved to concentrate more on our efforts in the Fiscal Wake-Up Tour. That Tour is coordinated by the nonpartisan Concord Coalition and it also involves scholars from the Brookings Institution, the Heritage Foundation, and me. Successful documentaries, Patrick explained to me early on, usually have one or more persons to focus on in order to help personalize the film. I was fortunate to be selected as one such person.

Patrick, Addison, and their crew followed the Tour to several locations across America, including Omaha, Nebraska; Des Moines, Iowa; Manchester, New Hampshire; Los Angeles, California; and Madison, Wisconsin. They also filmed many other subjects

The Fiscal Wake-Up Tour also took on extra notoriety after the CBS 60 Minutes program decided to do a segment on it. The program helped increase attendance at our events outside Washington as well as the attention paid to our efforts inside Washington’s Beltway. The 60 Minutes segment also paved the way for a timely introduction to our work in the documentary.

We found in our many Town Hall meetings that the American people were smarter than many politicians realized. Once you state the facts and speak the truth, people get the message. At the same time, the American people are distrustful of Washington. They’re starved for two things: truth and leadership.

In November 2007, after many Tour stops, I was fortunate to be recognized as the Concord Coalition’s Economic Patriot of the Year. Prior recipients included former president of the United States Bill Clinton, former Treasury secretary Bob Rubin, and former chairman of the Federal Reserve Paul Volcker. Little did I know that in accepting that award, my career path would change once again.

During that evening I made a brief yet substantive acceptance speech. I also had the opportunity to participate in a substantive panel discussion with Rubin, Volcker, former senators Rudman and Kerrey, and the president of the Concord Coalition, Pete Peterson. I must have done all right because about a week later, I received a call from Pete Peterson.

Pete called under the pretense that he wanted my input on his plans to start a new foundation dedicated to trying to address the budget and other key sustainability challenges. It didn’t take long before his real purpose became clear: He wanted me to head his new foundation.

Needless to say, I was flattered and surprised. And yet I was very happy with my current job and the work I was doing at GAO. While I noted that fact and raised a number of reasons why I felt it probably did not make sense for me to change, Pete was persistent. A couple of months of discussion later, I decided to accept his offer.

My primary reason for deciding to accept was that I became convinced that at my new post I would be able to do certain things to help achieve changes that I could not do as Comptroller General. As the president and CEO of the Peterson Foundation I would be able to advocate specific policy solutions, build strong and overt coalitions for change, and stimulate and support the various grassroots efforts designed to pressure Washington policy makers to make tough choices—and to hold them accountable if they failed to act.

I was also interested in working in partnership with Pete, who is a great American and in many ways a case study of the American dream come true.

As I said when asked about leaving my position as Comptroller General and head of the GAO, “Committed generals do not leave the fight, although sometimes they change their position on the battlefield.” I said that we aim to “keep America strong and the American dream alive by promoting responsibility and accountability today in order to provide more opportunity tomorrow.”

After joining the Foundation, I proposed and the directors agreed that the Foundation should purchase the documentary from Agora and finance its distribution. We are excited about its message and feel strongly that the time is right for it to be heard.

We look forward to the theatrical release of the film and to its later premier on television. We also plan to take other steps to make sure that it is ultimately seen by as many people as possible.

In my view, it is time for elected officials to start making tough policy choices in connection with our nation’s budget, entitlement programs, spending policies, and tax policies. Our next president needs to make fiscal responsibility and intergenerational equity a priority. If he does, and if he resists making dumb promises, while using the bully pulpit of the presidency and working on a bipartisan basis to achieve real and lasting change, we can successfully meet this challenge.

If this happens, and a few bipartisan leaders join in the fight, we can make sure that our future is better than our past and that the United States is the first republic to stand the test of time. These are goals worth fighting for. “We the People” can turn things around. If you agree, then join the fight for America’s future at www.pgpf.org. You, your country, and your family will be glad that you did.

Honorable David M. Walker President and CEO, Peter G. Peterson Foundation Former Comptroller General of the United States

I.O.U.S.A. Cast of Characters

CAST

Hon. David Walker: Former U.S. Comptroller General and President and CEO of the Peter G. Peterson Foundation.

Robert Bixby: Executive Director of the Concord Coalition.

Sen. Kent Conrad (D-ND): Chairman of the Senate Budget Committee.

Sen. Judd Gregg (R-NH): Ranking member, Senate Budget Committee.

Alice Rivlin: The first director of the Congressional Budget Office and on the team that balanced the budget during the Clinton administration. William Bonner: Bestselling author and founder and president of Agora, Inc., a financial research and publishing group.

The Concerned Youth of America: A grassroots, non-partisan organization whose goal is to increase awareness of the state of the U.S.’s finances among the youth of the nation.

Robert Rubin: 70th Secretary of the U.S. Treasury (1995-1999), one of the key players in the Clinton administration’s balanced budget.

Peter G. Peterson: Co-founded the Concord Coalition in 1992, and founder of the Peter G. Peterson Foundation.

Paul Volcker: Chairman of the Federal Reserve Board (1979-1987), and best known for battling the inflation of the early 1980s.

Hon. Ron Paul: Outspoken proponent of “free market” economics and critic of the Federal Reserve System.

Alan Greenspan: Chairman of the Federal Board (1987-2006, and still seen as a leading authority on U.S. economic and monetary policy.

Warren Buffett: CEO of Berkshire Hathaway, and regarded as one of the world’s greatest stock market investors.

James Areddy: Correspondent for the Wall Street Journal in Shanghai, China.

Paul O’Neill: 72nd Secretary of the U.S. Treasury, who was fired after 23 months, after having a ‘difference of opinions’ about deficits with Vice President Cheney. Art Laffer: Former member of President Reagan’s Economic Policy Board. He is best known for popularizing his Laffer curve.

CREW

Addison Wiggin, Executive Producer

Patrick Creadon, Director

Christine O’Malley, Producer

Sarah Gibson, Producer

Doug Blush, Editor

Brian Oakes, Graphic Design

Theodore James, Associate Producer

Kate Incontrera, Associate Producer

Acknowledgments

It turns out that reverse engineering a documentary film into a companion book is not as easy as it might sound. Creatively, you can convey a lot of information with images, music, and dialogue in a movie that require much more background and setup in a book. There are a number of people we want to thank for allowing us to take six weeks in the summer of 2008 to wrap our heads around two and half years of travel, filming, interviews, and research.

First, we want to thank Ian Mathias and Greg Kadajski for holding down the fort in Agora Financial’s 5 Min. Forecast and The Daily Reckoning, respectively. Writing, editing, and publishing daily stock market and economic commentary is a daunting task when you’re working as a team. Going it alone is much more so. Both have done an admirable job. Thanks to all the folks who work so hard at Agora Financial, including but not limited to Joseph Schriefer, Mark O’Dell, Greg Grillot, Chris Mayer, Eric Fry, Michelle Nickels, John Forde, Chad Barrett, and Mike Pizzo, for relieving us of critical duty during the writing of the book, and to Bruce Robertson for helping negotiate all the paperwork and the labyrinthine accounting process.

We’d like to thank Bill Bonner, too, not just for his insights in The Daily Reckoning, but for biting his tongue and giving us the freedom to explore the documentary project at will. Thanks to Matt Turner, Myles Norin, and Bob Compton for supporting the project legally and financially, and to Scott Weiser and Doug Nevin for ably representing our interests in the film acquisition by the Peter G. Peterson Foundation.

Thank you to David Walker for taking such an interest in our work, for helping us get the story straight on the nation’s four deficits, and for providing the Foreword to this companion piece. It’s worth noting that while David wrote the Foreword to this book and his consultation was helpful in piecing the script together, the words in this book are our own and do not necessarily represent the views and/or opinions advocated by the Peter G. Peterson Foundation. In addition, we’d like to thank Elizabeth Wilner at the Peterson Foundation. Thanks to Bob Bixby and all the folks at the Concord Coalition for the ideas and insights they contributed to the film and subsequently the book.

A big thank-you goes to the amazing crew that put together the movie: Patrick Creadon, the director; Christine O’Malley, Sarah Gibson, and Theodore James, producers extraordinaire; Brian Oakes, who designed all the graphics you see in the film and in this book; and our editor, Doug Blush. We know this subject can be extremely difficult, but this group of talented individuals tackled this project wholeheartedly. We are very grateful for the unique vision and insights each person brought to the table to help shape the story of I.O.U.S.A. We would also like to thank Jon Carnes and the One Horizon Foundation for getting the film from just an idea we were batting around to a reality, and to Roadside Attractions for getting I.O.U.S.A. out into the public eye. A big thank-you to Dorianne Perrucci and the team over at John Wiley & Sons, especially Debra Englander, Joan O’Neill, and Kelly O’Connor, for all of their hard work on this book and putting up with our unique understanding of deadlines.

We would like to thank the Wiggin and Incontrera families, as well as Craig Stouffer, for their continued support of this project (and of us). Thanks to our friends and co-workers for putting up with our hectic schedules, being a sounding board when needed, and even providing us with a place to write (thanks, Kyle!).

Last, we would like to thank the distinguished group of experts who allowed us to interrupt their busy lives to sit down with us to be interviewed for I.O.U.S.A.:

• Alice Rivlin

• William Bonner

• Robert Rubin

• Peter G. Peterson

• Ron Paul

• Paul Volcker

• Alan Greenspan

• Warren Buffett

• James Areddy

• Paul O’Neill

• Arthur Laffer

• Steve Forbes

Part One

THE MISSION

THE MISSION

Deficit reduction cannot be described as a sexy topic. Unfortunately, it is hard to break through with an unsexy message. It comes across as kind of like taking a cold shower. We come along after the sexy messages and cool people off.

—Bob Bixby, executive director, Concord Coalition, in the film I.O.U.S.A.

The I.O.U.S.A. project has been one long, cold shower. As Bob Bixby put it, it’s hard to break through with an unsexy message. But we’ve been trying. The film and the book are the culmination of nearly five years of work. When we began, the potential difficulties of a growing national debt and a struggling currency—both abetted by negligence on the part of the nation’s policy makers—were far from the media headlines.

Words like subprime, mortgage-backed securities, and inflation barely piqued the interest of the average American. Gasoline and food prices appeared to be stable. The stock market appeared to have recovered from the tech bust and was on its way to new record highs. It looked like house prices would be going up forever. Interest rates were dropping. Despite the wars in Iraq and Afghanistan, Americans were generally positive about the outlook for the economy and their own prospects within it.

But we had our suspicions.

Along with much of the Western world, the United States is entering a demographic transformation to an older society. But we’re doing so at a bad time. Health care costs are rising dramatically. The nation has a falling savings rate. Together they make a very bad combination for the economy. But, as with any extravaganza, it’s hard to get people to see that the party’s over.

In the fall of 2005, after two years of research and writing, Bill Bonner and I published Empire of Debt, a look at the history of rising debt in all levels of American society. The federal government had been, and still is, running historic deficits in the federal budget. The national debt was growing at a pace never seen in the nation’s history. While the Bush administration waged increasingly unpopular wars overseas, Congress—and, by extension, the American people—was depending more and more on foreign lenders and tapping the Social Security and Medicare trust funds to pay its bills. The national savings rate was about to go negative. And the current account balance—the nation’s balance sheet with the rest of the world—was entering historically negative territory as well.

On the surface, the stock market and housing were growing nicely, indeed. Underneath, a review of the numbers told an entirely different story.

We didn’t know for sure, but suspected the mortgage market was likely to show the first cracks of a system under stress. We forecasted an implosion in that market and an ensuing recession led by a slowdown in housing, which so many Americans had begun to rely on as their principal source of wealth. As such, we thought it would be a good idea, if a tad impertinent, to send the book Empire of Debt to all the members of Congress at their home offices. We sent a copy to the Federal Reserve and another to the White House. At the time, we were under the impression no one in Washington was paying attention. As long as U.S. dollars were rolling off the presses at the Bureau of Engraving and Printing, the record seemed to show no one was inclined to worry.

One serendipitous moment would prove us wrong.

On November 14, 2005, the very day we were stuffing copies of the book into manila envelopes, USAToday ran a cover story featuring a press conference that David Walker, then comptroller general of the United States, had given before the National Press Club.

“The United States can be likened to Rome before the fall of the empire. Its financial condition is ‘worse than advertised, ’” the newspaper said, quoting Walker. “It has a ‘broken business model.’ It faces deficits in its budgets, its balance of payments (the trade deficit), its savings—and its leadership.” That we were mailing a book which effectively drew the same analogy seemed like more than a small coincidence. Little did we know how important Mr. Walker’s list of “four deficits” would become to this project. As you’ll see, they would provide both the context and framework we were looking for to help bring a difficult, complex, and unsexy message to a wider audience.

Before we even had a title for Empire of Debt, I got snowed in for several days doing research at Brad and Julie Wiggin’s condo in Sugarbush, Vermont. I’d taken a slew of reading material and one documentary along with me, Daniel Yergin’s The Commanding Heights. Yergin’s work follows the ideas of two of the twentieth century’s most influential economists, John Maynard Keynes and Friedrich A. von Hayek, during the course of their prolific lives.

Surrounded by the deep snow, and sitting amidst those books, I used the film Commanding Heights as a diversion. Call me a masochist. By the second run through, I was impressed with the way the filmmakers had woven together similar themes to our own. They’d even turned economics into an entertaining program for television.

Several months later, the publication of Empire of Debt drew moderate interest from the media. We were featured briefly in the New York Times magazine. ABC News put us on their 4:00 A.M. slot. The Economist listed us as one of their “must reads” for 2005, based on sales from Amazon.com. The book even made it on to the New York Times business list. But the housing boom was nearing its peak. Most of the media viewed our work with a jaundiced eye.

Recalling the snowed-in episode in Vermont, I decided at that point, naively, that turning Empire of Debt into a documentary would be a good idea. Wouldn’t it be easier to hand a friend a DVD and say, “You have to watch this movie,” than a 400-page economic tome on the history of debt in the United States? You’d think so. But making a movie, it turns out, involves a few more moving parts than writing a book.

After a few false starts, we got lucky and found the team that would ultimately pull the project together. Jon Carnes, a reader of our Daily Reckoning e-letter, responded to an informal proposal of the film we’d written up. Jon, who had founded Eos Funds, a firm providing research for hedge funds, had recently invested in a production company in Hollywood. Jon said he’d met some producers through the process and could introduce us if we were serious. That relationship lead us to Sarah Gibson, who produced a film featured at the Sundance Film Festival in 2006, where she met Patrick Creadon and Christine O’Malley, who were also at Sundance with their film Wordplay, a documentary about the New York Times crossword puzzle.

The O’Malley-Creadon team didn’t come to the project lightly. It took several, five in fact, serious phone conversations and a few face-to-face meetings to help them see we were serious about taking a rather complex and dry economic subject and making it fun and entertaining enough for a wider audience.

Eventually, Patrick and Christine grew interested in the challenge. “We didn’t think we could find a more challenging subject for a film than crosswords,” Patrick would later tell an audience of Wordplay fans in Los Angeles, “until we decided to make this film about the national debt.”

With the team assembled, and a fair amount of the budget already on the line, we went to work. Among the first tasks involved in making the documentary was to assemble a hit list of the folks we’d like to interview for the project. Naturally, David Walker’s comments regarding the finances of this country resembling Rome before the fall of the Empire put him at the top of our list. Having been engaged in the Fiscal Wake-Up Tour, he accepted a meeting with us.

To our surprise, during our first meeting David revealed he’d read Empire of Debt and enjoyed it—even if he didn’t agree with everything in the book. We learned we shared an interest in economic and political history.

From the director’s perspective, Patrick’s talent is clear. He convinced us that if were we to be successful in telling a complicated story to a general audience, we’d need a “real” human story to help carry the viewers’ interest. After a few tense, but fruitful, days in a classroom at the American Film Institute, Patrick’s alma mater, we grew increasingly interested in David Walker and Bob Bixby as the lead protagonists of the film. They, in turn, grew more interested in working with us.

Readers of this book will likely expect a screen-by-screen “making of” of Empire of Debt. But because of the challenge we faced turning that story into a film, what we have now is something quite different. Indeed, the I.O.U.S.A. project took on a life of its own. And thus, as you’ll no doubt read in the credits, the documentary was “inspired” by the book. After our first meeting with David, we seized on the “four deficits” he had outlined in his Fiscal Wake-Up Tour as a solid structure for telling what may be most important story of our generation.

The film and this book are largely an exercise in literary economics and consequently different from most of the writing we do in our daily letters, or in our other books, for that matter. As we’ve seen from our discussions, interviews, and chance encounters across the country, the average citizen doesn’t have a clue about economics or the challenges we face as a nation. On average, most think Social Security and Medicare, the wars in Iraq and Afghanistan, managing the “money supply,” or keeping the government afloat, are somebody else’s job—an “expert” in Washington or in New York.

In order for people to feel empowered to institute change, we decided to travel the globe and go visit them. Of course, the film took us to New York and Washington, D.C. But it also took us all over North America—Los Angeles; Vancouver; Omaha; Concord, New Hampshire; Ames, Iowa. It took us overseas to Shanghai, Beijing, London, and Paris.

We interviewed two former Fed chairmen, two former Treasury secretaries, one former commerce secretary, and two former presidential candidates. We talked to the two ranking senators on the Senate Budget Committee and the first director of the Congressional Budget Office.

We aimlessly wandered through the marbled halls on Capitol Hill, each of us carrying a different piece of camera or lighting equipment. In the same fashion, we politely slipped through security at the nation’s largest bank. Likewise, we jabbered our way through conversations with the richest man in the world, several best-selling financial authors, leading policy makers, bankers, economists, entrepreneurs, and civic leaders. We badgered journalists and editors of leading financial publications. For 18 months, we bounced our ideas off other filmmakers, writers, and producers.

Everywhere we went—to a fault, some would say—we asked the proverbial “man on the street” what he thought about our mission, the economy, his lot in life.

In the end, what we learned and, by extension, what you’ll read in this book, can be boiled down to one statement: No one agrees 100 percent on what the solutions are for the problems we face as a nation. But that we’ve lived beyond our means for too long is obvious to everyone. “There is no free lunch,” Robert Rubin told us in the executive offices of Citibank. We agreed with him.

While we have included some numbers and charts to illustrate what we expect will happen if the nation’s four deficits are not addressed, to keep the story interesting, we focused on people—the people who are making important decisions about the economy and the finances of the federal government.

Who wouldn’t want to hear, for example, Paul O’Neill, the 72nd Treasury secretary of the United States, tell us, in person, his account of the day Dick Cheney, then vice president, told him “Reagan proved deficits don’t matter,” or later when he got fired for “a difference of opinion” over the Bush tax cuts. What Reagan proved was deficits don’t matter if you, the electorate, don’t hold them, the office holders, accountable.

Having written a chapter entitled “The Fabulous Destiny of Alan Greenspan” in Financial Reckoning Day (Wiley, 2003), we didn’t know what to expect when we interviewed him. But we found his explanation for why interest rates remained so low during the 18 years of his tenure as the chairman of the Federal Reserve very interesting. The end of the Cold War, he said, and the fall of the Iron Curtain had created a demand for capital in the East that kept interest rates low in the West.

We met with Robert Rubin, the 70th Treasury secretary of the United States, at the Citigroup executive offices where he was presiding, only five months before the subprime crisis began in earnest. But Mr. Rubin told us, calmly, how difficult it was to reach “political coalescence” when the Clinton administration showed a federal surplus on the budget “for the first time in roughly 30 years.”

Warren Buffett joined us in an unassuming meeting room at his Berkshire Hathaway headquarters in Kiewit Plaza in downtown Omaha. Initially, we believed we only had 20 minutes with him; however, when he entered the room he told us he “wasn’t doing anything else today.” By the end of the interview we had exhausted our list of questions and had over an hour of film with him.

The point of this particular literary exercise is simple. We wanted to show what Alice Rivlin, the first director of the Congressional Budget Office, meant when she said, “People may think somehow that decisions are made by other people far away, but in a democracy that’s not really true. It is your representative in Congress or in the Senate that is influencing what happens—so it’s pretty important for people to pay attention to it.”

As the conditions of the once-vibrant U.S. economy began to take a turn for the worse, the American people seemed to be paying more attention to the country’s fiscal challenges. And when the debt crisis gained mainstream attention with the near default of Bear Stearns in July 2007, the I.O.U.S.A. project took another turn. By mid-September, we were forced to throw out the whole film as we’d conceived it to be up to that point … and start again. The crisis we had been expecting was no longer “going to happen” but was, in fact, happening right then. We could read it in the headlines every morning before getting settled in the editing bay.

Having gone back to the drawing board, we were shocked when I.O.U.S.A. was among 16 out of 935 films to be selected for competition at the Sundance Film Festival in Park City, Utah, in 2008. At the festival it became clear that the audience was in tune with the film’s message, as it sold out every screening and we received standing ovations. Variety, the film industry magazine, likened the film to An Inconvenient Truth for economics. Kenneth Turan, film critic for the Los Angeles Times, called it the “scariest film at Sundance.” Michael Sragow of the Baltimore Sun lauded our project as having come from a “new breed of documentary filmmakers.”

We subsequently took the film to Dallas; Philadelphia; Jacksonville, North Carolina; Oregon; and Silver Spring, Maryland. At each festival the film was received with critical acclaim. We screened at the Maryland Film Festival, in our home town of Baltimore, with the help of festival director Jed Dietz, whose office is a stone’s throw away from our own. Jed was instrumental in helping us navigate the early phase of the project. Again, we were encouraged by the audience’s response. By this time, we began to notice new faces in the crowd. Former senators and members of previous presidential cabinets arrived and took part in question and answer sessions. We hope they were paying attention.

David Walker, as he explains in the Foreword, was inspired by the film’s reception. He was persuaded to resign his post at the Government Accountability Office (GAO) to head up the Peter G. Peterson Foundation. His first act at the Foundation was to acquire the film from Agora Entertainment, the production company we founded to produce the film, and subsequently to orchestrate the distribution of the film.

Through the Peterson Foundation’s efforts, the film opened in 400 theatres around the country on August 21, 2008. The premier itself was held in Omaha, Nebraska, with a live simulcast satellite feed featuring Warren Buffett, Pete Peterson, and David Walker. During the two weeks following the event, the film was screened at the Impact Film Festival, and was one of four selected for viewing at both the Democratic and Republican national party conventions.

The timing of the debut of the film on the national scene and the release of this book couldn’t be more appropriate. Over the course of the project, the national debt alone has provided ample proof of what negative compounding can do to a balance sheet. At the time we were mailing Empire of Debt to Congress, and David Walker was sounding the alarm at the National Press Club, the national debt stood at $4.7 trillion. We didn’t want to believe the $8 trillion the Levy Institute projected by 2008. Unfortunately, their projections fell significantly short. On August 31, 2007, the debt hit $8 trillion. As I.O.U.S.A. debuted in theatres in August 2008, the debt spiraled over $9 trillion.

The promises on the books for all of the federal obligations, including Social Security and Medicare programs, already exceeds $53 trillion—a number so monumental it makes understanding the scope of the obligation next to impossible.

To meet its current obligations, the U.S. government racks up another $1.86 billion of debt every day. In very simple terms, every citizen already “owes” over $32,000. By 2010, that figure will be $38,000. By 2017, Social Security will no longer run surpluses and, thus, will no longer help fund the government’s other activities. From that point forward, the debt compounds negatively—and in dramatic fashion.

What’s at stake? The U.S. government is going broke. At this rate it won’t be able to do what you believe it can do. One study, conducted by the National Center for Policy Analysis (NCAP), suggests that without meaningful increases in government revenues and reform of the entitlement programs:

• By 2012, the federal government will stop doing 1 in 10 things it’s doing now.

• By 2020, the federal government will stop doing 1 in 4.

• By 2030, the federal government will stop performing half of the services it provides.

• By 2050, Social Security, Medicare, and Medicaid will consume nearly the entire federal budget.

• By 2082, Medicare spending alone will consume nearly the entire federal budget.

At the current rate, it’s inevitable: Most Americans are going to have to rethink what they expect from their government. Do politicians need to be held accountable for the promises they make during election campaigns? Seems like a natural. But individuals need to take responsibility for their own financial future, too. Planning better, saving, and investing wisely in private life will make it easier for policy makers to make difficult decisions regarding the finances of the government.

We have set this book up in a different fashion than Empire of Debt or Demise of the Dollar. The first part, “The Mission,” can be read almost as if it’s a play—a tragicomedy of sorts. It’s a primer if you’re seeking a basic understanding of the nation’s biggest economic challenges, both public and private.

If you’d like to dig a little deeper, we’ve printed the full transcripts of all the interviews we conducted in the second part, “The Interviews.” There is no shortage of ideas, fiery discussion, and inflammatory statements. Some readers will want this book to be an attack on one party at the behest of the other. Still others will want us to throw Molotov cocktails at the Establishment and suggest the United States government is a failure and deserves what it has coming. In this book, as in the film, we do neither. We reserve those activities for other more appropriate locales.

Together, the book and film do provide a unique slice of contemporary economic history in the United States early in the twenty-first century. With any luck, we’ll make fiscal responsibility hip in Washington again and inject the themes of the book and the film into the national conversation well before and long after the 2008 election.

Or maybe we should just wait for the next bubble.

Chapter 1

THE REAL STATE OF THE UNION

I would argue that the most serious threat to theUnited States is not someone hiding in a cavein Pakistan or Afghanistan, but our own fiscalirresponsibility.

—David Walker, former comptroller general of the United States

On January 28, 2008, the forty-third president of the United States, George W. Bush, gave the final State of the Union address of his presidency. During the speech, he was interrupted 72 times by applause. Curiously, the president only broached the nation’s deficit once, briefly, and then only to reassert the administration’s pie-in-the-sky projection that it will be reduced to zero by 2012.

The president asserted his administration’s premise that tax cuts would spur economic growth and that growth would, in turn, help the nation “grow” its way out of debt. Yet, even by Congress’s own measures, as of late January 2008, the yearly deficit for that year was already on track to increase by $219 billion. It in fact ended the year at $482 billion more than twice the projection. Those figures don’t include off-budget spending for the wars in Afghanistan and Iraq. Nor do they include the so-called economic stimulus checks the president and Congress passed out to American consumers in the spring. The economy in the meantime had been teetering towards recession—no “growth” at all—for nearly two years.

Debt Ceiling: The maximum borrowing power of a governmental entity; this limit is set, and can therefore be raised, by Congress.

During the speech, the President used the word debt once, despite the fact that the national I.O.U. had already crossed the $9 trillion threshold in the same month. By the time the Bush administration leaves office in January 2009 it will have tacked on another trillion.

A complicit Congress has already given the green light for such a debt burden by raising the debt ceiling to $10.6 trillion. On July 26, 2008, Congress snuck the increase into the Federal Housing Finance Regulatory Reform Act of 2008, which was passed to bail out giant mortgage enablers Fannie Mae and Freddie Mac and to help victims of bank foreclosures.

A short review of contemporary history reveals that the State of the Union is nothing more than political theatre. Congress has interrupted every president with partisan applause since the addresses made their television debut during the Eisenhower administration. We combed the archives looking for examples of leadership in tough economic times but found little more than sound bites and vacuous promises:

“We must try to break this calamitous cycle.” President Eisenhower was referring to the huge explosion in our debt during World War II.

“We will continue on the path to a balanced budget.” Then President Johnson put his stamp of approval on Medicare benefits, one of the most expensive programs in federal history.

“We have been self-indulgent,” President Ford chided Congress in 1975.

“and now the bill has come due. . . . The State of the Union is not good.”

“We must act today in order to preserve tomorrow.” President Reagan looked earnest, but he grew the debt more than two and a half times—from just under $1 billion to $2.6 billion.

“We will solve problems,” George H. W. Bush (number 41) said before failing to keep his promise not to raise taxes, “and not leave them to future generations.”

“We need a spending discipline in Washington, D.C.” said President George W. Bush (number 43) to wild applause on January 28, 2008.

As we have seen, Congress and the presidents bask in the heat of TV camera lights, but behind the scenes—in the committee rooms and oak-paneled bars of Washington D.C.—it is clear that the process for managing the nation’s finances is badly broken. When Bush 43 came into office in 2001, the federal debt was $5.6 trillion. He’ll leave the next president—and every other American citizen—nearly twice as much. Meanwhile, the real state of the union—or at least the popular perception of it—can be seen by rifling through the headlines of the nation’s mainstream media:

December 4, 2007: “Economy moves to fore as issue for 2008 voters,” writes the Wall Street Journal.

March 4, 2008: “Record High for Oil Socks Economy” states the Chicago Tribune. Gas prices, too, have been weighing heavily on consumer balance sheets.

May 16, 2008: “U.S. Consumer Confidence at Lowest Since 1980.” reports the Financial Times, noting that 1980 was the last year in which concerns about inflation played a major role in a presidential election.

June 30, 2008: “Expect U.S. economic woes to linger into 2009,” warns the Christian Science Monitor.

July 1, 2008: “It’s a Murphy’s Law Economy,” says the Baltimore Sun, referring to the bursting housing bubble, suggesting that “whatever can go wrong” in the economy “will.”

GAO: This non-partisan agency is the audit, evaluation, and investigative arm of the U.S. Congress and is in the legislative branch of government. It exists to help improve the performance and accountability of the federal government for the benefit of the American people, according to its most recent mission statement. At the helm of the GAO is the Comptroller General of the United States, which is a 15-year position appointed by the President.

Beginning with revelations that the investment bank Bear Stearns was nearly insolvent, in the summer of 2007, the average citizen learned new terms like subprime and inflation and woke up to the fact that something wasn’t right with the economy.

Enter our first protagonist.

The Fiscal Cancer

“Who is David Walker?” Steve Kroft asked on CBS’s March 4, 2007, episode of 60 Minutes, “and why should we care?”

According to Kroft, “He’s the nation’s top accountant—the comptroller general of the United States. He’s totaled up the government’s income liabilities and future obligations and concluded that our current standard of living is unsustainable unless some drastic action is taken . . . and he’s not alone.”

In his capacity as the comptroller general of the United States, David Walker was head of the U.S. Government Accountability Office, better known as the GAO. The office is in the legislative branch of government and, as Walker stated in the documentary I.O.U.S.A, is charged with “improving transparency, enhancing government performance, and assuring accountability for the benefit of the American people.”

Three months before the 60 Minutes episode aired, we’d had the opportunity to meet with Mr. Walker and came to see that we shared similar concerns for the state of the economy. Over the next year of filming and producing I.O.U.S.A., we talked to him in numerous locations around the country. This first interview was at his office at the GAO in Washington, D.C.

“I was set to be career military,” says Mr. Walker. “I had appointments to the Naval and Air Force Academies but I couldn’t go at the last minute because I had a bad left ear and it kept me out of my military career. I knew it was only a matter of time before I decided to serve my country in some way. And I’ve been fortunate to have three presidential appointments—one from Reagan, one from Bush 41, and this one from Clinton. It’s been a pleasure and an honor to serve my country.”

Today, however, for Mr. Walker, service to his country includes issuing a dire warning. “We suffer from a fiscal cancer,” he asserted on 60 Minutes. “It is growing within us and if we do not treat it, it could have catastrophic consequences for our country.”

“We suffer from a fiscal cancer,” Walker asserted on CBS’s60 Minutes.“It is growing within us and if we do not treat it, it could have catastrophic consequences for our country.”

Fiscal cancer? Sounds grave. What’s he talking about?

Let’s see. When we began making the film the federal debt was $8.7 trillion, and as mentioned in the beginning of this chapter, that number is growing daily at a rapid rate.

With a number this big, it helps to compare it to the overall size of America’s economy, or what economists call the gross domestic product (GDP). In February 2007, when our federal debt was $8.7 trillion, our GDP was around $13.5 trillion in size. That meant that our federal debt was about 64 percent of our GDP. This level of debt to GDP ratio is not the real problem. It’s where we are headed that matters.

“In addition,” David Walker says, “as you’ll find out soon, this $8.7 trillion number is just a fraction of our fiscal challenge. And it’s projected to get much worse in the future.”

But Walker isn’t banging on his fiscal responsibility drum alone. There are others like him who see an economic disaster of epic proportions waiting for the United States just around the corner, and who are passionate about alerting the American people. Take Bob Bixby, for example, who is the executive director of the Concord Coalition. We first met Mr. Bixby in his office at the Concord Coalition headquarters in Washington, D.C. “Our current fiscal path is unsustainable,” he says. “Most people from the left or the right agree

Gross Domestic Product (GDP):