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Baby boomers' legacy for their descendants won't be pretty

With a $2 trillion swing from surplus to debt since 2000, the next generation needs help now.

 

Last week I was reflecting on the halcyon days of 2000. The country was ending the years of the Clinton presidency in an incredibly powerful position in the world.

We had vanquished the threat of the Soviet Union. Things seemed so calm in the world that a good friend who was a Navy admiral and third-generation career naval officer told me he was advising his son to leave the Navy because there wasn't likely to be a central role for the military in the new world order.

On the economic front, inflation had been tamed. The tech boom was fueling a strong economy. Budget forecasts for the 2009-2012 period projected an average surplus of almost $850 billion per year.

How far the mighty have fallen. The tech bubble collapsed. The Sept. 11, 2001, attacks happened. Afghanistan and Iraq soon followed. Ironically, my Navy friend, Dennis C. Blair, who retired after the Bush administration came into office, is now back in action as the director of national intelligence.

All of this came flooding back as I read an article in The New York Times last week by its excellent economics correspondent, David Leonhardt.

The article was titled "How a Sea of Red Ink Spread from a Puddle" and documented how the U.S. budget deficit changed from an $800 billion surplus to what is now forecast to be a $1.2 trillion dollar deficit – a swing of $2 trillion.

Of this total, almost 40 percent represents the impact of two down business cycles, one in the early 2000s and the current recession.

Almost as significant was the impact of George W. Bush's policies, namely tax cuts, the Iraq war, and growth in Medicare spending with prescription drug coverage.

Next in importance are programs of the Bush administration that are being carried forward by the Obama administration. This accounts for about 10 percent of the swing.

The Wall Street bailout accounts for 8 percent, Obama's stimulus package, interestingly enough, is only about 7 percent of the $2 trillion total.

Alan Auerbach, an economist at Berkeley and the author of a study of the dangers of current deficits, has this comment on our situation: "Bush behaved incredibly irresponsibly for eight years. On the one hand, it might seem unfair to blame Obama for not fixing it. On the other hand, not fixing it is, in a sense, making it worse."

We are in a pickle. Obama is betting that investments in education and green technology can fuel economic growth that will bring these deficits down to a more manageable size, perhaps 3 percent or 4 percent of GDP.

It is a long-shot bet. The administration is smart enough to recognize this. This is the reason Obama called on Congress last week to reinstate "pay-go."

"Pay-go" simply means that any additional government spending must be offset by savings in other areas. This approach, begun in the Clinton administration, is one of the reasons we generated a budget surplus in the later Clinton years.

Of course, pay-go would simply hold expenditures at current levels. Reductions in spending, particularly in the Medicare and Social Security programs, likely will be needed. The Obama administration has stated repeatedly that controlling health care costs is an important administration priority.

However, as the administration is discovering with its proposal for a public health insurance alternative to those programs offered by insurance companies, powerful vested interests in health care are tough to buck.

To control Medicare costs, Obama would also have to take on the doctors. Note, in this regard, Atul Gawande's article in the June 1 New Yorker on why the small town of McAllen,Texas, has some of the highest health care costs in the nation.

Gawande provides the clearest explanation I have read of how doctors manipulate the Medicare system to ensure that their compensation will remain intact whatever the situation.

What does this leave in the way of alternatives to bring the deficit to a manageable level? Increased taxes, of course.

I, for one, am not necessarily against increases in taxes, but only if they are combined with a plan that will address Medicare and Social Security spending issues over the longer term.

Looking back, it just doesn't seem that only nine years ago things could have been so different and so much better.

The baby boomer generation is going to leave quite a legacy for those who come after us. It isn't pretty.