No, I don’t expect Virginia to delve into an orgy of California-style taxing, borrowing and spending. I expect Virginia’s governors and legislators to conduct business as prudently in the future as they have in the past. But we face two horrendous challenges for which we are unprepared. First, fiscal pressure on state and local governments across the United States will be unremitting in the years ahead. In particular, health care spending, which has increased as a share of state and local spending from 12 percent in 1978 to 20 percent in 2008, will continue growing without let-up. Absent policy changes, concluded a June Government Accounting Office study, “state and local governments’ long-term fiscal position will steadily decline through 2060.”
Secondly, Virginia’s economy is highly dependent upon federal spending — according to a Tax Foundation special report, the commonwealth had the 7th highest ranking of federal expenditures per capita in the country in 2004. If something happens to our No. 1 industry, the federal government, the economy is toast, and so are tax collections.
Unfortunately for Virginia and the rest of the nation, the federal budget is on a collision course with calamity. Foreign wars, pork-barrel spending, the expansion of entitlements, the age wave of retiring baby boomers, and a global rise in interest rates make federal budgetary policies unsustainable. As I argue in my book, “Boomergeddon,” by 2025 to 2030 the U.S. Treasury will be unable to roll over the trillions of dollars of debt that come due each year — in effect, going into default. Uncle Sam will face a budget gap equal to some 40 percent of the budget, which it will try to close through some combination of cutting spending, raising taxes, repudiating the debt or cranking up the printing presses. The result will be economic chaos, if not another Great Depression-style meltdown.
Insofar as Congress responds to the freeze in foreign borrowing by allowing spending to decline, the axe will fall disproportionately upon Virginia, in particular upon Northern Virginia and Hampton Roads with their large complement of federal civilian and military employees. Unemployment in Virginia will soar, business activity will decline, and tax revenues will plummet. Simultaneously, fiscal hardship will trickle down to state and municipal governments nationally as the federal government curtails the transfer of money it no longer has in the form of aid to states and localities. As states are called upon to fill the void, Virginia’s economy will be a shambles and revenues will go into in free-fall. The AAA rating will be history.
How can I be so certain that these dire predictions will come true? Let’s look at the facts.
The national debt now stands at $13.4 trillion. According to the 10-year budget projections of the Obama administration, the nation will rack up another $8 trillion in debt by 2020 — and that’s pretty much a best-case scenario. The Congressional Budget Office projects $9.8 trillion in cumulative deficits by then; the non-partisan Concord Coalition says $15.2 trillion. All estimates are insufficiently pessimistic because none of them question the economic assumptions underpinning the Obama forecast.
One assumption looks outdated already — 3.4 percent average economic growth between now and 2020, roughly equal to the Internet-fueled economic expansion of the Clinton administration. What would happen if, in recognition of the significant impediments to the economy’s growth like continued consumer indebtedness and a collapsing real estate market, we assumed annual growth of only 2.4 percent annually and a mild recession later in the decade? According to estimates prepared for me by Chmura Economics & Analytics, a Richmond-based economic consulting firm, the annual deficit would soar from $1 trillion a year under the Obama scenario to $1.7 trillion a year by 2020. The national debt would hit $29 trillion.
Alternatively, what would happen if interest rates climbed to levels seen as recently as 1990 – ten percent on 10-Year Treasury bonds — as some reputable economists think could happen by 2020? According to Chmura’s calculations, the annual deficit would shoot to $2.7 trillion a year, and the national debt to $32 trillion.
And that’s just ten years out. The age wave slams ashore in the following decade; hordes of boomers will run up Medicare and Medicaid expenditures. Then, around 2023, the Social Security administration will start drawing down its $4.3 trillion trust fund over a period of some 15 years, adding hundreds of billions of dollars yearly to the sums that Treasury will have to borrow in the capital markets. As if that weren’t bad enough, aging countries around the globe, from Japan and China to the U.S., Canada, Italy, France and Germany will be saving less. The global capital glut, as Fed Chairman Ben Bernanke calls it, will become a global capital shortage. Interest rates will shoot higher. Meanwhile, a major nation like Japan, Italy or Spain likely will default on its debt, sparking a flight from sovereign debt — including that of the U.S. — and driving rates even higher. Absent truly wrenching changes to tax and spending policies that neither U.S. political party appears at present to be willing to make, Boomergeddon is all but inevitable by 2030.
Virginians will not be the ones to create Boomergeddon, but we will have to live with it. The Old Dominion and its localities must prepare for the worst. To maintain services in the future, we need to start bullet-proofing our balance sheets now. We need to make our finances so rock-solid that Moody’s will be inspired to create a new category — AAAA — just for us!
Gov. Bob McDonnell’s Commission on Government Reform and Restructuring is an excellent place to start. Among topics we should examine:
- Putting the Virginia Retirement System on a sound actuarial footing. Require state employees to make a bigger contribution, and make it a top priority to fully fund the state’s contribution. Finding the money won’t be any easier five years from now.
- Taking an inventory of all debt, not just General Obligation debt backed by the full faith and credit of the commonwealth but any other kind of debt incurred by stray agencies and independent authorities at the state, regional and municipal levels. How much is the total debt? How sound is it? What potential exposure does the commonwealth have?
- Reforming Medicaid by creating an entrepreneurial, market-based health care system that promotes economic productivity and better medical outcomes, saving money by reducing medical complications and readmissions.
- Creating credible funding sources for transportation infrastructure going forward. No gimmicks like privatizing ABC (not in itself a bad idea) or siphoning off oil royalties. Funding should be based on the principle that those who use/benefit from new projects are the ones who pay for it.
- Reforming the scattered, low-density and disconnected human settlement patterns that drive up the cost of maintaining utilities, providing public safety and delivering other public services.
- Diversifying the economy. Stop enlarging the federal government presence as an “economic development” priority. Come Boomergeddon, we’ll kick ourselves for failing to recruit more private-sector jobs.
We’ve got 15 to 20 years to finish the job. Let’s get to work.
James A. Bacon is author of “Boomergeddon.” You can see the Table of Contents and Read the Introduction here. You can then go and purchase the book on Amazon. James is also the publisher of the blog Boomergeddon.