It's the stupid economy

Accountant aims to tell voters what politicians won't: America is on the brink of disaster

From the hustings and the airwaves this campaign season, America's political class can be heard debating Capitol Hill sex scandals, the wisdom of the war in Iraq and which party is tougher on terrorism. Democrats and Republicans talk of cutting taxes to make life easier for the American people.

What they don't talk about is a dirty little secret everyone in Washington knows, or at least should. A majority of economists and budget analysts agree: The ship of state is on a disastrous course and will founder on the reefs of economic disaster if nothing is done to correct it.

There's a good reason politicians don't like to talk about the nation's long-term fiscal prospects. The subject is short on political theatrics and long on complicated economics, scary graphs and very big numbers. It reveals serious problems and offers no easy solutions. Anybody who wanted to deal with it seriously would have to talk about raising taxes and cutting benefits, nasty nostrums that might doom any candidate who prescribed them.

Fiscal roadshow warns United States of trouble ahead

David M. Walker sure sounds like he's running for office, talking about the future of the country and its children and how people have to rise up for change.

But as comptroller general of the United States, head of the Government Accountability Office, Walker doesn't want or need a vote. What he's looking for is attention for his message that the country is on the road to financial ruin.

There are serious problems and no easy solutions - and the hard solutions include raising taxes and cutting benefits, the kind of talk that can doom a politician's career.

The backbone of Walker's campaign has been the Fiscal Wake-up Tour, a travelling road show of economists and budget analysts who share his concerns. Walker has committed to touring the country through the 2008 elections, talking to anybody who will listen about the fiscal hole Washington has dug itself and the recklessness of borrowing money from foreign lenders to pay for the operation of the U.S. government.

"You can't solve a problem until the majority of the people believe you have a problem that needs to be solved," Walker says.

Polls suggest that Americans have only a vague sense of their government's long-term fiscal prospects, that they are more likely to identify the war in Iraq, terrorism, jobs and the economy as major problems facing the country. The deficit doesn't even crack the top 10 unless the respondents are directly asked about it, and then a majority says it's a serious problem.

The looming fiscal crisis is not a partisan issue, says Walker, who is accompanied on his tour by experts from across the political spectrum.

Their basic message is this: the U.S. national debt is currently US$8.5 trillion and it could reach $46 trillion or more over the next few decades, adjusted for inflation, if the status quo doesn't change. That's almost as much as the total net worth of every person in the U.S. - Bill Gates, Warren Buffett and those Google guys included.

And every year that nothing is done about it, Walker says, the problem grows by $2 trillion to $3 trillion.

And though the federal debt has grown in dollar terms since 2001, it hasn't grown dramatically relative to the size of the economy.

But that's about to change, thanks to the country's three big entitlement programs - Social Security, Medicaid and especially Medicare.

With the first baby boomers becoming eligible for Social Security in 2008 and for Medicare in 2011, the expenses of those two programs are about to increase dramatically.

Economists Jagadeesh Gokhale of the American Enterprise Institute and Kent Smetters of the University of Pennsylvania calculate that Medicare's fiscal shortfall - the annual difference between its dedicated revenues and costs - will have risen to $25 trillion by 2080.

Social Security is a much less serious problem. The program currently pays for itself with a 12.4 per cent payroll tax, and even produces a surplus that the government raids every year to pay other bills. But Social Security will begin to run deficits during the next century, and ultimately would need an infusion of $8 trillion if the government planned to keep its promises to every beneficiary.

Like many of its citizens, the United States has spent the last few years racking up debt instead of saving for the future. Foreign lenders - primarily the central banks of China, Japan and other big U.S. trading partners - have been eager to lend the government money at low interest rates, making the current $8.5-trillion deficit about as painful as a big balance on a zero-per cent credit card.

But Walker isn't optimistic that the government will be able to tackle its fiscal challenges so soon.

"Realistically what we hope to accomplish through the fiscal wake-up tour is ensure that any serious candidate for the presidency in 2008 will be forced to deal with the issue," he says. "The best we're going to get in the next couple of years is to slow the bleeding."

U.S. economy's growth rate slows

The slumping housing market dragged the U.S. economy into its weakest growth rate in more than three years in the third quarter, the government reported Friday in its final reading of overall economic health before the Nov. 7 congressional elections.

Inflation moderated, even without the effect of falling oil prices, but it remained higher than the Federal Reserve's "comfort zone" — keeping alive the possibility of future interest rate hikes by the central bank.

Many analysts said the relatively weak 1.6% growth in the July-to-September period represented the storm before the calm. Almost all forecast an upswing in the final three months of the year....

On economic stewardship, Bush's approval rating in a recent Associated Press-Ipsos poll was 40%, near the low for his six years in office, and more respondents said they trusted the Democrats more than the Republicans with the economy.

Republicans put the best face on the latest economic news. House Majority Whip Roy Blunt of Missouri, who ranks third in the House GOP leadership, said the economy had grown every quarter for five consecutive years. "The economic fundamentals are strong," Commerce Secretary Carlos M. Gutierrez said.

The nation's growing trade deficit also acted as a drag on economic growth. That the economy grew at all was due in large measure to a 3.1% upswing in spending by the indefatigable American consumer.

After-tax income rose slightly faster than personal spending, resulting in an improvement in the saving rate from a negative 0.6% in the second quarter to a negative 0.5% in the third. Americans have spent more than they have earned for about two years, thanks in large part to borrowing at low interest rates against the value of their homes.

But home values are dropping as interest rates are rising....

Homeowners with adjustable-rate mortgages worry about rising interest rates, but many believe they will be able to refinance their loans if necessary, according to a study released Monday.

An [sic] survey of homeowners conducted for Wells Fargo & Co., the San Francisco-based bank, found that about one in seven respondents had an adjustable-rate mortgage, or ARM.

The study found that nearly 80 percent of homeowners with ARMs said they were "somewhat" concerned, "very" concerned or "extremely" concerned about rate increases. (See, How to gain from their pain.)

But more than half said they believed they could refinance their loans. And about 20 percent said they were prepared for rate adjustments and didn't plan any changes.

Wells Fargo's third annual homeowners study also found that homeowners expect their properties to appreciate, although they apparently are aware that price increases are slowing.

Some 10 percent said they expected their home values to increase a lot, 53 percent said they'd increase "a little," and 27 percent said they'd stay the same. The rest expected a decline or weren't sure.

Overall, 72 percent of those surveyed said that the equity in their home was their most important investment, she said.

"That's a shift," Woo Ho said. "A home is now considered a major part of homeowners' financial portfolios."

The survey of more than 1,300 homeowners was conducted by the ICR of Media, Pa., and the margin of error was about 3 percent.

Wal-Mart reports weakest monthly sales in years

Despite an upbeat forecast for October, Wal-Mart Stores Inc. notched the slowest gain in same-store sales in years, the retail giant reported Saturday.

Wal-Mart (WMT)) said sales at established U.S. stores rose an estimated 0.5%, far off the 2-to-4% gain the company originally forecast for October.

The 0.5% same-store sales figure for October is the weakest since the 0.3% rise posted in December 2000, according to the Wall Street Journal.