Fiscal Follies

David Walker came straight to the point in spring 2007 when he addressed a packed Citizens League gathering at the Solera restaurant in downtown Minneapolis. The Citizens League, a St. Paul–based public policy and civic leadership group, brought Walker in to give his talk, “America’s Checkbook: Overdrawn,” which summarized the bleak fiscal picture facing the federal government.

Walker, who at that time was the U.S. comptroller general, warned the crowd that younger generations will end up paying the bills if the government doesn’t get its fiscal house in order. Many of his listeners were in their 20s and 30s.

Then came the questions. Someone wanted to know why then-emerging presidential candidates weren’t saying much about this issue. Too many candidates, Walker replied. Too much noise. And other hot-button issues had grabbed the spotlight for the time being. He suggested that once the two parties’ nominees move into the home stretch of the campaign, the stage will be set for more weighty debate about this issue.

Walker left his federal job this past March for another high-profile post, as the first president and CEO of the new Peter G. Peterson Foundation, a New York–based group that plans to tackle sustainability issues, from health care costs to energy consumption. Fiscal issues will be at the top of the foundation’s agenda. Has the time for serious discussion arrived?

“What I’m hoping is that fiscal irresponsibility and intergenerational equity will be issues in the general campaign,” Walker told me in an interview a few days before he moved to his new job.

Markets Vulnerable

The capital markets should hope for that, too. The first of the baby boomers will be eligible for both Medicare and Social Security benefits by 2011. Without a comprehensive plan to finance these programs, the country will face mounting debt.

Increasingly, America depends on foreign investors to buy the securities that finance its debt. If these investors lose faith in the country’s ability to run a tight fiscal ship, they could take much of their money elsewhere. Were that to happen, Walker says, interest rates would rise. Fixed-income and equity markets would feel the strain.