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"The Problem Is Not Where We Are. It's Where We Are Headed."

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It's Day 1 here in Vancouver, British Columbia, at the Agora Financial Investment Symposium, put on by the folks of The Daily Reckoning newsletter. I think the most effective way to cover this is a rundown of each speaker's major points, saving my thoughts for later when I can connect everyone's ideas.

First up was David Walker, the nation's former Comptroller General. The Comptroller General is responsible for analyzing the government's finances and scaring the everliving hell out of us with the truth. It isn't pretty. "I'm going to turn it over to David Walker, who will provide the foundation of your nightmares for the next few weeks" capped off his introduction.

Below is a transcript of Walker's key points, edited for clarity.

On his mission: You need a Plan A and a Plan B. My Plan A is to help save the Republic of the United States. My Plan B is Vancouver, British Columbia.

On the problem: Since 1800, there have only been two times that debt [held by the public]-to-GDP was over 60%. One was World War II. We're there again today. Add in entitlements, and it's 90%. Add in state and local government debt, and it goes well over 100%.

On change: It's pretty clear that Americans get it. It's also clear that Washington is a lagging indicator, and we the people are going to need to wake up and become alive to make these changes.

The big threat: If we don't make tough choices, there are two paths we could go down. One is passing a tipping point, where we have a massive heart attack similar to Greece. The dollar loses significant value, people riot … it's bad. I think we'll avoid that. The biggest risk is gradual erosion. In a slow way, our position in the world erodes. Our competitive posture erodes. Our standard of living stagnates and then erodes. That will happen if we don't make tough choices.

On those tough choices: There's a dirty four-letter word in Washington: M-A-T-H. You can't just fix this on the spending side, or just on the tax side. The numbers just don't work. People on the left say "Don't touch the social programs." That doesn't work. People on the right say "Don't raise taxes. It will be the end of civilization as we know it." That doesn't work either. You need everything. The far left and far right are out of touch with reality. They would flunk math. Our politics are dominated by the fringes and politicians who want to keep their jobs.

On how to fix the problem: For one, we need major tax reform. We must generate more revenue. A good place to start are exemptions and exclusions. If you add up just the top five tax exemptions, it costs more than we spend on Medicare, and almost as much as defense. If you add up all exemptions and deductions, it's $1 trillion a year. Some of the biggest are exemptions from paying tax on employer-provided health care, and the mortgage interest deduction on your primary residence.

Within tax reform, we need to reduce the marginal tax rate for corporations. Multinational companies have no loyalties to countries like people do. They only have duties to shareholders. They will move if corporate taxes are too high compared to the rest of the world. And they are.

We need a streamlined income tax. Not a completely flat tax, but a flatter tax. The top 0.05% of workers pay 23% of all taxes. Over 40% pay no income taxes at all. They're getting a free ride. That's a dangerous disconnect from a political standpoint. We also need a progressive consumption tax and a carbon tax. When I say carbon tax, I don't mean cap-and-trade -- I'm talking like higher gasoline taxes. That's probably where we're headed.

But we shouldn't ask for more revenue until there are tough statutory spending limits in place. Our problem is a government that's grown too big, promised too much, and delivered too little. We need a limit written into the Constitution that says how much we can spend in relation to GDP. Other countries have this. We need one.

On spending reform: The problem is not where we are. It's where we're headed. We must recognize that there are short-term deficits, and there are long-term structural deficits.

Today's deficits are short-term. They're huge, but they're temporary. They're caused by revenue loss, tax cuts, two wars, stimulus, bailouts, and unemployment benefits. These are temporary. Half of the current deficits are from declines in revenue, the other half is spending, and it's temporary spending.

But that isn't the problem. It's long-term structural deficits that are the problem and that threaten the republic. They will still be there once the economy recovers. That's what we need to focus on.

Start with Social Security reform. Make it stronger for people in poverty, and less for people with higher incomes. Raise the retirement age to reflect life expectancy. In 1950, there were 16.5 people working for every Social Security recipient. Today it's around 2. When Social Security was created, senior citizens had the highest poverty rate. Today they have the lowest, children now have the highest. And what are we doing? We're promising more to seniors at the expense of our children and grandchildren. It makes no sense.

With Medicare, health-care costs go up not just faster than inflation, but faster than the economy even when the economy is growing. That's why it is eating up more and more of our GDP. We spend about twice as much per person as major industrialized nations do, yet we rank below average in results. We're No. 1 on cost and we're No. 1 on obesity. That's not a good thing.

[Later, Walker was asked what the U.S. could learn from Canada. This is where he touches on how we can bring down health-care costs]:

  • Canada doesn't give blank checks for their medical programs. No other countries do, in fact. Only us.
  • Canada doesn't pay the majority of medical costs on a fee-for-service basis.
  • Canada uses evidence-based medicine, without paying for heroic procedures that don't work. Three out of every 10 Medicare dollars are spent for people in their last year of life. Companies ought to spend whatever they want, but when it comes to taxpayer dollars, we've promised way more than we can deliver.
  • Canadian doctors make less money.
  • Canada has less excess medical infrastructure. Our excess leads to a proliferation of technological waste that drives costs needlessly higher.
  • Canada doesn't allow pharmaceutical companies to advertise. [Sorry, Pfizer (NYSE: PFE  ) and Merck (NYSE: MRK  ) . You're part of the problem. ]

Comparing the fiscal crisis to the banking crisis: In the banking crisis, there were four major problems: (1) There was a disconnect between those who benefited and those who bore the burden. (2) There was not enough transparency on the magnitude of debt. (3) There was too much debt, not enough cash flow. (4) There was oversight failure and regulatory failure to act until the problem was at our doorstep. Those four are the exact same problems we face with our fiscal situation.

Final words: Yes we can! Yes we can -- if we tell the truth, make tough choices, and admit that we have a dysfunctional democracy. We need to hold people accountable. I don't care if it's Democrat or Republican or Independent. It's irrelevant. There's no party of fiscal responsibility based on actual track records. It's not about party. It's we the people.

I'll have more from Vancouver each day this week.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Pfizer is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (38)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 21, 2010, at 3:30 PM, timmer47 wrote:

    Thank you for speaking the truth. Your article should be "front page".

    The time is now to implement the kind of changes you are talking about. Unfortunately we do not have the leadership to get it done at the federal level. I am hoping November will make it clear that this is what the citizens of this country want. It is too late for temporary fixes to work.

  • Report this Comment On July 21, 2010, at 3:41 PM, cmfhousel wrote:


    Thanks. Just to clarify, this wasn't me speaking. It was Dave Walker. I just hit the keys on the keyboard.


  • Report this Comment On July 21, 2010, at 6:37 PM, Phoenix002 wrote:

    Welcome to Vancouver Morgan! Please enjoy our beautiful city and friendly people!

    Did Walker touch on any US Banks vs Canadian Banks during his speech? I've seen the commentary on on this subject but would like to know what Walker has to say.

  • Report this Comment On July 21, 2010, at 8:41 PM, ChrisBern wrote:

    Thanks for transcribing this Morgan. I've always liked David Walker, and feel that he's a modern day patriot who only wants what's best for his country. The last paragraph says it best, "I don't care if it's Democrat or Republican or Independent. It's irrelevant. There's no party of fiscal responsibility based on actual track records." Truer words have never been spoken.

  • Report this Comment On July 21, 2010, at 9:01 PM, cmfhousel wrote:

    "Welcome to Vancouver Morgan! Please enjoy our beautiful city and friendly people!"

    Thanks! And I couldn't agree more. This city is incredible in every way.

  • Report this Comment On July 22, 2010, at 9:30 AM, noryakerson wrote:

    One of the best articles in a long time--fresh and insightful. Thanks.

  • Report this Comment On July 22, 2010, at 9:58 AM, slpmn wrote:

    Great comments from Mr. Walker. Thanks for passing them on! Its the common sense wisdom that everyone with a brain understands, but which falls apart the second it runs into the political meat grinder.

  • Report this Comment On July 22, 2010, at 2:26 PM, Borbality wrote:

    Excellent story. Let's put this guy in charge.

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