Current fiscal policy harms U.S. competitiveness

April 11, 2013, 6:04 PM UTC

FORTUNE — Political dysfunction in D.C. has led to the American public being barraged by continuous media reports about the fiscal cliff, the debt ceiling, and the sequester. But the political skirmishes and impasses around these short-term events are distracting us from the real danger ahead: Our reckless fiscal trajectory that threatens America’s competitiveness.

For the nation to prosper, we must remain an attractive location for companies to pay competitive wages consistent with high and rising living standards. This requires targeted investments by the government, especially in physical and informational infrastructure, education and training, and scientific research. But the bad measurements used by the government are keeping the public in the dark about how needed investments for the future are being crowded out by the government’s enormous debt and other obligations.

The nation’s reported debt has almost tripled — to over $16.6 trillion — just since 2000, and the interest on this debt will be paid every year into the future. This obligation, however, is not the real problem. The U.S. actually is in a much deeper financial hole, and one that is not evident on the federal balance sheet.  The nation’s off-balance sheet obligations include our country’s promises for future Medicare and Social Security payments which, as of fiscal 2012, totaled nearly $50 trillion. These off-balance sheet obligations also include other promises, such as the unfunded pension and retiree health benefits for civilian and military personnel, and for various contingent commitments like guarantees for student loans, home mortgages and corporate pension benefits.

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Adding up all these governmental obligations brings total debt and unfunded obligations to about $70 trillion, more than four times our current GDP, and up from about $20 trillion at the end of fiscal 2000. And, lacking any current action this number grows by $350 billion every month.

Bill Clinton observed in 1992 that the government is “spending more on the present and the past, and building less for the future.” Yet during the past 20 years this problem has gotten far worse. Paying for interest on the public debt and meeting our unfunded obligations and promises will drive mandatory governmental spending to unsustainable levels. The mandatory spending in the federal budget — which includes social insurance programs, federal employee retirement benefits, and interest on the national debt — was 49% of the budget in 1972, 64% of the budget in 2012, and projected by the Congressional Budget Office to become 76% in 2023. As mandatory spending increases, fewer funds are available for discretionary governmental spending, especially on the critical investments that ensure and increase America’s competitiveness.

Investments in the future are being crowded out by mandatory spending on the past and the present.

Economist Paul Krugman and others argue that the government should take advantage of today’s very low interest rates to borrow to stimulate our current economy since the risk of crowding out private investment is negligible. But their analysis ignores the balance sheet effects of borrowing to pay for today’s consumption. Every trillion dollars we borrow today will require much higher mandatory interest payments when the debt is inevitably refinanced in the future. This will worsen future government’s ability to invest for competitiveness and higher living standards. Every 1% (100 basis point) increase in future interest rates adds over $165 billion in annual interest to future mandatory spending.

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To keep the government on a sustainable fiscal path, with the discretion to make investments that benefit our children and grandchildren, we must solve both the short-term economic and the long-term structural debt challenges simultaneously. But solutions that focus only on the government’s reported debt ignore the much, much higher total of future government obligations. The gap in what is measured as the federal debt and what should be measured distracts people from taking sensible actions today.

We believe that setting a goal to stabilize the total debt as a percentage of GDP at a reasonable and sustainable level would lead to a consensus on the best way to address our short- and long-term fiscal challenges. With everyone on the same page, a fiscal “Grand Bargain” by Congress and President Obama becomes more realistic. The “Grand Bargain” could allow for targeted stimulus investment to shore up an economy that is still weak and vulnerable while beginning to make intelligent and targeted cuts in discretionary spending on current consumption. But the agreement must also include changes in law that dramatically slows the growth of future mandatory spending commitments. These actions, combined with comprehensive tax reform, can put us on a more prosperous and sustainable fiscal path.

The President and the Congress should strive to solve our long-term fiscal challenge and also begin to shift the government’s spending mix more for the future and less on the present and the past. Changing how we keep score and focusing on a realistic ultimate fiscal goal can help make this happen sooner rather than later.

David Walker served as United States Comptroller General from 1998 to 2008, and is Founder and CEO of the Comeback America Initiative. Robert Kaplan is a Professor Emeritus at Harvard Business School and co-developer of both activity-based costing and the Balanced Scorecard.