Themes for the Plan: Forces Shaping the United States and Its Place in the World
Themes for the Plan: Forces Shaping the United States and Its Place in the WorldQuestions and Comments
In charting GAO’s work over the next several years, the agency’s strategic plan takes into account the forces that are likely to shape American society, the United States’ place in the world, and the role of the federal government. This section discusses these forces through the eight themes that form the context for what GAO hopes to accomplish--its goals and objectives--and that suggest the major trends ahead and their implications for congressional decision making.
This update to the plan includes a new theme, related to the nation’s growing long-term fiscal imbalance. Given the magnitude of the problem and its potential consequences, it will form a critical backdrop to GAO’s work over the next several years. The other major themes for this update to GAO’s plan remain similar to those in the prior plan, but with some additional emphases. National security continues to remain a prominent concern for the United States, for example, but with new dimensions of homeland security and global economic security now linked to military power and international relationships. After a period of containment, health care costs have again been on the rise, foreshadowing significant economic and fiscal consequences when considered with the overall aging of the population. The higher retirement and health care costs associated with an aging population will further constrain the federal government’s flexibility to address important national resource needs. Finally, while concerns about quality of life issues remain, the discussion of this theme now takes into account the growing efforts of nations and communities to adopt key social, economic, and environmental indicators to measure their progress and position systematically.
- the nation’s Large and Growing Long-term Fiscal Imbalance;
- Evolving National and Homeland Security Policies;
- the increasing global interdependence of enterprises, economies, civil society, and national governments;
- the global shift to market-oriented, knowledge-based economies;
- An Aging and More Diverse Population;
- Advances in Science and Technology and the opportunities and challenges created by these changes;
- Measuring the Quality of Life for the nation, communities, families, and individuals; and
- Diverse Governance Structures and Tools.
Any significant changes in these areas over the next 6 years, the period covered by this plan, will affect GAO’s ability to meet its goals and objectives. GAO will therefore continue to track developments in these areas to make sure that its plan remains responsive to the needs of the Congress, the federal government, and the American people.
The U.S. government’s long-term financial condition and fiscal outlook present enormous challenges to the nation’s ability to respond to forces that shape American society, the United States’ place in the world, and the role of the federal government. The near-term deficit forecasts are daunting--a $401 billion deficit in fiscal 2003 and a $480 billion deficit in fiscal 2004, according to the Congressional Budget Office. If the near-term deficits represented a short-term phenomenon, there would be less cause for concern. Unfortunately, these short-term deficits are but a prelude to a projected worsening long-term budget outlook.
The United States faces a long-term structural deficit. The Congressional Budget Office has projected that, on the basis of current rules for benefits, federal spending, excluding interest payments, will rise considerably as a share of national income. According to GAO’s long-term budget simulations, demographic trends and rising health care spending will drive escalating federal deficits and debt. Assuming, as in figure 3, that discretionary spending grows with inflation over the next decade and that current tax cuts expire when scheduled, spending for Social Security, Medicare, and Medicaid would consume almost three-quarters of federal revenue in 2040. If all expiring tax provisions are extended and discretionary spending keeps pace with the economy, by 2040, federal revenues may not even be adequate to pay Social Security and interest on the federal debt (see fig. 4).
Notes: Although all expiring tax cuts are extended, revenue as a share of GDP increases through 2013 due to (1) real bracket creep, (2) more taxpayers subject to the alternative minimum tax, and (3) increased revenue from tax-deferred retirement accounts. After 2013, revenue as a share of GDP is held constant. This assumes currently scheduled Social Security benefits are paid in full throughout the simulation period.
To balance the budget would require massive spending cuts, massive tax increases, or some combination of the two. Neither slowing the growth of discretionary spending nor allowing tax cuts to sunset--nor both together--will eliminate the long-term imbalance. While additional economic growth will help ease any burden, the potential fiscal gap is too great to grow our way out of the problem.
Further, neither 10-year budget projections nor financial statements recognize the longer-term implications of present day policies and historical commitments. As figure 5 shows, the federal government takes on a wide range of fiscal exposures--from explicit liabilities to those implied by current policies. Although the long-term budget simulations shown in figures 3 and 4 assume currently-promised Social Security and Medicare benefits, the federal government’s financial statements do not record as liabilities the difference between future promised and funded benefits of Social Security, nor do they adequately account for future health care benefit costs for veterans. Regardless of whether these items are ultimately considered liabilities from an accounting perspective, they represent significant commitments that will have to be addressed by future generations.
To facilitate consideration of the long-term impacts of budget and policy decisions, current budget process and measurements need to be reviewed and reconsidered. A way should be found to permit the long-term cost of selected major spending and tax proposals to be quantified and presented before legislation is enacted. This is especially important in connection with proposals for which the related costs significantly escalate after the current 10-year projection period. Financial accounting and reporting practices should also be reviewed.
Finally, policymakers will need to anticipate the effects of the looming long-term fiscal imbalance on the nation’s ability to thrive in the world that we face in the 21 st century. As discussed at length in the rest of this section, national and homeland security needs, the requirements to support a knowledge-based and global economy, the opportunities and challenges resulting from scientific and technological advances, public expectations for improved quality of life, and the governance structures and tools needed to provide for all of these will increasingly become the focus of public policy. To effectively address these needs, policymakers will have to begin today to reconsider the constraints that current fiscal policies place on their ability to act.
National security in the 21 st century is a complex interaction of military power, international relationships and foreign policy, homeland security, and international economics. Understanding the dimensions of these issues, and their mutual impacts and relationships, is key for decision makers in deciding on roles and responsibilities of key federal entities, levels of investment, and expected outcomes.
Militarily, the United States is unchallenged and probably will be for the foreseeable future. Some call it the “world’s sole superpower”; some call it a “hyperpower.” Whatever the terminology, since the demise of the Soviet Union and the end of the Cold War, the United States has emerged as the dominant military, political, and economic power in the world. In fact, according to some analysts, no nation in the history of the world has attained such military preeminence. The United States spends several times more on its military than any conceivable adversary, and together with its allies accounts for more than two-thirds of total worldwide defense spending. U.S. conventional forces include the 12 largest aircraft carriers in the world, the only stealth aircraft in the world, a long-range bomber and air cargo force able to reach worldwide with the help of a huge aerial refueling fleet, and prepositioned military equipment around the world equaling the size of the total military inventory of many countries. U.S. nuclear weapons, while reduced over time through agreement with Russia, still provide a formidable triad of incredible destructive power.
And, in recent years, the United States has demonstrated its ability to project and use its military forces with great effectiveness. U.S. forces quickly defeated the Taliban regime in Afghanistan--a trained and experienced guerrilla force--and the Saddam Hussein regime in Iraq--which had the world’s sixth largest army. Defense spending increased significantly after the terrorist attacks of September 11, 2001, not only to conduct those military operations and improve homeland security, but also to upgrade military forces even more. (see fig. 6.)
U.S. technological advantage on the battlefield, already considerable, is being further enhanced through breakthroughs in such areas as precision guided munitions, unmanned aerial vehicles, and battlefield awareness and communications. Future developments in nanotechnology, sensors, and space-based and nonkinetic weapons will further increase this advantage. The United States spends more on defense research and development than all but a small number of countries spend on their entire defense budgets.
New military missions are also changing, evolving from countering state adversaries to countering less structured terrorist groups, and employing greater use of special operations forces, peacekeepers, and engineers for reconstructions following conflicts. Prolonged, if lower-intensity engagements influence world views of the U.S. military, ranging from “protector” to “occupier.” And unlike conflicts prior to the 21 st century, the war on terrorism is unlikely to have a discrete end point.
International relationships and foreign policy is another dimension of national security. Since the end of World War II, this U.S. military might has generally been employed through a series of alliances and partnerships from Europe to Southeast Asia, originally aimed at containing the Soviet Union and its communist allies. For example, the United Nations arose out of the ashes of the war as a way to resolve international disputes diplomatically before they escalated into armed conflict. While these institutions have been evolving since the end of the Cold War, recent events indicate that this overall system of multilateral organizations and alliances may be starting to break down or at least be de-emphasized by evolving U.S. policy. For example:
- The United Nations itself has come under question by those who believe it is good at debating and passing resolutions but lacks credibility in enforcing them. An action-oriented United States finds itself in conflict with the United Nations’ status-quo-oriented Security Council.
- The North Atlantic Treaty Organization (NATO), having “won” the Cold War, now must reinvent itself to be relevant in the 21 st century. Expansion eastward is bringing new members--the “New Europe”--that are very different from the alliance’s original members. Serious disagreement with France and Germany over Iraq policy exposed some gaping holes in alliance cohesion.
- U.S. solidarity with South Korea against the North has been a given since the 1950 invasion across the 38th parallel. This relationship seems to be fraying somewhat, with talk of repositioning U.S. forces in response to South Korean public outcries.
- Support for the State of Israel and the plight of Palestinians in the Middle East has dominated U.S. relations in that part of the world since Israel’s founding, and especially since the 1967 war when Israel won control of the West Bank, Gaza, Golan Heights, and Jerusalem. A solution to that long-standing problem has been elusive, yet a resolution may be the only way to improve U.S. relations with Muslim countries throughout the region.
- In the Persian Gulf, Saudi Arabia has long been the key U.S. relationship, especially since the fall of the Shah of Iran in 1979. The 1991 Gulf War was fought largely from Saudi territory. In Operation Iraqi Freedom, however, the Central Command headquarters was very visibly in Qatar, not Riyadh. Kuwait, Qatar, Oman, and Bahrain--and in time, maybe even Iraq--are becoming more important partners and will likely affect the U.S. relationship with Saudi Arabia.
In addition to these changing relationships, U.S. foreign policy seems to be turning away from multilateral arrangements and toward more unilateral and bilateral interactions. In challenging such previously negotiated international agreements as the missile defense treaty, an international war crimes court, the ban on landmines, and the Kyoto agreements on greenhouse gases, the United States has charted a different course with yet unknown consequences for its international relations and relationships. U.S. handling of Afghan combatants at Guantanamo Bay or reconstruction efforts in Iraq may be driving additional wedges between the United States and its traditional allies. The policy of preemption--striking at terrorists or regimes before they attack the United States--may prove to be effective, but it has been controversial around the world and even within the United States.
In this new era, homeland security is a major dimension of national security. Despite America’s unrivaled military advantage, Americans are feeling more vulnerable. The hijackings and successful attacks on the World Trade Center and Pentagon shook citizens’ confidence about their safety at home and in their workplaces. The anthrax attacks and persistent threats from terrorist spokesmen continued to raise anxiety levels. With the war in Iraq and religious and social unrest in many countries, experts worry about more terrorism against U.S. interests.
Since the September 11 attacks, legislation such as the USA Patriot Act and the Homeland Security Act, which created the Department of Homeland Security, responded to terrorism and other threats to personal, financial, and national security. The new Northern Command has provided additional resources and authority for homeland defense. The administration published a series of national strategies, such as the National Strategy for Homeland Security, setting initiatives in homeland security areas. Periodic adjustments to the department’s color-coded homeland security threat levels respond to threats. However, some commentators believe the nation is still not as prepared to prevent and respond to a terrorist attack within the United States as it should be, and have recommended that the pace of preparation to prevent, respond to, and contain an attack must accelerate.
While diplomatic and military efforts have focused on fighting the war against terrorism abroad, risks have been exposed in many aspects of normal life at home. Terrorist weapons need not kill or injure large numbers to have the terrorists’ desired impact; the psychological impact alone can disrupt the economy and undermine people’s confidence in the government. Bioterrorism poses risks of unprecedented magnitude, potentially affecting air and water supplies and food production chains using instruments of normal life, such as the mail or air conditioning systems. Many elements of everyday life that are critical to the American economy, such as airports and power stations, have become potential targets.
The administration has asked for significant homeland security funding in normal budget and supplemental funding requests. For example, the President’s fiscal year 2004 budget request for homeland security is $41.3 billion, including funding for the Department of Defense. This more than doubles 2002 funding and will cover priorities in mission areas such as intelligence and warning, border security, and the protection of critical infrastructure. However, these federal funding changes and new organizational structures alone will not significantly improve the security of the homeland. Homeland security can only be accomplished through recognizing the interdependencies of federal, state, local, and private sector partners and the careful planning and integration of the roles and responsibilities of federal and nonfederal partners. For example, emergency response to a terrorist attack involving chemical or biological weapons will require effective coordination among federal, state, and local law enforcement agencies; other first responders; as well as public health agencies, affected hospitals, and laboratories. The challenge for the federal government is to design, select, and manage the various tools to prompt effective integration and leverage scarce resources. Critical information must be shared, analyzed, integrated, and disseminated to help prevent or minimize terrorist activities. These efforts require the involvement of the Central Intelligence Agency, the Federal Bureau of Investigation, the National Security Council, the National Security Agency, the Department of Defense, the Department of Homeland Security, and a myriad of other agencies.
The Congress faces the difficult task of integrating and balancing fighting terrorism and meeting the requirements for homeland security with efforts to maintain economic vitality and innovation; create jobs; and improve education, housing, health care, and the quality of life in general while protecting core American values. Rapidly rising costs for homeland security also are a concern. In the long term, homeland security measures should be undertaken with a deliberate and informed analysis of the choices and balances that must be struck, for example, balancing the cost and benefit of security measures, including the collateral or unintended consequences on missions not related to homeland security and American values.
Traditional threat, risk, and criticality assessments remain valuable tools in the fight against terrorism. However, the use of such assessments should be viewed in a broader national preparedness context in which decision makers consider how homeland security can be viewed as integral to everyday life--in which measures are consistently expected, applied, and integrated into the underlying business process or programs from the very beginning, not separate and apart from other strategic and operational decisions. Weaving homeland security into the everyday life of the American people will be complex and time consuming. However, it will be critical to fashioning a sustainable homeland security strategy that balances the need for increased protection against other national priorities.
A final dimension is international economics. National security in this new era is more intertwined than ever with economic security in a world that increasingly recognizes the opportunities a robust economy can bring. Many see reducing poverty and enlarging the middle class, especially in countries troubled by terrorism, as a key to attacking the root causes of unrest. According to this argument, young people around the world, regardless of their cultural or religious upbringing, must have some prospects for economic prosperity to give them a reason to strive to better themselves and their countries. The nascent reconstruction of the Iraqi economy could be a crucial test of whether a functioning free-market economy can emerge from a country damaged by years of dictatorship and war in a troubled part of the world. And because access to natural resources is vital to worldwide economic health, priority will be given to restoring Iraqi oil production to help power the local economy and to restore order to energy markets.
Broader economic question are also arising as strains with some traditional allies could affect trading patterns. Changes in NATO membership could lead to changes in economic ties between Europe and the United States, as Eastern European countries attract more attention. The Pacific Rim countries are increasingly a focus of U.S. security and economic policy. The biggest issue of all, in the view of many analysts, is the U.S. relationship with China: Will it be a relationship of trade and economic ties or a tense one focused on military rivalry? Domestically, the recent sluggishness in the economy has been exacerbated by factors at least partially related to terrorism: high energy prices, disruptions in the travel and tourism industry--especially commercial airlines, and low consumer confidence. Large budget deficits not just in the United States but also in governments around the world make economic prosperity even more important and more elusive. Moreover, the U.S. lead in military equipment and technology depends on a robust industrial base that can provide the know-how to stay ahead of potential competitors. The challenge for the United States is to avoid the pitfalls of the “military-industrial complex” that was a concern as far back as President Eisenhower--how to promote a strong private sector capability that will not “capture” security policy.
Military power, international relationships and foreign policy, homeland security, and international economics must all be considered in defining the parameters of national security. While the Cold War stressed a containment and deterrence strategy--defined by the balance of power--the new war on terrorism, some suggest, is defined by the “power of balance”--balancing implementation of powerful national security strategies against their societal and economic impact. In the midst of World War II, President Roosevelt noted the supreme objective for the future, and for the United Nations, was one word: security. He emphasized that security meant not only physical security, but also economic security, social security, and moral security. Contemporary national security still meets that definition.
Recent decades have witnessed a rapid increase in international trade and in the movement of investment, people, and information across borders. As a result of these trends, nations’ economies, cultures, and governments have become increasingly interdependent--that is, globalized. These movements have brought many changes and many benefits to people around the world, but this high level of interdependence also creates challenges. Some of these challenges have long been known, such as the need to extend the benefits of globalization to the poorest parts of the world. Other challenges are more recent, such as the outbreak of severe acute respiratory syndrome (SARS) and containing its spread. In both examples, increased interdependence means that governments have to be involved in events outside their borders to resolve these new global problems.
One measure of growing worldwide interdependence is the total share of world goods and services that is traded. As shown in figure 7, from 1970 through 2002, world exports increased from about 12 percent to about 24 percent of world gross domestic product (GDP). Hence, all over the world, people are depending more and more on other nations to consume the goods they produce and to produce the goods they in turn consume.
In the United States, where the economy was relatively self-contained in the decades following World War II, the importance of international trade, investment, and financial flows has grown noticeably in recent decades. U.S. exports as a share of U.S. GDP grew from about 5 percent to about 9 percent from 1970 through 2002 (see fig. 8). The rise in U.S. imports was even greater, increasing from about 5 to about 13 percent of GDP. These increases came during a period when overall U.S. output, adjusted for inflation, more than doubled.
A companion to growing international trade is an overall increase in international financial flows and net financial inflows as an important source of U.S. capital. The internationalization and liberalization of financial markets worldwide, along with growing wealth in many countries, have fueled huge increases in cross-border investments. Gross capital flows relative to GDP have grown almost tenfold for industrial countries since 1970. For the United States, net financial inflows--comprising foreign holdings of U.S. stocks and bonds as well as foreign direct investment in the United States--generally increased from under 1 percent to about 7 percent of U.S. GDP from 1970 through 2002, as shown in figure 9. Net financial outflows, which reflect similar U.S. investments abroad, have fluctuated over this period, and fell noticeably over the past 2 years. The difference between financial inflows and outflows, the net financial inflows into the United States, is a measure of U.S. reliance on foreign capital to finance domestic investment.
A second important aspect of globalization is the movement of people around the globe. These movements occur for a variety of reasons, such as permanent migration, temporary relocation for business or educational reasons, or travel and tourism. The movement of people represents both a cause and a consequence of globalization in that people who migrate tend to create stronger links between nations, while some people visit other nations because of established business relationships or to learn about different cultures. During the 20th century, permanent migration to the United States fluctuated, beginning with a high of 8.8 million immigrants admitted from 1901 through 1910, dropping significantly, in response to the Depression and the Second World War, to a low of half a million admissions from 1931 through 1940, and gradually rising again, reaching record admissions of over 9 million immigrants from 1991 through 2000.
Relocation for educational reasons has also reached high levels in the last few decades. As shown in figure 10, from 1986 through 2002, the number of foreign students enrolled in U.S. colleges and universities increased by 70 percent to nearly 600,000. During the same period, the number of U.S. college and university students studying abroad more than tripled from 48,000 to 154,000 students each year.
Finally, admissions of international tourists to the United States increased nearly fourfold from 1985 through 2001. Overall, the number of tourist visas issued during this period increased from 9.5 million to 33 million, with the largest increase, a 45 percent increase, occurring from 1995 through 2001.
The third area that helps illustrate the rapid pace of globalization is the movement of information across borders, a development that is directly related to the advances in IT. While there is no single indicator of the rapid growth in information crossing borders, telephone and Internet communications both provide some insight. The number of main telephone lines in use throughout the world doubled from 1991 through 2001, from 550 million to 1.1 billion, while cellular phone subscribers increased from 16 million to 955 million. During the same period, the number of Internet users increased from 4.4 million to 502 million, with concentrations of Internet users reaching over 20 percent of the populations of a number of advanced industrial countries.
This increase in international communication is met with ambivalence in many countries. The 2003 Pew Foundation Global Attitudes Project reports that “large majorities in most countries” dislike the United States’ growing influence in their countries, but equally large majorities support the technologies that promote increased international interaction. The Global Attitudes Project reports that “majorities in almost all nations” feel positively about the Internet, and “overwhelming majorities” in nearly all countries surveyed feel positively about cellular telephones.
While many countries have benefited greatly from the increased movement across borders, this movement also creates some daunting challenges. One of those is ensuring that globalization creates benefits that are not overly concentrated in countries around the world. As shown in figure 11, some less-developed countries experienced strong income growth as world trade flows increased while others experienced only slow growth. Overall, differences in per capita income across countries have largely continued over the past 25 years, although China and India stand out as countries that have shown significant gains. Even when differences in cost of living across countries are taken into account, average incomes in 1999 were about 13 times higher for countries in the high-income group than in the low-income group, compared with incomes about 14 times higher in 1975.
Note: These country groupings contain 28 low-income, 45 middle-income, and 30 high-income countries as grouped by the World Bank based on 1975 per capita income. China and India are shown as a distinct grouping due to their size and strong income growth over the period. Countries’ per capita incomes are converted into dollars using purchasing power parity exchange rates, which take into account differences in costs of living across countries.
A second challenge is ensuring that the measures taken to assure the security of trade and investment and the movement of people do not choke off the benefits of those movements. For example, some of the security measures designed to protect against risks related to container trade could affect the efficiency of the trade flows. In addition, measures taken to control the threat of terrorists entering other countries could reduce the number of migrants or visitors who might provide benefits to the originating and the host nations.
A related challenge is the need to assure that health problems--and particularly contagious diseases--do not spread uncontrolled around the world. The recent outbreak of SARS rapidly had an impact on movement to and from some of the most highly globalized parts of the world, such as Hong Kong, Singapore, and China. While AIDS has had devastating impacts on certain nations such as those in Africa, the speed and critical role of communications and cooperation among nations has been particularly important in trying to limit the spread of this highly communicable disease.
All of these challenges make it clear that some of the most difficult issues that policymakers will continue to address cannot be resolved within the borders of any nation. Because of the interdependence, nations will have to rely in part on the institutions that have been in place to address international concerns and are constantly evolving as they attempt to meet the current challenges. Part of this evolution is related to the increasing efforts of nations to ensure that these institutions achieve their particular goals. This is not surprising as interdependence grows, since the decisions made in these forums have important consequences for the nations involved.
The last decade has witnessed a sharp debate about the ability of the international trade and financial institutions to address problems such as worldwide income disparities and the turmoil in financial markets that lead to country crises. For example, while the World Trade Organization has emphasized the importance of efforts to bring more advantages of trade to the less-developed world, disagreements between developed and developing countries and among diverse interest groups on how to accomplish this have made reaching new agreements very difficult. The United States has also become more assertive in the United Nations and other institutions, as it believes that events such as the September 11, 2001, terrorist attacks create the need for more active use of military options to prevent further spread of terrorism and possible use of weapons of mass destruction. The efforts to use these institutions in ways that they have not been used in the past highlight the different views of nations on issues such as the use of force, but also affects the credibility of the institutions themselves. The dominance of the United States in terms of its economic influence and military power has also lead to some resistance and resentment around the world, and this may have consequences in other institutions as other nations attempt to counter and limit U.S. influence.
Many of the issues facing the Congress and the nation stem from complex and evolving domestic and global economies. The last few years of the 1990s saw a dramatic surge of productivity and economic growth that was reduced but not eliminated by the economic slowdown associated with the decline in financial markets, capital spending, corporate scandals, and issues related to international terrorism in the early 21 st century. The growth was fueled in part by the nation’s shift to a knowledge-based economy, the adoption of new technology, and a greater emphasis on public policies that rely on market forces and competition. In the coming years, the United States faces the challenge of returning to strong economic growth while meeting increased demands for spending to counter terrorism and improve security. Over the longer term, declining personal saving, coupled with the overall aging of the population, presents significant challenges to meeting the commitments to Social Security, Medicare, Medicaid, and other national priorities.
After two decades of diminished expectations and reduced economic performance, the GDP grew dramatically in the late 1990s, only to slow due to the bursting of the technology bubble, corporate scandals, and challenges in addressing international terrorism, all of which added to uncertainty about the economy. As shown in figure 12, labor productivity growth accelerated from 1.5 percent per year in the early 1990s to 2.6 percent per year from 1996 through 2002. This growth can be attributed, in part, to the move away from the nation’s traditional, manufacturing-based economy toward one characterized by the production of information and services. In fact, for most of the past two decades, high-technology manufacturing and knowledge-based services have grown at roughly double the rate of other manufacturing industries. In light of forecasts for a shift downward in labor productivity growth for the remainder of this decade, the challenge for the future will be to sustain GDP growth.
Due to the changing composition of the economy, states appear to be facing a long-term erosion of their sources of revenue that is causing challenges in the provision of government services. That base is estimated to have declined from 51.4 percent of personal income in 1979 to 41.5 percent in 2001. Four factors are cited as contributing to the decline: technological changes, legislated exemptions, cross-border shopping, and changing purchasing patterns. Technological advances such as digitized books and music have changed some taxable, tangible goods into nontangible products that are not taxed in some states. Cross-border shopping via mail order and electronic commerce has been growing rapidly, much of which escapes taxation. Finally, the rise in services’ share of personal consumption from about 47 percent in 1979 to 59 percent in 2002 has reduced the sales tax base because most services, particularly professional services, are exempt from the sales tax on which states rely heavily. At the same time, there is evidence that the types of purchases subject to sales tax declined from the early 1970s to the 1990s but have remained relatively stable as a percentage of consumption since then.
The growing use of technology and knowledge-based services raises a number of policy issues. Because intellectual assets are the underpinning of a knowledge-based economy, investment in human capital and research and development is fundamental to continued growth. For policymakers, this shift requires greater attention to education and training, both for children and adults. The methods of preparing children for their futures as citizens and workers should be adapted for new needs. New importance should be given to continuing education and training for adults, whose longer life expectancies will allow them to stay in the workforce longer, a prospect that also holds significance for retirement policies. The importance of research and development, particularly in the private sector but augmented by basic work in the public sector, requires strategic management and attention to incentives.
The shift to new technologies and knowledge-based services has had a significant impact on the delivery of health care in the country and on the percentage of the nation’s resources devoted to this industry. For instance, laser surgery has made it possible for people to see clearly without the need for glasses or contacts; brain disorders that cannot be treated by conventional surgery are now treated by using precisely targeted beams of radiation. Recent medical discoveries, such as mapping the human genome, provide new knowledge that may lead to unheard of medical advances. However, advances in medical technology, along with demographic trends and other factors, have contributed to health care consuming a continually increasing proportion of the nation’s GDP, as shown in figure 13.
The shift to a knowledge-based economy also has implications for immigration policy. The emergence of technology-oriented industries has tended to create both high-paying jobs in computing and IT and low-skilled jobs ultimately delivering the services these industries provide. To fill these jobs, the United States has come to rely increasingly on workers from other countries, working either in the United States or in their home countries. In light of heightened concern for homeland security, the relatively easy flow of workers into the country may be reassessed. Moreover, the demand for both high- and low-skilled workers may contribute to a long-term trend of inequality in income in which those in the richest segments of society see their incomes increase more than do those in the poorest segments.
Consumer and investor protection policies are also affected by the growth in knowledge-based industries. With human capital and technological capabilities as the principal assets of these companies, valuation of corporate assets has become particularly difficult. Moreover, many of these companies--in the financial services sector, for example--are in the business of selling a range of new and complex services, the value of which is difficult to calculate. Questions of market power in a knowledge-based economy also make determining consumer and investor protection policies more difficult.
The shift in the U.S. economy to knowledge-based industries calls into question whether GDP, the traditional indicator of economic performance, should take into account investment in human capital and in other intangible assets, such as research and development, or include supplemental accounts for broader measures of production. As a result, the public policy issues of the future are likely to demand new metrics that can measure the long-term strategic impact of government choices.
Other changes in the U.S. and world economies have occurred because of government policies to improve the economic performance of both the private and public sectors through measures such as liberalizing trade and drawing on greater market competition. The U.S. government and, increasingly, foreign countries have moved away from heavily regulated or state-owned enterprises to more competitive markets. In the United States, the federal government has moved to deregulate industries such as trucking, electricity, and telecommunications. In Europe and elsewhere, governments have privatized formerly publicly owned industries, and many formerly planned economies have reorganized to be more market oriented. Consequently, formerly regulated industries have been forced to become more efficient as new competitors enter previously protected markets.
According to a study conducted by the Organization of Economic Cooperation and Development (OECD), the U.S. economy benefits from an industry structure, with comparable entry but more active exit, and from less restrictive labor and product market regulation compared to many other members of OECD. Nevertheless, as the electricity market woes in California and the problems besetting the airline industry illustrate, markets work within a boundary of oversight institutions and regulations that are provided by government.
Although the economy was still growing in the early years of the 21 st century, the sustainability of this growth was becoming more of a concern because of a serious decline in the personal saving that is used to fuel capital investment and research and development. Saving and investment drive the productivity growth that allows personal incomes to rise without accelerating inflation. Since 1990, personal saving declined from 6 percent of GDP to about 1 percent in 2001 (see fig. 14). In recent years, low personal saving was offset by government budget surpluses and sustained by foreign investment in the United States. To the extent that these offsetting trends change, personal saving must rise if growth in investment and productivity is to continue at the levels of the 1990s.
OECD has determined that several of the sources of economic growth are related to key factors in the changing economy. Among key factors that OECD determined will affect growth are research and development expenditures, reduced variability in inflation, increased human capital formation (as measured by education), inflation, trade openness, and physical capital investment. The ability of a society to change these factors also varies; for instance, it may be more difficult or expensive to change business research and development by 1 percent than it is to change the variability in inflation. The impact of research and development and that of human capital highlight the importance of the knowledge base of the changing economy.
Increases in spending on national defense and homeland security add to already intense competition for resources among many national priorities. In the longer term, the level of aggregate saving may place even greater constraints on federal spending for national priorities, particularly Social Security, Medicare, and Medicaid. As previously noted, GAO’s long-term budget model shows that simply paying for the higher retirement and health care costs associated with the baby boom generation will limit budgetary flexibility while leaving few resources for investment in new technology. This budget outlook reinforces the importance of long-term growth--fueled by efficiency, saving, and investment--that will allow the nation to support its commitments to future generations.
Profound changes in the characteristics of the U.S. population will continue in the coming decades as the population becomes increasingly older and more diverse. According to the 2000 census, the median age of the U.S. population is now the highest it has ever been, and the most rapidly increasing age group is the 45- to 54-year-olds--the baby boomers. As the baby boomers age, the share of the population aged 65 or older is projected to grow from 12 percent in 2000, to about 19 percent in 2030, and to 23 percent in 2075 (see fig. 15).
As noted earlier, the baby boomers’ aging and retiring will have severe effects on the Social Security and Medicare program trust funds, with both programs projected to begin running cash deficits in the next decade that will continue to grow for decades into the future. By 2040, their combined cash deficits are estimated to be $670 billion (see fig. 16).
Furthermore, public spending on the elderly through the Medicare and Medicaid programs will consume a drastically increasing share of GDP, rising from about 3.4 percent in 2000 to approximately 9 percent in 2040 and to 14.3 percent in 2075 (see fig. 17).
Notes: Projections based on the intermediate assumptions of the 2003 Trustees’ Reports, the Congressional Budget Office’s (CBO) March 2003 short-term Medicaid estimates, and CBO’s June 2002 Medicaid long-term projections under midrange assumptions.
At the same time that the baby boomers are exerting such major pressures on federal expenditures, the growth of the labor force is expected to slow considerably, becoming negligible by 2050 (see fig. 18).
This decline in the number of working-age people compared with the rise in the number of elderly has obvious implications for the Social Security and Medicare trust funds. Today, about 3.3 people pay into Social Security for every person receiving benefits (see fig. 19). By 2030, this ratio is projected to decline to 2.2 and by 2080 fall to 1.8.
Unless there are improvements in the underlying sources of productivity--such as education, technology, and research and development--low labor force growth will lead to slower growth in the economy--and to slower growth in federal revenues at a time when the expenditure demands on federal programs for the elderly are increasing. This slowing labor force growth is likely to raise questions about current retirement policies in both the public and private sectors and whether people ought to be encouraged to stay in the workforce longer and be given opportunities to continue their education and training. As with demand for scarce technical skills and low-cost labor, the slowing growth in the labor force increases pressures to import workers, thereby raising questions about immigration policies.
The implications of a growing elderly population are likely to extend far beyond the financial status of the Social Security, Medicare, and Medicaid programs. Services provided by state and local governments for housing, transportation, and programs for the elderly also are likely to change in response to the needs of this population. Privately provided services, including communications and financial services, also are likely to change in response to the needs of the elderly population. These changes are likely to have their largest impact on areas in which the elderly population is increasing the most. From 1990 through 2000, the elderly populations in 8 states increased by more than 25 percent, while 22 states had increases of just under 10 percent.
This demographic shift will affect other industrialized nations as well. For example, in some European countries, social program costs are projected to consume a greater share of total GDP than in the United States. As the health and retirement costs of these nations burgeon, their budgets may become more constrained, which in turn could affect U.S. interests. For example, while U.S. assets today represent a significant share of foreign portfolios, European lending to the United States is likely to be scaled back as the continent has to finance the consumption needs of its elderly populations. The United States’ international interests could also be affected if Europe and other major donors are forced to curtail their contributions to international lending institutions and peacekeeping missions and their aid to developing countries.
While the U.S. population is growing older, it is also growing more diverse--in large part because of record numbers of immigrants. From 1990 through 2000, the number of foreign-born people in the United States grew by 57 percent to total more than 31 million--the largest number of foreign-born residents in U.S. history. While these foreign-born residents make up about 11 percent of the U.S. population overall, in some parts of the United States, the numbers are especially high. For example, 26 percent of California’s population is foreign born--over three-quarters of whom came from Mexico and Asia. Also, in 18 other states, at least one-half of foreign-born residents came to the United States since 1990. Although over one-fourth of these immigrants are college educated, foreign-born residents are more likely to be less educated and more likely to live in poverty and lack health insurance than residents who were born in the United States, placing special demands on education, health, and other social service systems. These changes also have implications for how the federal government targets subsidies and grants to mitigate regional disparities.
This more diverse population means that minorities, as well as women, will continue to represent a continuously increasing share of the workforce. In 2000, women constituted 47 percent of the American workforce, up from about 45 percent in 1990, and this proportion is expected to increase further in the future (see fig. 20). African Americans, Hispanics, Asians, and other minorities are projected to account for about 30 percent of the total labor force by 2010, but will account for about 60 percent of all new workers from 2000 through 2010. These trends, along with slow labor force growth, have implications for federal policies and programs in education, training, child care, and immigration, among other things.
Science and technology influence every aspect of American life. While information technology is a major technological force of this era--linking individuals, organizations, and economies around the world--other kinds of scientific and technological advances also are creating significant changes. For example, the rapidly increasing understanding of the human genome is leading to new developments in genetic engineering. For society and government, these developments in science and technology present great opportunities to improve the quality of life, the performance of the economy and the government, and the relationship of government to its citizens. At the same time, the increased development and use of new technologies challenge the government’s and the Congress’s ability to evaluate their potential and assess their effect on security, safety, privacy, and equity.
Advances in science and technology have been fueled by increases in research and development (R&D) funding by the public and private sectors. As shown in figure 21, R&D funding has increased dramatically over the past 30 years, although the relative federal share of total funding has declined over this period.
The positive outcomes from technological developments are well illustrated by IT, which contributed to the substantial gains in productivity that fueled the U.S. economy in the 1990s. Electronic commerce in the United States far outpaces the rest of the world and is expected to grow exponentially over the next few years. IT has begun to alter the way citizens interact with government, making it easier for them to get information and assistance, identify and obtain services, file applications and taxes, and conduct other transactions with government.
Although such advances have opened the workforce to people who were previously barred by physical handicaps or geographic distance, fundamental access to technology will continue to prompt debate over the digital divide--the disparity in the ability of different socioeconomic groups to access and use technology. Other advances in IT raise additional challenges for the nation. The growth of electronic commerce, for example, has made it more difficult to determine the source and character of taxable income and sales, thereby complicating division of the tax base across national, state, and local jurisdictions. Moreover, as organizations become more interconnected, the ability to share data among systems can lead to inappropriate access to medical records, credit histories, and other personal and confidential data. As shown in figure 22, the number of reported hacker attempts, viruses, and other computer bugs exploded in recent years.
Furthermore, the widespread interconnectivity of computer systems with the critical operations and infrastructures they support has also created new vulnerabilities. The nation’s telecommunications, power distribution, public health, national defense (including the military’s war fighting capability), law enforcement, financial, government, and emergency services all depend on computer operations. Because financial markets and other critical infrastructure are also reliant on IT, the United States and world markets can be attacked even without an actual physical assault.
Despite these vulnerabilities, the nation’s ability to detect and counter bioterrorism greatly depends on information generated by biomedical research on dangerous, disease-causing microbes and on growing understanding of the immune system’s response to these pathogens. This research is critical to the accelerated development of diagnostic tests, vaccines, antivirals, and antimicrobials. Efforts to accelerate biomedical science related to homeland security, in turn, allow for a more rapid response to naturally occurring disease outbreaks.
Furthermore, the improved understanding of diseases and how the human body operates has led to new therapies and treatments and may lead to the elimination or significant control of some diseases. Advances in the biological sciences, such as the mapping of the human genome, are furthering the nation’s understanding of disease mechanisms and creating significant opportunities for new approaches to medical care. Advances in cell biology have accelerated diagnostics and treatments. Rapid developments in the field, including promising research on potential uses for stem cells, have opened the possibility of treatments for a host of disorders that have proved difficult to counter. In addition, genetically modified crops have the potential to dramatically improve the health and nutrition of many of the world’s poorest people.
When used in conjunction with medical advances, nanotechnology, which involves manipulating matter at the level of individual atoms, could provide further breakthroughs. For example, advances made by a multiagency nanotechnology research group and others may lead to far-reaching innovations such as drugs able to target specific parts of the body at a given time. However, the effects of nano-sized materials on human tissues are unknown and the technology’s unforeseen economic consequences could lead to widespread employment disruptions.
Other biomedical advances raise concerns as well. Although they hold great promise for improving health care, the affordability of new diagnostic and treatment methods is becoming a growing issue for federal and state health care programs. Newer treatments may not reach poorer countries, where even treatments currently available in the United States are out of reach because of their costs. Additionally, advances in biotechnology raise a number of difficult ethical and legal questions that society has not had to address before. For example, the rapid progress of the Human Genome Project opens the possibility of identifying a genetic predisposition for diseases in individuals and, thereby, the opportunity for preventive interventions. At the same time, this information may make people more vulnerable to discrimination by employers and insurance companies.
A variety of economic, environmental, and social indicators suggest that, in some respects, the quality of life for Americans has improved over the past several decades. Large segments of the population continue to enjoy greater economic prosperity than ever before. In 2002, over 94 percent of the labor force was employed and the median annual household income was over $42,000. More than two-thirds of American households own their own homes, and children are graduating from high school and going on to college at record rates. The quality of the physical environment has also improved, with air and water pollution declining over the last couple of decades and larger numbers of hazardous waste sites cleaned up.
Americans are also living longer, with the average life expectancy at birth now up to 77 years, a trend likely to continue with advances in medicine. Further, mortality rates have continued to decline in recent years, both in general and for some of the nation’s leading causes of death, such as heart disease and stroke. In the last decade, the well-being of many Americans has been enhanced through the dramatic increase in the availability of new drug therapies, such as those for treatment of high cholesterol. In fact, since the mid-1990s, an average of 100 new drugs have been approved annually. Recent medical advances, such as mapping the human genome and researching the use of vaccines for certain types of cancer, may lead to continued improvements in the quality of life for the nation’s population.
However, improvements have not been without cost, and rates of improvement can be slowed and certain resource trade-offs sharpened by a prolonged economic downturn. The nation’s spending on health care, for instance, doubled from 1990 through 2000, and this growth is expected to continue through 2010 (see fig. 23). For the federal government, these trends are of enormous consequence to the future scope and coverage of the Medicare and Medicaid programs, as well as the defense and veterans’ health care systems--two of the largest health care systems in the world.
Despite the effort and expense of achieving and maintaining these improvements in quality of life, the improvements have not been evenly distributed across the population. In 2002, more than 43 million Americans did not have health insurance, and since then additional numbers have lost Medicaid benefits as states, faced with significant budget deficits, discontinued coverage for certain individuals. Unemployment rates for African Americans and Hispanics were nearly twice the rate for whites. These groups also include proportionally fewer college graduates, their average income levels are considerably lower, they are less likely to have health insurance, and their poverty rates are more than double those of white Americans. Evidence also points to regional disparities. For example, a lack of adequate infrastructure, housing, and safe water contribute to a myriad of health and economic problems to many living along the U.S.-Mexico border. Violent crime rates remain high in certain geographic areas and for certain parts of the population, although they have fallen considerably across the nation as a whole. Affordable housing remains out of reach for many in the Northeast, northern California, and Hawaii.
Moreover, prosperity itself has placed greater stresses on the quality of life. Greater economic activity, for example, is producing more air and highway traffic and heightening concerns about safety and environmental quality. Families are struggling to balance the demands of work and home and to find and pay for good day care. Parts of the country that have seen rapid development--particularly the Southeast and Southwest--are facing increased competition for water, land, and other natural resources. Population and economic growth also create demand for new transportation and other physical infrastructure and place strains on existing capacity.
In the future, the need for new investments will increasingly come into competition with other national priorities, including spending on Social Security, Medicare, and Medicaid as well as on national preparedness to confront security threats, thus creating difficult budgetary choices for the federal government. To assist in making these difficult trade-offs, decision makers would benefit from tools that indicate where the nation stands in improving the quality of life for all citizens. These indicators would help decision makers identify areas that warrant relatively greater or lesser attention and resources and help ensure that all citizens are beneficiaries of gains made in the nation’s quality of life.
A number of efforts are under way around the world to develop comprehensive national indicators systems that help leaders, professionals, educators, and the public reflect on key quality of life issues. For example, Germany, France, Australia, Canada, and a number of other countries have developed detailed sets of national indicators. In fact, an international group of measurement practitioners and researchers maintain that while indicator systems should be comprehensive, they should also be designed to provide easily digestible, user-friendly, and timely information.
The United States also has established a wide variety of comprehensive and specialized national, regional, and local indicator systems. The most developed of these systems focus on the economy, the environment, and key social areas, such as health care. There is a growing consensus, however, that the establishment of a comprehensive portfolio of key national performance indicators is needed to support informed public debate and decisions within and between different levels of government and society.
To that end, the Comptroller General--in cooperation with the National Academies--held a forum in February 2003 with national leaders and experts to explore whether and how to establish a portfolio of national indicators for the United States. The participants generally agreed that developing a key national indicator system is important and complex. Such an effort will require applying “lessons learned” from past efforts and building upon many of the efforts currently under way. In this regard, GAO will continue to work with the Congress and a number of public and private sector institutions to facilitate continuing dialogue and work on how to improve the amount of information that can be brought to bear on determining Americans’ overall quality of life.
As the pace of change accelerates in every aspect of American life, government is faced with new and more complex challenges. The demographic pressures, emerging scientific and technological changes, and emergent diverse security threats are among the forces that will test the relevance and effectiveness of current governmental programs and tools. As the federal role has grown in addressing a wide range of needs and wants, the public has come to expect effective performance from the public sector.
To deliver on these expectations, the nation’s system will be pressed to adapt policy-making processes and management systems to address the implications of the previously noted themes for public policy outputs and outcomes. First, the capacity of the system to address these emerging issues will be based on a policy process that has sufficient foresight to address the longer-term forces shaping the nation’s policies and choices. As discussed earlier, GAO’s long-term budget model shows that, absent reforms on the spending or revenue sides of the budget, higher retirement and health care costs associated with the baby boom retirement will crowd out flexibility within the budget to address important national needs and eventually lead to unsustainable levels of deficits and public debt (see figs. 3 and 4). Waiting to address these forces could require precipitous policy actions that would have disruptive consequences on the lives of retirees and workers alike. Rather, addressing these pressures earlier through timely actions to reform Social Security and health care programs and policies that boost long-term savings and growth can provide time for social adjustments to policy change while helping future generations stave off economic decline and reclaim a larger measure of fiscal flexibility.
Second, these long-term fiscal pressures and other emerging forces will test the capacity of the policy process to reexamine and update priorities and portfolios of federal programs and policies. A process that only considers incremental changes to existing policies will constrain the nation’s capacity to both respond to the fiscal challenges and to make government more relevant for the 21 st century. The base of existing fiscal commitments and programs will need to be addressed periodically so that emerging needs can be addressed while outdated and unsustainable programs can be either reformed or eliminated.
Third, the reexamination of existing commitments calls for the development of systematic indicators on the performance and costs of federal programs. A performance-based process can help the nation reprioritize by identifying those programs for which performance falls below expectations and costs perennially exceed projections, giving the nation the opportunity to improve program delivery or reallocate scarce funds to higher priority programs with better performance prospects. The foundation for performance-based policy making has already been established through 1990s reforms in performance, financial, and information management. Agencies are now developing performance goals and plans and more systematic and reliable information is available on costs and performance. However, much remains to be done in developing performance information that is useful to policymakers in evaluating the efficacy of existing programs. In the recent Office of Management and Budget (OMB) exercise applying the Program Assessment Rating Tool (PART) to the fiscal year 2004 budget, for instance, OMB concluded that performance measures and data were insufficient for making a judgment about the effectiveness of half of the 234 programs sampled (see fig. 24).
Fourth, promoting a more strategic focus on the broad goals achieved by portfolios of government programs is essential to bringing about a results-oriented debate reexamining government roles and responsibilities. Numerous federal programs and tools are involved in addressing the important policy goals in mission areas that are the focus of most policy debates. For example, as figure 25 illustrates, for the education and labor budget function, a wide range of discretionary, mandatory, credit, and tax expenditure programs are involved in addressing federal policy goals. The policy process itself must have the capacity to transcend the narrow focus on specific programs and agencies to address how portfolios of programs and tools contribute to policy goals. Assessing the coherence of all related policy tools to ascertain whether they are aligned and relevant for a changing society will be a critical task in rethinking and updating the federal government’s role.
The nation’s capacity to address broad mission areas can be enhanced by the development of national performance indicators focused on the broadest levels of policy aspirations in its system, for example, improving national health outcomes, reducing crime, or improving national educational progress. The development of such indicators can prompt a healthy national dialogue among key stakeholders to establish consensus on goals and to reach agreement on a set of indicators to measure current performance and track progress.
Fifth, redefining performance goals and indicators must be a national, not a strictly federal, initiative, because important national performance goals involve a broad range of federal, state, and local governmental, nonprofit, and for-profit organizations and even international organizations. Figure 26 indicates the growing involvement of third parties in federal programs. Since at least the 1960s, the number of federal employees has dropped even as federal outlays have risen, partly because the dollars that fund federal programs are increasingly flowing to nonfederal entities. Promoting effective partnerships with third parties in the formulation and design of complex national initiatives will prove increasingly vital to achieving successful policy outcomes in the years ahead. Protecting the nation from the threat of terrorism, for instance, will call for a concerted effort by all three levels of government as well as key private sector leaders responsible for critical infrastructure and resources.
This growing interdependence has important ramifications for governance and accountability. The public rightly expects to hold the federal government accountable for achieving important national outcomes. Certainly, involving state and local governments and other types of organizations in the federal mission can add new capacities and efficiencies and can promote responsiveness to a wider range of local interests. However, unique accountability challenges arise as well, both from the involvement of independent interests operating under their own sovereignty and from the reliance on ever more complex networks to deliver federal services. The challenge for the federal government will be to design, select, and manage the various tools of governance--regulations, grants, tax preferences, or loans--to prompt these independent interests to work together in defining and pursuing common national goals. More broadly, as the nation manages through partnerships across boundaries, the fiscal and management challenges faced by each level of government have become increasingly intertwined. Going forward, the performance and fiscal capacity of the public sector as a whole will become more relevant in determining how successful the nation will be in addressing important national policy goals. Successful partnerships will entail refocusing accountability and metrics to capture a more integrated perspective on the efforts and accomplishments achieved by all actors working in partnerships across conventional government or private sector boundaries.
Finally, the management systems and processes in federal agencies will have to undergo fundamental changes to respond effectively to the daunting challenges facing the nation. Nothing less than a transformation in the people, processes, and technology used to address public goals will be necessary to address the demanding policy goals facing the nation in a time of rapid change. Ultimately, the federal government needs to create a culture that moves from
- process to results,
- stovepipes to matrixes,
- hierarchical to flatter and more horizontal organizations,
- an inward to an external focus on citizens and customers,
- reactive to proactive approaches,
- avoiding risk to managing risk, and
- protecting “turf” to forming partnerships.
This transformation will require fundamental changes in culture within the federal government. Top leadership involvement and clear lines of accountability for making improvements will be necessary governmentwide. Organizational frameworks will have to be redefined to accommodate the adaptability needed to address emerging public policy challenges and leverage the partners and stakeholders who will prove to be essential to implementing needed reforms. Building on the evolving agenda of reforms in financial, performance, and information management will be necessary to establish the accountability mechanisms to track results. However, strategic human capital management will be the centerpiece of any serious change management initiative. The people working for government are the most important asset in addressing the emerging challenges facing the nation. The aging of the federal workforce as well as the growing competition for bright new entrants makes it imperative that the federal government equip itself with new tools necessary to recruit, retain, and reward talented workers. A consistent strategic approach to marshaling, managing and maintaining the human capital needed to maximize government performance is essential. Effective changes can only be made and sustained through the cooperation of leaders, union representatives, and employees throughout an organization.