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<H1 property="dc.title">Running in the red: How the U.S., on the road to
surplus, detoured to massive debt</H1>
<H3 property="dc.creator">By Lori Montgomery, <SPAN class=updated>Saturday,
April 30, <SPAN class=special>8:02 PM</SPAN></SPAN></H3>
<P>The nation’s <A
href="http://www.washingtonpost.com/wp-dyn/content/article/2010/04/23/AR2010042302222.html">unnerving
descent into debt</A> began a decade ago with a choice, not a crisis.</P>
<P>In January 2001, with the budget balanced and clear sailing ahead, the
Congressional Budget Office forecast ever-larger annual surpluses indefinitely.
The outlook was so rosy, the CBO said, that Washington would have enough money
by the end of the decade to pay off everything it owed.</P>
<P><A
href="http://www.washingtonpost.com/wp-srv/politics/special/clinton/stories/president012099.htm">Voices
of caution</A> were swept aside in the rush to take advantage of the apparent
bounty. Political leaders chose to cut taxes, jack up spending and, for the
first time in U.S. history, <A
href="http://www.washingtonpost.com/wp-dyn/content/article/2007/05/07/AR2007050701582.html">wage
two wars solely with borrowed funds.</A> “In the end, the floodgates opened,”
said former senator Pete Domenici (R-N.M.), who chaired the <A
href="http://www.whorunsgov.com/people/Congress/Senate_Committees/Budget">Senate
Budget Committee</A> when the first tax-cut bill hit Capitol Hill in early
2001.</P>
<P>Now, instead of tending a nest egg of more than $2 trillion, the federal
government expects to owe more than $10 trillion to outside investors by
the end of this year. The national debt is larger, as a percentage of the
economy, than at any time in U.S. history except for the period shortly after
World War II.</P>
<P><A
href="http://www.washingtonpost.com/blogs/behind-the-numbers/post/more-deficit-concern-less-hope-about-solving-problem-washingtion-post-pew-center-poll-finds/2011/04/26/AFneWgsE_blog.html">Polls</A>
show that a large majority of Americans blame wasteful or unnecessary federal
programs for the nation’s budget problems. But routine increases in defense and
domestic spending account for only about 15 percent of the financial
deterioration, according to a new analysis of CBO data.</P>
<P>The biggest culprit, by far, has been an erosion of tax revenue triggered
largely by two recessions and multiple rounds of tax cuts. Together, the economy
and the tax bills enacted under former president George W. Bush, and to a lesser
extent by President Obama, wiped out $6.3 trillion in anticipated revenue.
That’s nearly half of the $12.7 trillion swing from projected surpluses to
real debt. Federal tax collections now stand at their lowest level as a
percentage of the economy in 60 years.</P>
<P>Big-ticket spending initiated by the Bush administration accounts for
12 percent of the shift. The <A
href="http://www.washingtonpost.com/world/april-is-deadliest-month-for-us-troops-in-iraq-since-2009/2011/04/30/AFsWO8LF_story.html">Iraq</A>
and <A
href="http://www.washingtonpost.com/world/images-from-afghanistan--april-2011/2011/04/04/AFvWJMQD_gallery.html">Afghanistan</A>
wars have added $1.3 trillion in new borrowing. A new prescription drug
benefit for Medicare recipients contributed another $272 billion. The
Troubled Assets Relief Program bank bailout, which infuriated voters and led to
the defeat of several legislators in 2010, added just $16 billion — and
<SPAN>TARP </SPAN>may eventually cost nothing as financial institutions repay
the Treasury.</P>
<P>Obama’s 2009 economic stimulus, a favorite target of Republicans who blame
Democrats for the mounting debt, has added $719 billion — 6 percent of
the total shift, according to the new analysis of CBO data by the nonprofit Pew
Fiscal Analysis Initiative. All told, Obama-era choices account for about
$1.7 trillion in new debt, according to a separate Washington Post analysis
of CBO data over the past decade. Bush-era policies, meanwhile, account for more
than $7 trillion and are a major contributor to the trillion-dollar annual
budget deficits that are dominating the political debate.</P>
<P>As Congress prepares this week to launch a high-stakes battle over whether <A
href="http://www.washingtonpost.com/politics/debt-ceiling-more-democrats-threaten-to-vote-against-raising-borrowing-limit/2011/04/28/AF5KvY8E_story.html">to
raise the legal limit on borrowing</A>, the analyses offer a clearer view of the
drivers of the debt — and of the difficulty of re-balancing the budget without
new tax revenue.</P>
<P>Most Republicans reject raising taxes as part of the solution; <A
href="http://www.whorunsgov.com/Profiles/John_A._Boehner">House Speaker John A.
Boehner (Ohio)</A> has called it a “non-starter.” But Democrats won’t go for a
proposal based solely on spending cuts. The<A
href="http://www.washingtonpost.com/business/economy/gang-of-6-senators-launch-public-campaign-to-support-deficit-reduction/2011/03/07/ABEtpzO_story.html">“Gang
of Six,”</A> a bipartisan Senate group dedicated to debt reduction, is expected
to unveil a strategy as soon as this week that couples sharp spending cuts with
a rewrite of the tax code that would raise additional revenue.</P>
<P>(The debt ceiling, set at $14.3 trillion, covers all federal debt,
including money the Treasury owes other federal entities, such as the Social
Security trust fund. The CBO data focus on the portion of the debt borrowed from
outside investors. The debt is the accumulation of annual deficits; if annual
budgets are in surplus, the nation can pay down the debt.)</P>
<P>The annual surpluses that set the nation on this course emerged in the final
years of the Clinton administration. In the typical American household, a
surplus comes as welcome news. But the White House is not a typical household.
When Treasury Secretary Robert Rubin saw the budget shift into the black in
1998, he immediately warned President Bill Clinton that, politically, it was a
mixed blessing.</P>
<P>Rubin wanted to use the surplus to start repaying the debt, which was then
just more than $3 trillion. The White House billed it as “saving Social
Security first,” viewing the surplus as an opportunity to shore up the nation’s
finances before huge numbers of the baby boom generation began claiming federal
retirement benefits. “The problem was a whole other part of the political
spectrum wanted to use the surplus for tax cuts,” Rubin said in an interview.
“They said they wanted to give the people back their money. Of course, it was
also the people’s debt.”</P>
<P>What to do with the surplus became a central issue of the 2000 presidential
campaign, with Vice President Al Gore arguing that much of it should be put in a
“lockbox” to protect Social Security and Medicare. Bush pushed for a broad tax
cut, arguing that taxpayers at all income levels were owed a refund. “Some say
that the growing federal surplus means Washington has more money to spend, but
they’ve got it backwards,” Bush said as he accepted the GOP nomination in August
2000. “The surplus is not the government’s money. The surplus is the people’s
money.”</P>
<P>As soon as he took office, Bush pushed Congress to make good on his tax
pledge. Less than a week after his inauguration, he got a boost from Federal
Reserve Chairman Alan Greenspan, who testified before the Senate Budget
Committee that “tax reduction appears required” to prevent the federal
government from accumulating too much cash. Greenspan feared that large
surpluses would turn the government into the nation’s largest investor, creating
distortions in the markets.</P>
<P>A chorus of skeptics warned against spending the surplus. Some stressed the
inherent uncertainty of the CBO projections. Others said a big tax cut would
unleash pent-up desire in both parties to pursue expensive priorities without
the pay-as-you-go restraints that had helped produce the surplus.</P>
<P>Congress approved a $1.35 trillion tax cut in record time. A second
package, worth $350 billion, followed in 2003. Together, they constituted
one of the largest tax cuts since World War II, according to the conservative
Tax Foundation.</P>
<P><A
href="http://www.washingtonpost.com/business/oneill-calls-foes-of-raising-debt-ceiling-terrorists/2011/04/27/AFpIWhyE_video.html">Bush’s
first Treasury secretary, Paul O’Neill</A>, resigned after the White House
decided to pursue the 2003 measure. “I believed we needed the money to
facilitate fundamental tax reform and begin working on unfunded liabilities for
Social Security and Medicare,” O’Neill said in an interview. But the White
House, he said, was focused on improving economic growth for the fourth quarter
of 2004. “They wanted to make sure economic conditions were great going into the
president’s reelection.”</P>
<P>Proponents of tax cuts argue that the legislation merely returned tax
collections to their appropriate levels. They note that the CBO’s 2001 forecast
assumed that tax collections would stay above 20 percent of the nation’s
gross domestic product (defined as the total of all economic output) — well
above the historic average of 18 percent of GDP.</P>
<P>“It’s not obvious that America was ready to have taxes at a level this high
persistently,” said Donald Marron, a former CBO director who now heads the
nonprofit Tax Policy Center. “Some degree of tax cutting was inevitable.”</P>
<P>But some key advocates of the tax cuts now say such a large reduction was
probably ill-advised.</P>
<P>“Nobody would have thought that all these things would have happened after
you cut taxes,” Domenici said. “That you’d have two wars and not pay for them.
That you’d have another recession. A huge extravaganza of expenditures” for the
military and homeland security after the Sept. 11, 2001, attacks. “You would
pause before you did it, if you knew.”</P>
<P>Bill Thomas, the former <A
href="http://www.whorunsgov.com/people/Congress/House_Committees/Ways_and_Means">House
Ways and Means Committee</A> chairman who helped shepherd the tax cuts through
Congress, defended the 2003 package as “fuel for the economy.” But he said in an
interview that the 2001 measure was larded with “stuff that I was not all that
wild about,” including bipartisan priorities such as a big increase in the child
tax credit and a break for married couples — provisions Thomas believes did
little to promote economic growth and amounted to “throwing money out the
window.”</P>
<P>“I couldn’t do anything about it,” said Thomas, a California Republican who
retired in 2006. “You’re the candy man when you advocate those kinds of tax
cuts.”</P>
<P>In the end, Bush cut taxes and spent more money. Good times masked the
impact, as surging tax revenues reduced the size of year-to-year deficits during
the first three years of his second term. But after the economy collapsed during
Bush’s final year in office, deficits — and therefore the debt — began to
explode as Obama sought to revive economic activity with more tax cuts and
federal spending.</P>
<P>Today, the CBO forecasts are unrelievedly gloomy, showing huge deficits
essentially forever. As policymakers grapple with the legacy of the past decade,
a demographic wave of senior citizens is crashing at their doorstep, driving up
the cost of Medicare, Medicaid and Social Security.</P>
<P>William Hoagland, who was for years a top budget aide to Domenici and other
GOP Senate leaders, said it is simplistic to think today’s fiscal problems began
just 10 years ago. In 1976, as a young CBO analyst, Hoagland produced a
long-term simulation that showed entitlement costs gradually overwhelming the
rest of the federal budget.</P>
<P>“This situation really goes back to long before [the Bush administration],
which is to say to old dead men that have long left the Congress,” he said.</P>
<P>Still, Hoagland said, the abandonment of fiscal discipline in the wake of the
surpluses clearly didn’t help. “Nobody pushed for paying for this stuff,” he
said. Not even after “it became very clear in the middle of 2003 that the line
had turned on us. And the surpluses as far as the eye could see were no longer
there.”</P>
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