Where Did All That Debt Come From?

I've intended since the spring to write about our country's current fiscal situation and how we arrived here. For months, Congressional Republicans have been asserting that our federal government does not have a revenue problem, it has a spending problem, and have argued for draconian spending cuts largely aimed at programs that benefit the middle class. And President Obama and many Democrats have largely conceded to the GOP on the issue, allowing them frame the debate about our economic woes as being the result of a large federal debt and ongoing budget deficit. Polling shows that a large majority of Americans blame our country's budget woes on wasteful government spending. However, it is critical to examine our country's fiscal policy during the past decade, to fully understand why our deficit and debt have become so large. The data show that the current budget deficit is primarily the result of 3 factors:

  • Significantly decreased federal tax revenue due to the 2001 and 2003 Bush tax cuts for the wealthy;
  • The wars in Iraq and Afghanistan, and other post-9/11 defense and security spending, which have added trillions of dollars in new debt; 
  • And more recently, the financial crisis of 2008 and recession have led to a dramatic decease in the amount of tax revenue coming into the U.S. Treasury (estimated to have increased the debt by $3.6 trillion).

At the end of Bill Clinton's Presidency in January 2001, the U.S. had a budget surplus that was projected to grow significantly over the next decade. With that surplus, national debt was in a trajectory to be paid off in full within a few years. However, as the administration of George W. Bush took office, the new political leadership in Washington had other priorities and did not care to pay off our debt, nor maintain a healthy budget surplus, which could have been used to solidify Social Security and Medicare for future generations (especially considering the upcoming "senior boom" as the baby boomer generation retires), and other infrastructure priorities. The Bush tax cuts in 2001 and 2003, which mostly went to the wealthiest Americans, have added $1.7 trillion to the national debt. My personal view is that it is inappropriate to label these tax cuts, since they were not even paid for! We had to borrow money, some of it from China, to allow corporations and American millionaires and billionaires pay lower taxes.

The wars in Afghanistan and Iraq are projected to add roughly $2 trillion or more by the time they end. While our operations in Afghanistan clearly were a necessary response to the 9/11 attacks, our misadventure in Iraq, which had no connection to 9/11 or al-Qaeda, added not only to our deficit but actually harmed our national security by empowering Iran, inspiring more al-Qaeda-like extremism, and stretching our armed forces thin.

According to analysis by the non-partisan Congressional Budget Office (CBO), nearly half of the $12.7 trillion swing from projected surpluses in 2001 to current debt in 2011 were a direct result of plummeting tax revenue from the 2008-2009 recession. U.S. federal tax revenue in 2011 is at its lowest level as a percentage of GDP in nearly 60 years. Tax revenues always plummet during a recession because the tax base decreases as businesses shrink or fold and individuals are laid off. Given these facts, it follows that one of the most important ways we can solve the budget deficit is to encourage economic growth. By getting the economy growing- businesses investing, expanding and hiring, and consumers spending more (but within their means), tax revenues will increase even at existing tax rates. This is the perspective the Obama Administration has taken since it took office and is evidenced by Obama's 2009 Recovery Act and the December 2010 compromise with Republicans that extended the Bush-era tax cuts, which were set to expire on January 1, 2011. That recent compromise led to continuation of a temporary payroll tax cut for employees and business, which they've had since the Recovery Act was passed. In a previous post, I wrote about how the Recovery Act worked to end the recession and to jump-start growth. And a dramatic change in the GDP growth rate is evidence that the Recovery Act did support growth. However, many economists, including Nobel Prize-winner Paul Krugman, argued in 2009 that Obama's Recovery Act was far too small for the magnitude of the economic crisis the world faced, as the amount spent on stimulus was much smaller than the amount of fiscal contraction our economy was experiencing during the recession. Not only were there serious problems with the American financial system and the U.S. housing market, but Europe faced (and continues to face) arguably more serious economic woes. And it is now becoming much more apparent that Krugman and many other economists were correct. The Recovery Act was simply too small and did not last long enough to get us through a global economic down turn.

Other bills have added to the debt over the past decade, but in a significantly smaller way than the three main areas mentioned above (Bush tax cuts, the ongoing wars and post-9/11 security spending, and the recession). The Wall Street bailout (otherwise known as TARP- Troubled Assets Relief Program), which was signed by President Bush only added $16 billion to the debt. Obama's Recovery Act added about $700 billion.

What is clear from an evaluation of the past decade of economic history is that Social Security, Medicare, welfare programs, and other domestic spending have not put us in the debt hole that we are in. That is why it is incredibly disingenuous when Republicans and the Tea Party call for massive cuts to Social Security and to effectively end Medicare by turning it into a voucher system that will cause seniors to pay much more in the long run, in order to balance our budget. It's kind of ironic to hear Republicans accuse President Obama waging "class warfare" when they are the ones who seek to cut programs that benefit the middle class, such as spending on education, research, Medicare, Social Security, environmental protection, job training, etc, in order to keep and even expand tax breaks for the wealthiest Americans. On the other hand, if Congress ends the Bush tax cuts and passes some measures that actually encourage hiring and economic growth, we'll turn around the shortfall in tax revenues and make great leaps towards solving our fiscal crisis. In short, we do have a revenue problem in this country!

I'll save a discussion about unemployment, and how cutting the deficit doesn't help with unemployment (it exacerbates it) for another post.

Want to see an excellent graphic that breaks down the current national debt and how much the specific policies over the past 10 years, under both Bush and Obama, have contributed to the national debt? Click here.

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