On Jan. 18, 2001, President Bill Clinton sat in the Oval Office and gave his farewell address to the American people. The nation had enjoyed eight years of peace and prosperity, he said proudly. The economy had created 22 million new jobs. And the fiscal health of the nation had never been stronger. As the nation looked ahead, he said, it needed to maintain its record of fiscal responsibility.
Through our last four budgets we’ve turned record deficits to record surpluses, and we’ve been able to pay down $600 billion of our national debt, on track to be debt-free by the end of the decade for the first time since 1835. Staying on that course will bring lower interest rates, greater prosperity, and the opportunity to meet our big challenges. If we choose wisely, we can pay down the debt, deal with the retirement of the baby boomers, invest more in our future, and provide tax relief.
Nine years ago, Americans were facing a very different kind of budget quandary than they are today. Budget projections indicated that surpluses would grow to $625 billion a year by the end of the decade. The big question was what to do with all the money. Cut taxes? Invest in education and the environment? Put Social Security in a “lock box”? Pay off the $5.7 billion national debt?
It was a wonderful dilemma to ponder. But it didn’t last long. Consider where we stand today.
The national debt has surged past the $12 trillion mark — double the level when Clinton gave his speech — and the Obama administration has forecast that the nation will add another $9 trillion by 2010. The Congressional Budget Office is even more pessimistic, projecting that another $11 trillion in deficits will pile up by 2010. It’s probably a good thing that the feds don’t conduct 20-year forecasts or they might spark a panic. That’s because the really big expenditures on Medicare, Medicaid and Social Security start kicking in a decade from now, pushing spending levels remorselessly higher.
Today the question isn’t whether we should pay off the national debt, it’s how long we can continue adding to it before the whole system collapses. How did we reach such a state of affairs in nine short years?
The two dominant political clans — the Hatfields and McCoys of American politics otherwise known as the Democrat and Republican Parties — would have you believe that it’s all the other’s fault. The sad truth is, there is plenty of blame for both. Since 2001, neither party has been serious about controlling the deficit.
The point may seem obvious to some, but it apparently eludes bloggers and TV’s talking heads who peddle the official party line, admitting no flaw and conceding no weakness. I dwell upon the issue because in my experience in personal conversations and as moderator of the Bacon’s Rebellion blog, an Internet forum where people of diverse perspectives actually do debate civilly, many people are more interested in exonerating their partisan favorites than fixing the problem. The sad reality is that, while balancing the budget is something that everyone says the U.S. ought to do, it isn’t at the top of anybody’s list of priorities. Given a choice, Democrats would rather jack up domestic spending and entitlements every time. Republicans would rather cut taxes and project national might overseas. As long as the elephants can pin the blame on the donkey, and vice versa, no one has to take ownership of their own actions.
We now know that the nation’s fiscal health was not as sound in January 2001 as President Clinton thought it was. Indeed, following the collapse of the dot.com bubble, the economy slipped into recession by March — only two months after Clinton’s speech. Then on September 11 the unthinkable happened: Islamic terrorists hijacked four jets and slammed two of them into the twin towers of the World Trade Center. Markets panicked and the slump deepened. Federal revenues took a dive and the surplus evaporated.
The terrorist attack also highlighted the U.S.A.’s lack of military preparedness. Following the collapse of the Soviet Union, the Clinton administration had overspent the so-called “peace dividend.” To respond to the challenge of fundamentalist Islamic terrorism, the Bush administration ramped up spending across the board on the military, homeland security and intelligence. While the invasion of Iraq was discretionary and arguably unnecessary, few disputed the necessity of spending more money to ensure that a repeat of 9/11 never reoccurred.
Finally, against the backdrop of the wobbly economy and war on terror, Congress let expire in 2002 a piece of legislation that had been crucial to holding deficit spending in check over the previous decade. Reneging on his famous vow, “Read my lips: no new taxes,” George H.W. Bush had agreed to a budget deal that included the Budget Enforcement Act of 1990. By conceding modest tax increases, he won important spending caps that helped restrain spending through the Clinton years. Unfortunately, his son, George W. Bush, had to work with a Congress that had no such institutional brake on its appetites.
Democrat spin-meisters tend to forget that Clinton had a partner in restraining spending: a Republican Congress. By putting Republicans in charge of both houses of Congress in 1994, for the first time in 40 years, voters sent a clear message that they wanted an end to fiscal business as usual. A champion of smaller government, House Speaker Newt Gingrich deserves much of the credit for pushing through welfare reform and other budget-tightening reforms. By 1996, small-government Republicans were so firmly in control of Congress that Clinton acknowledged the obvious, declaring, “The era of big government is over.”
While Republicans and Democrats alike share credit for balancing the budget in the 1990s, president George W. Bush bears much of the responsibility for letting deficits run amuck in the 2000s. Bush’s defenders could argue, like President Obama does today, that he inherited his fiscal problems. After all, the economy went into the tank two months after he stepped into office, and 9/11 took place after nine months. Had Clinton not drawn down military spending so much, Bush wouldn’t have had to ramp it back up so much. But other big fiscal decisions were his. Bush fought for tax cuts as an economic stimulus. He expended political capital to gain support for the budget-busting war in Iraq. He launched the two biggest expansions of entitlements in years, the State Childrens’ Health Insurance Program (SCHIP) and Medicare Part D, the prescription drug benefit. And he tolerated Congress’ growing predilection for pork, allowing earmarks to multiply like feral swine.
The administration’s insouciance toward deficits was captured in a famous story told by Bush’s first Treasury Secretary, Paul O’Neill. During a meeting of the Economic Policy Group O’Neill argued against the proposed tax cut. Government, he argued, needed the money to fix Social Security and Medicare, redesign the tax system and fund the ongoing war on terror. Vice President Dick Cheney disagreed. As O’Neill remembered Cheney’s retort: “When Ronald Reagan was here, he proved that deficits don’t really matter.”
Animated by Cheney’s advice, the Bush administration followed the easy fiscal path, borrowing record sums to pay for guns and butter. On the day Bush took office, the national debt stood at $5.73 trillion. On the day he left office, it had risen to $10.63 trillion — an increase of $4.9 trillion, and the most spectacular run-up since the United States mobilized for total war in 1942.
President Barack Obama rightfully criticized Bush’s fiscal recklessness during his presidential campaign, but he conveniently forgot that the Democrats, who had recaptured control of Congress in Bush’s final two years, passed the budget bills that he was now denouncing. Posturing as a fiscal hawk, Obama continued to blame his predecessor for the worsening fiscal straits when he took office. As he said during a high-level summit one month into the job:
This administration has inherited a $1.3 trillion deficit — the largest in our nation’s history, and our investments to rescue the nation’s economy will add to that deficit. We cannot and will not sustain deficits like these without end. Contrary to the prevailing wisdom in Washington these past few years, we cannot simply spend as we please and defer the consequences to the next budget, the next administration or the next generation.
After saying all right things, Obama proceeded ignore his own advice. After signing a $797 billion stimulus package, to be paid for all with borrowed money, he employed TARP money to bail out Chrysler and General Motors, a use which Congress had never contemplated, and he made his top legislative priority the overhaul of the U.S. health care system, an initiative that would add, depending upon the particular bill in question and who was conducting the analysis, upwards of hundreds of billions of dollars to the national debt over the next 10 years. The budget shortfalls would be even bigger in the out years.
While the Congressional leadership made an effort to give the health care bills the appearance of being “budget neutral,” the debate bogged down in back-room negotiating over whose ox would be gored to cover for the cost of the initiative, variously estimated between $800 billion to $1 trillion over 10 years. The problem was, the Democrats’ version of health care reform was a zero-sum game. For every winner (someone who gained access to health care insurance), there would be a loser (someone who paid the fees and taxes marbled throughout the legislation). In the end, the debate degenerated into a classic exercise in dodgy accounting and redistribute-the-wealth politics. Other than a few promising pilot programs, none of many proposals floated by Democrats would have boosted productivity or improved patient outcomes enough to bend the long-run cost curve downward.
The Democrats may believe Obama’s rhetoric about fiscal responsibility, but the American people do not. Toward the end of 2009, public opinion polls showed flagging approval ratings for Obama generally, opposition to “ObamaCare” specifically, and a throw-the-bums-out mindset universally. Despite Obama’s lingering personal popularity, Americans disapproved in September of his handling of the federal deficit by 58% to 38%. As the year came to a close, the public mood soured even more. A Nov. 30 Rasmussen poll showed that 71% of voters said they were angry at the policies of the federal government — up five points from September — and 46% were very angry.
The American people are clearly focused on something that the political class, growing fat on unprecedented spending, would prefer to sweep under the rug: The federal government faces massive unfunded liabilities with Social Security and health care. With no credible plan for making good on the old entitlements, the nation cannot afford to be making new entitlements. The bail-out and stimulus money may be helping the Wall Street tycoons, the United Auto Workers and incumbent Democratic Congressmen, but it isn’t helping ordinary Americans. All they get is a mountain of debt that propels the nation ever faster toward Boomergeddon.
More than 200 years ago, the economist and moral philosopher Adam Smith observed that there is much ruin in a nation. The United States is a great nation. We have great strengths, not the least of which is the entrepreneurial vitality of our economy and the adaptability of our people. And it will take a lot to ruin us. But ruined we will be if we continue down the path we’re on.
There are four primary drivers of our looming budget disaster: Social Security, Medicare, Medicaid and interest payments on the national debt. The numbers are well known, and I shall not dwell on them at any length. My main purpose is to avoid mushing them all together into one big SocialSecurityandMedicareandMedicaid crisis, to borrow Ezra Klein’s phrase. By examining each one in turn, we can gain a keener appreciation of the problems we face.
In brief, here is the argument that I shall lay out. Social Security is a problem but it is not beyond redemption. Tweaks to the system made within the next few years should suffice to put the program on a firm footing that will survive the stress of Baby Boomer retirement and old age — although there is no “lockbox” to protect Social Security in the event of a total fiscal meltdown. Medicare and Medicaid, meanwhile, are disasters unfolding before our very eyes. If left on auto-pilot, they will precipitate the melt-down. End of story. The one ray of hope is that everybody agrees that a problem exists, even if no one can agree on a remedy.
Finally, there is the interest payment on the national debt. Of all the fiscal challenges facing the nation, this is the least appreciated by the American people — and the most threatening. While there is at least the theoretical possibility that runaway health care costs can be contained, by rationing if nothing else, there is no way to finesse the snow-balling size of the national debt. A debt burden that grows at an accelerating rate is a mathematical certainty.
As long as we depend upon foreigners to lend us the money, we have limited options for dealing with that debt. If American citizens were the only significant creditors, as Japanese citizens are the primary creditors to their own government, we could play the usual redistribution-of-wealth politics that allow us to rob Peter to pay Paul. But the Chinese, Japanese and Persian Gulf oil states are not subject to Congressional jurisdiction. We cannot tax them, fine them or regulate them, nor can we sneakily devalue our debt through inflation or talking down the value of the dollar. Our foreign creditors don’t even have to yank their trillions of dollars in loans to bring us to our knees. As long as we’re running trillion-dollar deficits, all they have to do is stop lending us new trillions, and it’s Boomergeddon time.
