by Risk calculated on 22/05/2023 10:31:00
At the turn of the millennium, the concern was that the United States was paying off the debt too quickly!
Here are some excerpts from a speech given by then-Fed Chairman Alan Greenspan in April 2001: Repayment of the federal debt
“Today I want to address a topic in which your group and the Federal Reserve share a keen interest: the repayment of the federal debt and its implications for the economy and financial markets. Although the magnitude of future budget surpluses unified feds be uncertain, they are very likely to remain considerable for some time. …
[C]Current forecasts are that under a reasonably wide range of possible fiscal and spending policies, the resulting surpluses will pay off the Treasury debt held by the public. Moreover, long before the the debt is eliminated–In effect, maybe in a few years— it may become difficult to further reduce the stock of debt to the public because the remaining obligations will consist mainly of savings bonds, well-established holdings of long-term marketable debt and possibly other types of debt that may prove difficult to reduce.”
What has gone wrong in the past 20 plus years?
Here is a list of events and policy choices that significantly increased debt after 2000:
1) The 2000 projections were too optimistic.
2) The 2001 recession.
3) The Bush tax cuts of 2001 and 2003.
4) 9/11, homeland security spending and the war in Afghanistan
5) The war in Iraq
6) The financial crisis and the great recession
7) Trump’s tax cuts
8) The pandemic.
1) Overly optimistic projections: Here are the CBO projections for July 2000: The Budget and the Economic Outlook: An Update
Click on the graphic to enlarge the image.
CBO projections showed nearly $6 trillion in debt reduction between 2001 and 2010.
I argued in 2000 that these projections ignored possible negative events such as an investment-led recession due to the bursting of the stock market bubble. These projections were clearly too optimistic.
2) The 2001 recession: Although Greenspan mentioned “the current downturn in economic activity” in his April 2001 speech, he failed to realize that the economy was already in recession. Of May 2000 FOMC Minutes:
“Information reviewed at this meeting suggests that economic growth remained rapid through early spring.”
The economy was already in recession!
3) Bush tax cuts: These tax cuts were sold as a slowdown in surplus growth (using Greenspan’s speech as a cover)! Instead, tax cuts (mostly for the wealthy) turned surpluses into deficits and reduced incomes by $1.5 trillion or more over the 2001-2010 period.
4) 9/11, homeland security spending and the war in Afghanistan: The attacks of September 11, 2001 led to a sharp increase in spending on homeland security and the war in Afghanistan.
5) The war in Iraq: The Bush administration argued that the war would cost around $80 billion. Vice President Dick Cheney said on Meet the Press, “every analysis said this war itself would cost about $80 billion.” Instead, the war cost well over $1 trillion (and countless lives were lost). Note: I mentioned on this blog that “I opposed the war in Iraq, and I was shouted at and called names like ‘Saddam’s lover’ for questioning the veracity of the information “.
6) The financial crisis and the great recession. It was the worst US recession since the Great Depression. This led to the first $1 trillion annual budget deficit in US history and dramatically increased the national debt. The causes of the bubble were rapid changes in the mortgage industry, rating agencies that ignored these changes, combined with a lack of regulatory oversight. I was talking with field regulators in 2005 and 2006, and they were all terrified. I was told that appointees at the top of the agencies were blocking any effort to tighten standards.
There were various inspector general reports that Fed and FDIC field examiners were expressing significant concerns in 2003 and 2004, but Greenspan was blocking all efforts to tighten standards – and the Bush administration was relaxing banking regulations!
This photo shows John Reich (then Vice Chairman of the FDIC and later of the OTS) and James Gilleran of the Office of Thrift Supervision (with the chainsaw) and representatives of three commercial banking associations: James McLaughlin of the ‘American Bankers Association, Harry Doherty of America’s Community Bankers, and Ken Guenther of the Independent Community Bankers of America.
“Not only will this tax plan pay for itself, it will pay down the debt,” Treasury Secretary Steve Mnuchin said. September 2017
“I think this tax bill is going to reduce the size of our deficits going forward,” said Sen. Pat Toomey (R-PA). November 2017
Complete absurdity.
8) The pandemic: Deficit spending has increased sharply due to the pandemic.
Here is a graph of the real annual deficits since 2000.
Note: This is not adjusted for economic growth. Later, I will publish a graph showing the annual deficit as a percentage of GDP.
So, what happened to “debt repayment”? A series of adverse events (September 11, pandemic), and bad political choices.
Note that all the “bad policy choices” were made by Republicans including tax cuts, the war in Iraq and the failure to regulate properly.
We can’t always avoid undesirable events, but I’ve opposed each of these bad policy choices as they happened – so they’re clearly avoidable.
“Chutzpah is that quality inherent in a man who, having killed his mother and father, throws himself at the mercy of the court because he is an orphan.”
When it comes to the budget, the GOP has made a series of bad policy choices and now they want to cut programs for the poor and middle class. Speak Chutzpah!