As negotiations proceed between the President and Congress on how to avoid the so-called "fiscal cliff," I think it’s important to look back and remember how we arrived at our current fiscal situation.
The success of the 1993 deficit reduction act, which was vehemently opposed by the GOP, led to a decade of prosperity and surplus. President Clinton balanced the budget for the first time since 1969 and ran surpluses for four years (the eight consecutive years during the Clinton term with a declining deficit/increased surplus was a postwar record).
Between 1998-2000, the publicly held debt was reduced by $363 billion -- the largest three-year pay-down in American history. Under Presidents Reagan and Bush, the debt held by the public quadrupled. By the time President Clinton had left office, the budget was on track to pay off the entire publicly held debt on a net basis by 2009. Some worried that we might actually pay off all of our federal debt. Unfortunately for us, those fears were unfounded.
Economic growth averaged 4 percent per year during the Clinton years, compared to average growth of 2.8 percent during the Reagan years. The economy grew for 116 consecutive months (the most in history), which fueled the creation of more than 22.5 million jobs (92 percent in the private sector) in less than eight years--the most jobs ever created under a single administration, and more than were created in the previous 12 years.
On January 20, 2001, when President George W. Bush took over from President Bill Clinton, the CBO estimated the total budget surplus for 2002-2011 would be $5.6 trillion. And the campaign to spend the surplus began in earnest, despite warnings.
Leading up to the 2001 tax cuts, the administration and the Republican Congress were well aware of the looming Alternative Minimum Tax (AMT) problem. Negotiators took advantage of this situation in order to keep down the costs of the 2001 tax cuts. In June of 2000, one Treasury economist studied the AMT and warned that AMT taxpayers were due to grow at a rate of 30% each year between 2000 and 2010. Nevertheless, President Bush proposed a $1.6 trillion tax cut without an increase in the exemption level to protect taxpayers from the AMT.
Since 2001, Congress has had to extend an AMT "patch" almost annually so that the Bush tax cuts are not taken back by the AMT. The true cost of what was to be a $1.6 trillion tax cut has been estimated to be $2.2 trillion because of the AMT patches, exploding expiration dates, and debt-financing when the surplus disappeared. Some have even lauded this budget gimmickry.
The other major expenditure contributing to our budget deficit was the engagement in two wars, and while some questioned further tax cuts in wartime, others thought it brilliant. In any case, it certainly was historic.
In 2002, Bush’s economic advisor Lawrence Lindsey caused a furor in the White House by stating the cost of a war with Iraq would be $200 billion when they were claiming only a quarter of that. According to the Congressional Research Service, the cumulative total of war funding for Iraq for FY2001-FY2013 (with FY 2013 requests) is about $821 billion and for Afghanistan $645 billion for a total of $1.5 trillion.
The turnaround in our budget picture during the Bush years was remarkable. In October 2008, CNN reported that the debt clock had run out of numbers. The debt had actually exceeded the 13 digits allotted so the clock had to be revised. According to one report at the end of Bush’s term, "The number of jobs in the nation increased by about 2 percent during Bush’s tenure, the most tepid growth over any eight-year span since data collection began seven decades ago. Gross domestic product, a broad measure of economic output, grew at the slowest pace for a period of that length since the Truman administration. And Americans’ incomes grew more slowly than in any presidency since the 1960s, other than that of Bush’s fatherŠFor the first seven years of the Bush administration, gross domestic product grew at a paltry 2.1 percent annual rate."
By the time George Bush left office on January 20, 2009, the debt was $10.6 trillion, setting a record for debt for any administration. Pursuing two wars and massive tax cuts is the reason. But as Dick Cheney told Treasury Secretary O’Neill in 2002, "Reagan proved that deficits don’t matter. We won the mid-term elections, this is our due."
Let’s not forget how we arrived at our current fiscal predicament.
Beginning next month, Richard Neal will be the Democratic representative for The 1st Berkshire District.