United States — Still Climbing Down the Debt Mountain
After the tax cut, how will this move affect the country’s ability to pay off its huge public debt?
June 5, 2001
From 1981 to the second half of the 1990s, the United States ran large budget deficits at the federal level. The continued deficits resulted in record levels of government debt — and were a source of great concern in world financial markets.
While many analysts had long believed that the United States would have a hard time ever coming down the debt mountain, the second half of the 1990s actually put the country on a solid course of debt payback.
Just how much debt did the U.S. government pile up? Let’s separate it into separate stages: Stage I includes the Reagan-Bush years, which lasted from 1981 to 1992 — and stage II, the Clinton years of 1993-2000.
Since 1997, the U.S. federal government has run budget surpluses. To date, that has amounted to three full fiscal years of surplus, compared to 17 years of deficits since 1981.
These surpluses have chipped away slightly at the outstanding federal debt. But, as of the end of 2000, it still totaled $3.4 trillion billion. That is almost five times the amount of debt before President Reagan took office.
The much ballyhooed surpluses therefore remain largely in the future. At present, they are but an artifact of forecasting — rather than money in the bank. In fact, since the U.S. federal government started to run surpluses, the debt has dropped less than 10% from its peak.
The United States has not even paid off the Clinton-era debt — never mind any of the $2.3 trillion which accumulated during the Reagan-Bush years.
One might suppose that the first goal of a responsible fiscal policy should be to restore at least the situation before the explosion of debt in the 1980s, when the Republicans took over the responsibility for the budget.
How long would the United States have to wait before being able to justify using surpluses for additional spending or tax cuts? The most respected scorekeeper for these matters is the Congressional Budget Office (CBO).
The CBO released projections in late January 2001. According to those projections, which assumed no tax cuts or spending increases, the outstanding U.S. debt would still total $818 billion after 10 years — over $100 billion more than the debt level Ronald Reagan inherited.
Thus, if the U.S. government simply had wanted to attempt to restore the fiscal balance of 1980, it would have had to postpone tax cuts or spending increases for at least 10 years.
Of course, all that debt was incurred as a result of bruising political battles — and was the responsibility not just of the Republicans (whether or not they held the White House), but also of the Democrats (who dominated the U.S. Congress back then).
As a result, political leaders need to take fiscal responsibility for the country’s past actions — whether events unfolded under the control of their own party or not. The Clinton Administration did so, when it decided to use the budget surplus to pay down the U.S. public debt — thus unwinding $400 billion of the $800 billion debt added in the first five years that Clinton was in office.
Imagine that the current administration had chosen to hold itself to the same standard. That, of course, would have entailed delaying tax cuts — just as the Clinton Administration was willing to delay much desired (by some Democrats) spending increases. That would have required waiting until 2011.
And even if the Republicans had chosen to draw a narrower line — and acknowledge responsibility only for the debt incurred under the Reagan and elder Bush Administrations — tax cuts would have had to wait until the debt had fallen below $1.1 trillion. The CBO projects that this will not occur until 2007.
Of course, the United States is a wealthy country. But any wealthy person knows that the key to staying wealthy is to stay out of debt — and to preserve one’s capital. In the 1980s, the United States broke this rule, and it faced serious consequences from its “buy now, pay later” philosophy.
More recently, the country had started back on the road to cutting up its credit cards and getting out of debt. Now — in the middle of that journey — does not seem to be the time to declare victory and walk away from a job half done by instituting large and unbalanced tax cuts.