What Happened To Paying Off The National Debt?
A week ago, this commentary by Bill McBride was up on Calculated Risk. A bit of history dating back to 2001. A very timely post and one which fits in with what was happening today with the National Debt. Take note of who was pushing less stringent regulation, tax cuts, etc. It will pay for itself!
What Happened to “Paying off the National Debt”? (calculatedriskblog.com, Bill McBride
At the turn of the millennium, the concern was that the US was paying off the debt too quickly!
Here are a few excerpts from a speech by then Fed Chair Alan Greenspan in April 2001: The paydown of federal debt
“Today I want to address a subject in which your group and the Federal Reserve share a keen interest–the paydown of the federal debt and its implications for the economy and financial markets. While the magnitudes of future federal unified budget surpluses are uncertain, they are highly likely to remain sizable for some time. …
[C]urrent forecasts suggest that under a reasonably wide variety of possible tax and spending policies, the resulting surpluses will allow the Treasury debt held by the public to be paid off. Moreover, well before the debt is eliminated–indeed, possibly within a relatively few years–it may become difficult to further reduce outstanding debt to the public because the remaining obligations will mostly consist of savings bonds, well-entrenched holdings of long-term marketable debt, and perhaps other types of debt that could prove difficult to reduce.”
What went wrong over the last 20+ years?
Here is a list of events and policy choices that significantly increased the debt after 2000:
1) The 2000 projections were overly optimistic.
2) The 2001 recession.
3) The 2001 and 2003 Bush Tax Cuts.
4) 9/11, Homeland Security Spending and the War in Afghanistan
5) The War in Iraq
6) The Finacial Crisis and Great Recession
7) The Trump Tax Cuts
8) The Pandemic.
Here is a brief discussion … (books have been written on each of these topics):
1) Overly Optimistic Projections: Here are the CBO projections from July 2000: The Budget and Economic Outlook: An Update
Click on graph for larger image.
The CBO projections showed an almost $6 Trillion in debt reduction in the 2001 through 2010 period.
I argued in 2000 that these projections ignored possible negative events such as an investment led recession due to the bursting of stock bubble. These projections were clearly overly optimistic.
2) The 2001 Recession: Although Greenspan mentioned “the current slowdown in economic activity” in his April 2001 speech, he didn’t realize the economy was already in a recession. From the May 2000 FOMC minutes:
“The information reviewed at this meeting suggested that economic growth had remained rapid through early spring..”
The economy was already in a recession!
3) Bush Tax Cuts: These tax cuts were sold as slowing the growth of the surpluses (using Greenspan’s speech for cover)! Instead, the tax cuts (mostly for the wealthy) turned the surpluses into deficits and reduced revenue by $1.5 trillion or more over the 2001 – 2010 period.
4) 9/11, Homeland Security Spending and the War in Afghanistan: The 9/11/2001 attacks led to a sharp increase in homeland security spending and the War in Afghanistan.
5) The War in Iraq: The Bush administration argued the war would cost around $80 billion. VP 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’ve mentioned on this blog that “I opposed the Iraq war, and was shouted down and called names like “Saddam lover” for questioning the veracity of the information.”
6) The Financial Crisis and Great Recession. This 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 lending industry, rating agencies that didn’t account for those changes, combined with a lack of regulatory oversight. I was talking with field regulators in 2005 and 2006, and they were all terrified. Saying the appointees at the top of the agencies were blocking any effort to tighten standards.
There were various Inspector General reports that the 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 Administratio was loosening bank regulations!
This photo shows John Reich (then Vice Chairman of the FDIC and later at the OTS) and James Gilleran of the Office of Thrift Supervision (with the chainsaw) and representatives of three banker trade 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.
7) The Trump Tax Cuts: These tax cuts – mostly for the wealthy – were sold with several promises – all failed. See: The Failed Promises of the 2017 Tax Cuts and Jobs Act (TCJA). A couple of quote:
“Not only will this tax plan pay for itself, but it will pay down debt,” Treasury Secretary Steve Mnuchin, Sept 2017
“I think this tax bill is going to reduce the size of our deficits going forward,” Sen. Pat Toomey (R-PA), November 2017
Complete nonsense.
8) The Pandemic: Deficit spending increased sharply due to the pandemic.
Here is a graph of the actual annual deficits since 2000.
Note: This is not adjusted for the growth of the economy. Later I’ll post a graph showing the annual deficit as a percent of GDP.
So, what happened to “paying off the debt”? A series of adverse events (9/11, pandemic), and poor policy choices.
Note that all the “poor policy choices” were by Republicans including tax cuts, the Iraq War, and failure to properly regulate.
We cannot always avoid adverse events, but I opposed each of these poor policy choices as they happened – so these are clearly avoidable.
In Joys of Yiddish, Leo Rosten gives the classic definition of “Chutzpah”:
“Chutzpah is that quality enshrined in a man who, having killed his mother and father, throws himself on the mercy of the court because he is an orphan.”
As far as the budget, the GOP has made a series of poor policy choices and now they want to cut the programs for the poor and middle class. Talk about Chutzpah!
big swing were war on terror outlays, covid/stimmies, etc
big miss not mentioned was social security aka fica cash inflow over payouts was in the hundreds of billions per year.
the as trust fund was gathering a lot of bills, crowding out private sector buyers….
horrors last year as actually cash a small amount of special treasuries they hold
PaddY
I believe most is listed in the list of events. SS was not mentioned.
Paddy
I have no idea what you are saying here.
The national debt was increasing because Congress was spending more than it was taxing. That means it was borrowing. One of the places it was borrowing was from the Social Security Trust Fund. Social SEcurity built up a large trust fund so the Boomers would prepay a lot of their eventual benefits..necessary to avoid the injustice to following generation of having to pay a larger tax than needed for their own benefits because of the greater number of Boomers.
This did not increase the debt….Congress would have borrowed the money from somewhere else if SS was not holding a temporary surplus.
As the Boomers have started retiring the Trust Fund is being paid back..first by paying the interest due on the money already borrowed, and then by paying sdown the principle. I think last year the amount of principle paid down was about one tenth of one percent of the total payroll for covered workers that year. This means that with no Trust Fund at all, Social Security could have paid all benefits by just raising the payroll tax one tenth of one percent of payroll.
I fail to see how any of this is increasing the debt, or crowding out anyone from anything. Could you make yourself clearer.
What if I were to not pay off my monthly credit card bill(s) every month, just let ’em ride, pay the interest. I am good for it, don’t you know. Been paying that interest every month since god knows when.
That’s the deal with the Nat’l Debt. There is no need to pay it off, because we’re Good For It.
As long as we do that, it’s a hell of an asset.
So, now we’re okay to keep doing that, for a couple of years at least. Yay!
What if the dinosaurs could have done that?
Would they have? Sure they would, in the blink of an eye!
(the time it took the asteroid that hit Chicxilub to wipe out the planet.)
Chicxulub asteroid
‘the cause of the Cretaceous–Paleogene extinction event, a mass extinction of 75% of plant and animal species on Earth, including all non-avian dinosaurs.’
Dinosaurs didn’t have any money, but they got too big to fail.
Just like here & now, you don’t matter if you ain’t got no money.
I dunno, wall street was broke, and it turned out they was all that mattered.
I may have to add that to my definition of money: the political power to print money? which makes me wonder if the current inflation might have something to do with quantitative easing coming home to roost at long last?
[i think the answer is no, but i thought i’d ask. and now a still small voice is whispering…did they avoid inflation by stealing money and homes from the poor?]
Wall St broke?
If all the money in the U.S. only totals $6 trillion how can the New York Stock Exchange have stocks valued at $15 trillion?
Credits and debits. Do you believe there is a piggy bank with billions of dollars in it? Or that the treasury has all the money we paid into SS and Medicare? To say, the Gov can not pay out SS and Medicare after collecting our funds in excess of expenditures is looney. Now that they have cleared the debit ceiling which neither of these programs has debt yet is silly too.
i hope someone else answers this who knows more thqn i do.
but it depends on what you mean by money. simplest answer is that a stock valued at a hundred dollars doesn’t need any “money” to have that value it can sit in your portfolio for years and never smell any money at all. then somebody comes over with a hundred bucks, or a check, or some electronic transfer between your account and his account. and you get a hundred bucks and he gets the stock. then you take the hundred bucks and buy another stock worth a hundred bucks, but wait..now we have talked about two hundred bucks worth of stocks and only a hundred bucks worth of “money.”
the conclusion is left as an exercise for the student.
Run
yes. deeply silly.
a dollar bill is just an iou..a promise to pay, backed by the government. this is also what a treasury bond is. it’s not exactly “money” because you can’t put it in your pocket and carry it around and exchange it for a hamburger. an entry in a ledger kept by SSA is a promise to pay backed by the government. the amount of pay is not exactly specified, nor is it absolutely sure (because Congress is not absolutely honest. but the people are in a position to keep Congress honest if they don’t let themselves be fooled. which is the problem).
as for the not absolutely specified, neither is the dollar..which is subject to inflation and taxation…as well as fraud by big business that the government fails to regulate. which is to say there is no assurance, or even moral obligation, that the universe is fair: every generation has it’s own unfairness (war, famine, the draft, Republicans…) but Social Security is the best insurance of keeping the value of some of your own earned dollars over a lifetime of work in order to have “enough” when you can no longer work…
…if we don’t let ourselves be fooled. which is the problem.
The rule since the 1970s, at least, has been that the deficit goes up under Republicans and down under Democrats because Republicans are the fiscally responsible party and Democrats are wastrels.
The main problem of with the debt is that it has been used to cut taxes on people who won’t spend the additional money and pissed off on useless war. If it had gone for something useful, like buying kids US made sneakers or a chain of clean public toilets, I’d be happier with it.
Despite my unhappiness with our debt level, there’s no reason to pay off the debt. The point of borrowing should be to build for the future, so borrowing for an education, to buy a home, or to start or expand a business is 100% reasonable. Since most people are mortal, there are good reasons they might to pay off their debts at some point. If nothing else, lenders know that they aren’t going to live forever, and new credit will be hard to find. Unlike people, the government doesn’t have a sell by date. As long is it is spending on making the future better, there’s no reason to stop borrowing.
Kaleberg
too right. there may be a problem when the interest on the debt becomes a real burden to the taxpayer…but like with buying a house, the interest is a burden, but having a house to call your own is considered worth it.
Otherwise, I think in American usage “pissed off” means “angry.” I think you meant “pissed away.” About which there is some argument. But the rich have always been pissed off about money pissed away on the poor. The fact that they run deficits in order to avoid taxes tells you how smart they are, if the fact that they keep trying to kill Social Security hadn’t already tipped you off.
btw
i haven’t seen any sign of “making the future better since about 1965.