Summary and Analysis of the
President's 2005 Budget

Debt and Deficits, Deficits and Debt

This Administration's first budget — as carried out in the Republican budget resolution for 2002 — left absolutely no margin for error. It spent virtually every dime of projected budget surplus for the first seven years of the budget window. Its proponents claimed to have a "reserve" in case of trouble, but virtually all of that reserve came in the last three years — when budget projections are most uncertain and speculative. So if anything at all went wrong, the budget had absolutely nowhere to go but into the red. And that is precisely what happened.

• 2002 Budget Put Tax Cuts First — To understand the Administration's lack of prudence in its first budget, consider the following words from President Bush in his first address to the Congress:

  ...my budget...is reasonable, and it is responsible. It meets our obligations, and funds our growing needs... My plan pays down an unprecedented amount of our national debt. And then, when money is still left over, my plan returns it to the people who earned it in the first place. (Emphasis added.)

  The President said that he would provide tax cuts only after the debt was paid down and our other obligations were met, with money left over. The problem is that he first gave out the tax cuts, and so our other obligations — including paying down debt, during these years on the eve of the retirement of the baby boom — were never met.

 

 

• First Bush Budget Did Not Fund Defense Buildup — In fact, the imprudence of the Republican Congress's first budget resolution was even worse than that. Contrary to its rhetoric, it did not provide for the President's proposed defense buildup. The President withheld the cost of his defense program until after his massive tax cut was already enacted. Then, the budget resolution provided that the defense buildup would be financed out of the extra revenue that was assumed to flow from the supply-side magic of those unbalanced tax cuts. In the end, however, revenues in 2002 fell more than $300 billion short of what was projected. The Social Security and Medicare Trust Fund surpluses were fully raided and spent, and there was plenty more deficit besides. The defense money was spent anyway, leaving the budget even further in the red.

  Democrats support a strong national defense, and a vigorous program for homeland security. But the fact that those efforts are essential does not mean that they bear no fiscal consequences. In the end, the federal government will pay its bills — that result is as inexorable as the law of gravity. But the government does have the choice of paying those bills on time, or paying them late — with interest. Fiscal denial of the consequences of these choices leads inevitably to waves of deficits building mountains of debt. And if our budget is not sound, we will not be able to afford a sound national defense.

• Imprudent Budgeting Yields Exploding Debt — Because the Republican Administration and Congress have chosen to ignore the consequences of their actions, there are now insufficient funds to address pressing national priorities, including homeland security. And that is after the public debt has virtually exploded. In his first budget, the President projected that the debt held by the public would be paid down to $2.7 trillion, or 23.8 percent of the GDP, by the end of fiscal year 2003. Instead, it was $3.9 trillion — $1.2 trillion higher than President Bush projected — and 36.1 percent of the GDP. Over the past three years, President Bush and the Republican leadership have borrowed 12.3 percent of our nation's annual production — almost one dollar in eight of what we produce each year — more than they planned. The President said that we would have the public debt paid off as of 2011. (Although the President said that he could not buy back all of the outstanding Treasury securities in the open market, he did project that by the end of 2011, he would accumulate cash reserves that would exceed the value of the outstanding securities.) Instead, by our reckoning and if the President gets his way on extending all of his tax cuts, by 2011 we will have a debt held by the public of more than $8.5 trillion, or more than 47 percent of our GDP.
  
  
• Bush Budget Makes Compound Interest Our Enemy — The universally recognized power of compound interest can be an enemy or a friend. To a saver, it is a friend, as it builds wealth. To the previous Democratic Administration, it meant that budget savings reduced deficits, which reduced debt, which reduced the government's interest bill, which in turn made it easier to continue reducing deficits — and ultimately, to build surpluses. It was a virtuous cycle. But after this Administration's rush to enormous tax cuts, this cycle has been reversed, with budget deficits adding to debt, which adds to interest costs, which increase future deficits. This is a vicious cycle for the budget, coming just before the retirement of the baby-boom generation adds unprecedented and not yet fully understood pressures on the budget.
  
  
• Deficits Too Large, Make Debt Grow — Just as the Bush Administration excuses itself for its deficits, so it excuses its deficits as less that the very largest in history as percentages of the GDP. Presumably, if the deficits are not the very largest by that yardstick, then they are, somehow, harmless and acceptable. This is like a football cheer of "We're not the worst!"

The single most important indicator of the state of the budget is the ratio of our debt — not the deficit — to the GDP (as confirmed by CBO Director Douglas Holtz-Eakin at a House Budget Committee hearing on January 27). And this indicator indicts the current Administration and its budgets. The recent deficits are more than large enough to make the nation's debt grow faster than its income — a sure indication of impending disaster, for a nation as for a household. Thus, our debt-to-GDP ratio has climbed from 33.1 percent at the end of 2001 to 36.1 percent at the end of 2003. If the President and the Republicans get their way with the extension of their unbalanced tax cuts, then projections show that the debt to GDP ratio will rise to almost 50 percent by 2014. That will wipe out all of the progress made by the Clinton Administration against the borrowing-and-debt spree of the Reagan and first Bush Administrations, during which the ratio of the debt to the GDP doubled, to almost 50 percent. And so the second President Bush is on track to leave the budget in an even worse condition than did the first President Bush.

• U.S. Treasury Must Rely on the Kindness of Strangers — In the years following World War II, when the United States totally dominated the developed world, economists dismissed the national debt on the ground that "We owe it to ourselves." But in today's world, that is no longer true. Foreigners own almost half of the privately held debt of the United States government. Since the beginning of the Bush Administration, overseas investors have increased their holdings of our debt by almost $400 billion — buying the entire increment of the new debt in private hands, and more besides. (Even more of the increase in the debt has been purchased by federal government trust funds, and by the Federal Reserve.) It is hard for a world leader to maintain its influence over its creditors — in either the economic or the geopolitical sphere. When the federal government must depend on non-domestic investors to buy its massive sales of bonds, even their threat to stop buying — much less to engage in large-scale sales — could send the financial markets into turmoil, driving up interest rates, driving down the dollar, and frightening investors and business firms. The recent rapid drop in the value of the dollar — down 33 percent against the Euro, and 9 percent against the Japanese Yen since the beginning of this Administration — is just a hint of the potential consequences of a loss of overseas confidence in the creditworthiness of the United States government.
  
  
• Bush Goal Is Too Little, Too Late — After turning the record budget surplus that it inherited into the record budget deficit, the Bush Administration says that it will cut the deficit in half in five years. It has no credible plan to do so. And for that matter, this claim is too little, and too late. Having turned a record budget surplus into a record budget deficit, the Republicans can hardly expect redemption for cutting a part of their error (only the deficit, not the lost surplus) in half. And by the five years in their claim, the baby-boom generation will already have begun to retire. President Clinton said that we should save Social Security first, before we addressed any less-urgent priorities; he backed up that pledge by vetoing Republican budget bills that violated his budget. Under President Clinton's approach, Social Security would already be safe for the long run. President Bush and the Republicans, instead, have used the Social Security Trust Fund surplus to pay for their tax cuts, and now find that the supply-side bonus that they expected is negative in size. So we are on the doorstep of the demographic challenge of the retirement of the baby-boom generation, and all the Republicans dare to promise, even with no valid plan behind the promise, is to cut part of their error in half. This is not good enough for America's seniors, or for future workers, either.

Three years ago, when the President proposed his large tax cuts, he believed that he was distributing an impending budget surplus — as imprudent as that assumption has proved to be. But now, all illusions are dispelled; the surplus is gone. So every dollar of the President's explicitly proposed $1.1 trillion of tax cuts is undertaken by choice; and every dollar goes straight to the bottom line of the deficit and the debt. The President has decided that big tax cuts for those who need the help the least trump all concerns of a bigger debt burden upon our children and grandchildren, and all of the needs that government should address today.

The Debt Tax

• Budget Calls for Ever-increasing Public Debt — Instead of approaching the fiscal challenges of the baby boom's retirement with declining public debt and stronger government finances, the President's budget increases debt for as far as the eye can see. Three years ago, the President claimed that his policies would retire all available public debt by 2008, and then would proceed to accumulate assets to drive the government's net indebtedness to zero. Now, the President's own budget predictions show public debt in 2009 at almost $6 trillion and rising.
  
  
• More than $1.8 Trillion in Additional Spending for Interest on the Public Debt Will Burden Our Children with a "Debt Tax" — The 2005 budget proposes additional tax cuts of over $1.1 trillion by the President's own accounting, despite the fact that these policies would leave the budget in deficit for the indefinite future. The President cannot now pay for these tax cuts with a projected surplus, as he claimed to do three years ago. Instead, he will borrow money from America's children and grandchildren to provide a tax cut today. The President's new tax cuts add directly, dollar-for-dollar, to the deficit, the public debt, and the burden on our children and grandchildren who will have to service that debt in perpetuity.
  

  Federal interest expense — the obligatory spending for interest on the nation's accumulated debt — is a "debt tax." Americans must pay taxes to provide the money for interest on the public debt. However, the taxpayers receive absolutely nothing in return for those taxes — no education, no homeland security, just the fulfillment of a legal obligation incurred years ago.

Republican supply-side tax cuts are responsible for an inordinate share of the debt tax. Between 1980 and 1992, the Reagan and first Bush Administrations quadrupled the national debt. Now, after Democrats pulled the budget into surplus and actually paid down some debt in the 1990s, the current Bush Administration is setting new records for additional debt created each year.

Since the President proposed his first budget, projected spending for interest on the national debt for 2002 through 2011 has jumped from $0.6 trillion to more than $2.4 trillion (adding some of the omitted costs back into the President's budget). This represents an additional $1.8 trillion in federal spending for interest on the public debt.

• How Big Is the Debt Tax? — American families of four now must pay almost $4,400 per year, on average, to service the nation's gross debt. The gross debt includes publicly held debt plus debt held by the government's trust funds, such as the Social Security Trust Fund. Under the Administration's policies, that debt tax will increase to almost $10,400 by 2014. (Counting only the debt held by the public, the debt tax would be about $2,100 this year, rising to about $5,400 in 2014.)

 

Republicans claim that their policies will increase economic growth, and thereby alleviate the debt tax. But that is what they said about their tax cut three years ago. They projected budget surpluses forever, even after their tax cuts. Now, when the Administration again tries to assure us that its budget projections are cautious and conservative, their claims ring hollow.

 

Jobs, Jobs, Jobs

It is not justifiable to blame the huge deficits on the economy, rather than on policy. All through the tax-cut debate in the beginning of 2001, and ever since, the Administration and the Republicans in Congress have said how much the tax cuts would help the economy. Because the economy remained weak, one can only conclude that the tax cuts did not work very well. The economy has recovered well behind the pace of the average of previous economic cycles. This is true of overall growth and investment, but the failure of the Bush tax cuts is clearest with respect to jobs.

• Bush Tax Cuts Fail to Deliver on Jobs — President Bush and the Republicans in the Congress have always claimed that their tax cuts were, in fact, a jobs program. Instead, the nation has lost 2.2 million jobs — 2.9 million private-sector jobs — since the President took office. This is the worst jobs performance of any Administration since Herbert Hoover. The record of this Administration's misunderstanding of the budget and the economy is clear.
  
  
• Unfulfilled Jobs Claims from 2001 — In 2001, the President said that his tax cuts — disproportionately targeted toward those who needed the help the least — would create jobs. Mischaracterizing his big top-bracket tax rate cuts as help for small businesses (no more than two percent of small businesses pay income tax at the highest tax rate), he said in his February address to the Congress, "...help for small business means jobs for Americans." In a White House speech that month, he said, "My plan is good for the long-term health of our economy. It is good for the businesses that create jobs."

The President's Council of Economic Advisers (CEA) claimed that his 2001 tax cuts would create 800,000 more jobs by the end of 2002. Instead, from the beginning of the Bush Administration to the end of 2002, the economy lost 2.3 million jobs.

• Unfulfilled Jobs Claims from 2002 — In his State of the Union address in 2002, President Bush said, "Good jobs depend on sound tax policy... The way out of this recession, the way to create jobs, is to grow the economy by encouraging investment in factories and equipment, and by speeding up tax relief..." By the time of this address in January of 2002, the nation had lost 1.9 million jobs; and the Bush Administration then had, and still has, the worst business investment record of any Administration since World War II.

In December of 2001, the CEA claimed that the President's proposed 2002 economic stimulus plan (which was substantially adopted) was worth about 300,000 jobs by the end of 2002. Again, this claim is difficult to reconcile with subsequent events, because the economy had lost 2.2 million jobs by the end of that year.

 

• Unfulfilled Jobs Claims from 2003 — In his State of the Union address in 2003, President Bush said, "Our first goal is clear: We must have an economy that grows fast enough to employ every man and woman who seeks a job... Jobs are created when the economy grows; the economy grows when Americans have more money to spend and invest; and the best and fairest way to make sure Americans have that money is not to tax it away in the first place... Lower taxes and greater investment will help this economy expand. More jobs mean more taxpayers..." By the time of his address in January of 2003, the nation had lost 2.1 million jobs; and the Bush Administration was running the largest budget deficit in American history.

In January of 2003, the President's Council of Economic Advisers claimed that, if the President's new tax cut proposals were enacted (they substantially were), they would create 190,000 new jobs in 2003 and 900,000 new jobs in 2004. In February, the CEA reestimated that the program would create 510,000 new jobs in 2003, and 891,000 new jobs in 2004. Again, these claims are difficult to accept, because at the end of 2003, the economy had 2.3 million fewer jobs than when President Bush took office.

• Questionable Jobs Claims from 2004 — In his 2004 State of the Union address, the President said that "...jobs are on the rise." In January of 2004, the economy created 112,000 new jobs. At that rate, it will take a year and eight months – well beyond the end of the President's term – for the economy to return to the number of jobs at the beginning of President Bush's term of office. And this is after three rounds of the President's tax cuts, which he has already claimed would have created millions of new jobs — but have instead created $1 trillion of new debt on our children and grandchildren.

It is clear that the Administration's all-tax-cuts, all-the-time economic program has failed to produce the jobs that the American people need.

 

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