StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Your Weekly Dose Of "Fiscal Fitness"

14 May 2008
Posted by Stan Collender

Here's my "Fiscal Fitness" column for this week from Roll Call.

Bush Budget Legacy:
Much More Debt,
Far Fewer Options

May 13, 2008

At the same time that the three main reality shows — “American Idol,” “Dancing With the Stars” and the 2008 election — are dominating much of the water cooler talk these days, I’m increasingly haunted by something George W. Bush promised as he was entering the White House: He said he would eliminate the national debt by the end of this decade.

That pledge was made for two reasons. First, federal budget surpluses were recorded from fiscal 1998 to 2001. Even though the surpluses were unexpected and no one was really sure why they happened, the president and almost everyone else assumed that, after four years in a row, they would continue.

There was also a certain amount of awe about the surpluses. The last time the United States had four consecutive budget surpluses was 1927-1930, and after years of having to deal with an annual deficit, no one in power had ever experienced this situation before. The federal budget process, which was largely designed to reduce a deficit, suddenly didn’t seem to be as valuable and there was less interest in complying with it.

Bush talked about the $5.6 trillion surpluses that were projected over the coming decade being so certain that policymakers and analysts were asking what they thought were serious questions about the implications of that happening. They wondered, for example, how the Federal Reserve was going to manage monetary policy without federal securities, and the Congressional Budget Office was asked to analyze the overall situation, including how much of the debt could actually be paid off.

Wall Street also bought into the notion that federal debt would soon be a thing of the past. Traders who bought and sold Treasuries seriously started to wonder how they could make a living if there were no new bills, notes and bonds to buy and sell. Some of the bond traders I know started to talk about new careers. At least partially because of this, the Bond Market Association urged the government to continue to borrow even if it had no deficit to finance so the market could be maintained.

Bush also made the pledge to eliminate the national debt by the end of the decade because that’s what Bill Clinton did as his term was ending. The new Bush administration had to look at least as fiscally conservative as the Democratic White House it was succeeding. There also was so much euphoria about the four consecutive surpluses that getting on that debt elimination train absolutely seemed like the politically correct thing to do.

It clearly hasn’t happened. Instead of being eliminated by the end of the decade, federal debt held by the public is now expected to increase by more than $2 trillion from fiscal 2001 to 2008. By the end of 2009, after Bush leaves office, the debt held by the public will be close to $6 trillion, an 80 percent increase over what it was when he first became president.

There are many reasons the Bush administration didn’t fulfill this pledge. But the bottom line is that it didn’t, and as a result the budget situation facing the next president and Congress will be far worse than it was at the start of the Bush administration.

The biggest problem will be that the federal government will be committed to paying about $200 billion a year in interest on the debt. These are funds that would have been available for anything and everything else had the promise to eliminate the debt stayed a high priority.

Even in an overall federal budget of more than $3 trillion, this will be a significant annual burden. For example, $200 billion is also far more than what’s needed to pay for the one-year fix for the alternative minimum tax that has caused such a heated political battle this year and has been one of the primary reasons the budget process has been delayed. Over the next 10 years, the amount the government is likely to spend on interest is also very close to what will be needed to offset the lost revenue from making the 2001 and 2003 tax cuts permanent and repealing the AMT. Both of these policies are now considered by many to be too expensive, and alternatives are being contemplated.

The amount the government will spend on interest this year will also be more than the amount projected for all activities in Iraq and Afghanistan and about two-thirds of what will be collected from the corporate income tax. It will also be close to half of the projected 2008 deficit.

It’s too late to do anything about this. The deficits have occurred, the debt has increased, and the interest expense is baked in to the federal budget pie. Failing to reduce the national debt as promised means that, long after the Bush administration is over, it will be causing even higher annual federal deficits, national debt and interest payments than would not have otherwise occurred. It will also limit other policy choices from being considered.

That means one of the biggest Bush legacies will be that the federal budget debate will be more difficult in the years ahead than it was while he was president. A second legacy will be that bond traders won’t have to worry about changing careers anytime soon.

"Life After Debt"

At the end of the Clinton Administration, we staff at the Council of Economic Advisers had drafted a section for Clinton's last Economic Report of the President, to tuck within the chapter on the economic merits of fiscal discipline. It was called "Life After Debt" and was really quite good in speculating how our financial markets would adjust as the federal debt got paid off. But it got squashed in the vetting process. At the time I thought it was because the Clinton Admin didn't want to point out any possible negatives associated with deficit reduction. But now I wonder if they just didn't want to "jinx it."

Andrew, Stan, Pete: New film "I.O.U.S.A."

Have any of you (or anyone else here) seen a screening of the film "I.O.U.S.A."? Or heard much about it? It was shown at Sundance. It's a documentary about our long-term fiscal imbalance apparently done in the style of "An Inconvenient Truth". See


I have, as it stars my new movie star boss, Bob Bixby (Concord Coalition) and former Comptroller General David Walker. Of course, I think it's great. It's supposed to hit theatres by later this summer. It most recently was shown in Baltimore at the MD Film Festival and this week will be shown at another film festival in Florida.

EconomistMom, I'm a BIG,


I'm a BIG, BIG, BIG fan of the Concord Coalition and I often direct people to information on Concord's website. You might enjoy a comment I made on last January
(I'm "B Rational" on SwordsCrossed)

And kudos to David Walker for his Fiscal Wake-up Tour. I hope he can do even more with the Peterson Foundation.

What is your expectation as to which faction of advisors will have more influence on McCain if he becomes president (the fiscally responsible advisors or the knee-jerk tax cut zealots)?

I can't wait to see I.O.U.S.A. I hope it's as well done as "An Inconvenient Truth" and that it achieves substantially wide distribution and media buzz.

Just added your blog to my "favorites". I look forward to reading it and participating.

No matter WHO becomes President...

...the fiscally-conservative advisors are going to have more influence on the President's policies AFTER the President arrives in the White House. The "knee-jerk tax cut zealots" as well as the "knee-jerk big spenders" are going to have more influence during the campaign. I suppose the candidates in the general election MIGHT try to sort themselves out somewhat on the issue of their commitment to deficit reduction, but I'm not counting on it, and we definitely shouldn't expect specific answers to "how 'ya gonna pay for it?" until after Inauguration Day. (Not even after Election Day, because why ruin a good time until you have to get to work?)

Thanks Diane. Follow-up questions

Diane (and anyone else who wishes to opine),

Yes, I agree that no candidate is in a hurry to speak seriously during the campaign about how he/she will address our long-term fiscal imbalance, although how much more serious he/she would be as president is an open question.

If McCain becomes president, what do you think is the probability that he will do an "H.W. Bush" (going back on "read my lips") and agree to substantial tax increases (as part of a deal including spending cuts)?

If Obama becomes president, what do you think is the probability that he will agree to phasing in substantial reductions in benefit levels (vs. current policy) and/or eligibility for Social Security and/or Medicare to reduce projected spending? For example, changing the indexing for Social Security; raising the retirement age; means testing; reductions in Medicare benefits; tough cost control measures on Medicare to reduce utilization; etc.)

Do you think McCain would do any of the above re: Social Security and/or Medicare?


By the way, I realize that a

By the way, I realize that a president can't do any of that without Congress. I'm asking about what policies the president would either pursue or at least agree to and sign if passed by Congress.

Also, on the tax increase side for McCain, my question includes not only allowing rate hikes, but also possibly going back on his position re: the AMT and not only NOT eliminating it, but also not patching it to the same extent we have so far.

Brooks, I have no idea...

If I were that clued into what the Obama or McCain presidency would do once in the White House, I'd be too busy doing interviews to be blogging like this on a Friday night...

ok, I just hope very much

ok, I just hope very much that the influence of Warren Rudman, Pete Peterson, and the Concord Coalition prevails over that of Jack Kemp, Steve Forbes and Phil Gramm, because it seems clear to me that we need to take our fiscal medicine on both the spending and taxation sides (cut spending and raise taxes). It's going to take much more political responsibility, honesty and guts than we've seen from Washington so far. And hopefully educational efforts like the Fiscal Wake-up Tour and I.O.U.S.A. can change the political calculus somewhat and make fiscal responsibility less politically costly.

Nice article.I like your

Nice article.I like your website.

thanks post

thanks post

Wow, Medicare is really in

Wow, Medicare is really in trouble now. It's our next major obstacle for sure.

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