US debt: How did superpower reach brink of default?

The National Debt Clock is seen on 6th Avenue in New York © AFP/File Stan Honda

AFP

WASHINGTON (AFP) – How did the United States, the world’s richest nation and sole superpower, come to the brink of a catastrophic default on its debt that could send shockwaves through the fragile world economy?

Dire economic downturns — including the worst since the Great Depression of the 1930s — giant tax cuts, costly wars in Iraq and Afghanistan, and a pricey new health program for the elderly all helped sour Washington’s fiscal picture.

Or, as President Barack Obama put it literally in a speech late Monday to plead for a blend of deep cuts to government programs and increases to tax revenues: “For the last decade, we’ve spent more money than we took in.”

Indeed, Washington posted a $236.2 billion federal budget surplus in the fiscal year ending October 1, 2000, and expected to post a $710 billion surplus a decade later, according to the non-partisan Congressional Budget Office.

“However, enactment of major legislation during the past decade, in combination with changing economic conditions, altered the long-term federal budget outlook dramatically,” the CBO said in a March 2010 report.

The dramatic turnaround has left Obama predicting, in his budget released in February, a staggering $1.65 trillion deficit for the current fiscal year, a figure the CBO recently narrowed to about $1.3 trillion.

Obama’s fellow Democrats like to point out that Washington was running a surplus when Democratic then-president Bill Clinton left office in January 2001, and swung to sky-high deficits under his Republican successor George W. Bush.

But Clinton benefited from deficit-slashing measures enacted by his predecessor, George H. W. Bush, including tax increases that alienated fellow Republicans and helped cost the Republican reelection, as well as a high-tech bubble that helped inflate government revenues.

The younger Bush came into office in January 2001, initially citing the surplus forecasts as a reason to enact historic tax cuts, which he muscled through Congress over strong Democratic objections.

But the high-tech bubble burst, the US economy went into a recession in March 2001, and the September 11, 2001 terrorist strikes traumatized the country, followed by tensions over the US invasion of Afghanistan.

Bush ordered US forces into Iraq to topple Saddam Hussein in 2003, and with his Republican allies in the US Congress beat back Democratic calls for tax increases or other measures to pay for both conflicts.

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But plenty of Democrats ultimately voted to fund the wars on Bush’s terms, like a young senator named Barack Obama, who backed some $300 billion in such spending between taking office in 2005 and his history-making 2008 White House run.

And plenty of top Republicans now loudly embracing fiscal sobriety backed Bush’s approach with little if any complaint, including House Speaker John Boehner and Senate Minority Leader Mitch McConnell.

The United States spent roughly $1.283 trillion on the two wars to 2011, the non-partisan Congressional Research Service (CRS) said in a March 2011 report.

And the CRS said in a May 2011 that the overall cost of tax cuts passed in 2001, 2003, and 2004 cost Washington some $1.76 trillion in revenues to 2011.

A new government-backed prescription drug benefit for the elderly, approved in 2003 with bipartisan support, added another $552.2 billion over ten years, the CRS said, citing a CBO analysis.

By the time Bush’s second four-year term ended in January 2009, he had piled $4.9 trillion more on top of the $5.7 trillion in debt he had inherited, and the US economy was in freefall, a victim of the 2008 global economic collapse.

“Wall Street got drunk,” he explained memorably in July 2008. “It got drunk and now it’s got a hangover.”

Obama’s proposed cure, an $800-billion-dollar stimulus plan passed in 2009 over Republican opposition, stemmed job losses but failed to keep unemployment below 8.0 percent, as the White House had promised.

The US national debt deepened, reaching its congressionally set $14.3 trillion on May 16 and forcing Washington to use spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating normally, which it can only do through August 2.

At that point, US leaders will face an agonizing choice about cutting an estimated 40 cents of every dollar in spending and defaulting either on debt payments or on other obligations like government health or retirement benefits.

Finance and business leaders have warned that failure to raise the US debt ceiling by then would send shockwaves through the fragile world economy, while Obama has predicted a default would trigger economic “Armageddon.”

Republican leaders face restive members close to the archconservative “Tea Party” movement who are dead set on draconian cuts, reject any tax revenue increases, and even doubt the debt ceiling needs to be raised — making a compromise elusive.

© AFP — Published at Activist Post with license