We’ve noted this history before, but many people have forgotten it. Given that the dispute over whether to extend all of the Bush tax cuts has now led the nation to the edge of the “fiscal cliff,” let’s take a trip back in time to recall why the Bush tax cuts were enacted in the first place. (The Fact Checker covered passage of the Bush tax cuts as an economic policy reporter for The Washington Post.)History lesson: Why the Bush tax cuts were enacted (Washington Post)
Oddly, a key reason the tax cut became reality was because of a fear the United States soon would have zero debt.
With federal revenue soaring in 2000, generating budget surpluses, there was pent-up desire for a tax cut, especially among Republicans.
George W. Bush had just been elected on a pledge to cut taxes, but his plan did not get much traction among Democrats until then-Federal Reserve chairman Alan Greenspan warned Congress of a dangerous new specter — that the government would pay down the national debt, and there would be no place to park excess funds.
“At zero debt, the continuing unified budget surpluses currently projected imply a major accumulation of private assets by the federal government,” he declared.
Yep, you read that right. The perceived danger was — believe it or not — that there would be no national debt left.
Greenspan, however, offered caveats and warnings that were largely ignored by Congress. In fact, he said that any tax cuts should have triggers that would halt them “if specified targets for the budget surplus and federal debt were not satisfied.”
In other words, the tax cuts would have been terminated or reduced, depending on the nation’s economic circumstances — precisely the tactic Republicans said was a non-starter in the 2011 debt-ceiling debate.
It sounds ridiculous today. But not so long ago, the prospect of a debt-free U.S. was seen as a real possibility with the potential to upset the global financial system.What If We Paid Off The Debt? The Secret Government Report (Planet Money)
We recently obtained the report through a Freedom of Information Act Request. The report is called "Life After Debt". It was written in the year 2000, when the U.S. was running a budget surplus, taking in more than it was spending every year. Economists were projecting that the entire national debt could be paid off by 2012. This was seen in many ways as good thing. But it also posed risks. If the U.S. paid off its debt there would be no more U.S. Treasury bonds in the world.
"It was a huge issue ... for not just the U.S. economy, but the global economy," says Diane Lim Rogers, an economist in the Clinton administration.
The U.S. borrows money by selling bonds. So the end of debt would mean the end of Treasury bonds. But the U.S. has been issuing bonds for so long, and the bonds are seen as so safe, that much of the world has come to depend on them. The U.S. Treasury bond is a pillar of the global economy. Banks buy hundreds of billions of dollars' worth, because they're a safe place to park money. Mortgage rates are tied to the interest rate on U.S. treasury bonds. The Federal Reserve — our central bank — buys and sells Treasury bonds all the time, in an effort to keep the economy on track.
If Treasury bonds disappeared, would the world unravel? Would it adjust somehow?
Something to keep in mind the next time you hear about how debt will destroy the world. The debt is just a weapon for the wealthy to wield against government. By coincidence I found this post I had bookmarked the last time the debt ceiling was all the rage in the news cycle:
[...] More fundamentally, Lofgren argues that today's Republicans believe they are better off if government as a whole is shown to fail, not just this Democratic Administration. Republican hard-liners might seem to have "lost" the debt-ceiling showdown, in that they wound up even less popular than the Democrats are. But in the long view, Lofgren says, unpopularity for anyone in Congress, including their party's leaders, helps the Republicans: "Undermining Americans' belief in their own institutions of self-government remains a prime GOP electoral strategy," because it buildings a nihilistic suspicion of any public effort, from road-building to Medicare to schools. (Except defense.) As I say, read it for yourself.'People Don't Realize How Fragile Democracy Really Is' (The Atlantic). Words worth heeding. Permanent paralysis of the government means the plutocracy is close to achieving their goal of eliminating the federal government. And I like this comment on The Big Picture:
When you're done, consider this message I received today, from another former Congressional staffer whose tenure overlapped almost exactly with Lofgren's. This too is worth reading carefully, for it advances an important complementary point:
Like Mike Lofgren, I am a retired Congressional staffer who worked for a House Member from 1985 until January of this year. Unlike Lofgren, I did not retire voluntarily; my boss, a moderate Democrat, lost his race for re-election last November. I found myself agreeing with virtually everything in Mike's article and immediately forwarded it to a bunch of my friends, some of whom remain working on the Hill.
Privately, many of us who have worked in Congress since before the Clinton Administration have been complaining about the loss of the respect for the institution by the Members who were elected to serve their constituents through the institution. I don't think people realize how fragile democracy really is. The 2012 campaign is currently looking to be the final nail in the coffin unless people start to understand what is going on.
One thing that especially resonated with me about Mike's piece is the importance of "low information" voters. The mainstream media absolutely fails to understand how little attention average Americans really pay to what goes on in all forms of government. During our 2008 race, our pollster taught me (hard to believe it took me 24 years to learn this) that the average voter spends only 5 minutes thinking about for whom to vote for Congress. All the millions of dollars of TV ads, all the thousands of robo-calls and door-knocks, and it all comes down to having a message that will stick in the voters' minds during the 5 minutes before they walk into the voting booth.
The media likes to call this group "independents," which implies that they think so long and deeply about issues that they refuse to be constrained by the philosophy of either party. There may be a couple of people out there who fit that definition, but those are not the persuadable voters campaigns are trying to capture. Every campaign is trying to develop its candidate into an easy-to-remember slogan that makes him or her more appealing than the other guy. Actually, because negative campaigning is so effective, they are more often trying to portray the opponent as more objectionable ("I guess I'll vote for the crook because at least he won't slash my Medicare").
I'm writing because now that I have been out of the Beltway Bubble, I have gained a little more perspective on how real people see the work of Washington, and I am scared that they are close to revolt. The debt ceiling debate in particular had me screaming at the TV on more than one occasion because both sides botched it so badly. I would like to hope that news outlets like yours could play a positive role in helping to educate people. But I'm feeling pretty pessimistic at the moment.
I think Heidi Moore and Adam Ozimek are more honest in their objection. The problem with having the US Mint produce a single, one-trillion-dollar platinum coin so Timothy Geithner can deposit it at the Federal Reserve is that it seems plain ridiculous. Yes, much of the commentariat believes that the debt ceiling itself is ridiculous, but two colliding ridiculousses don’t make a serious. We are all accustomed to sighing in a world-weary way over what a banana republic the US has become. But, individually and in our roles as institutional investors and foreign sovereigns, we don’t actually act as if the United States is a rinky-dink bad joke with nukes. As a polity, we’d probably prefer that the US-as-banana-republic meme remain more a status marker for intellectuals than a driver of financial market behavior. Probably.A banana republic with nukes. Yikes! Anyway, hopefully the trillion dollar coin deal will make people realize what an artificial hallucination our so-called money "system" really is. A collection of medieval folkways, indeed.