Bush was the most fiscally irresponsible president in the history of the republic. Obama is not helping on deficit.
During last year's campaign, President Obama vowed to enact a bold agenda without raising taxes for the middle class, a pledge budget experts viewed with skepticism. Since then, a severe recession, massive deficits and a national debt that is swelling toward a 50-year high have only made his promise harder to keep.
The Obama administration has insisted that the pledge will stand. But the president's top economic advisers have refused to rule out broad-based tax increases to close the yawning gap between federal revenue and government spending and are warning of tough choices ahead.
Republicans are already on the attack, accusing Obama of plotting to break his no-tax vow, the same political transgression that cost Democrats control of Congress under former president Bill Clinton and may have cost president George H.W. Bush his job. Democrats say Obama is highly unlikely to break the pledge before next year's congressional election and observe that it would be safer to wait until his second term if a tax increase becomes unavoidable.
"If you rule out inflating our way out of the problem and defaulting on the debt, there are two ways: Cut spending or raise taxes," said William G. Gale, an expert on fiscal policy at the Brookings Institution. With more than 80 percent of federal spending devoted to politically untouchable programs such as Social Security, Medicare and Medicaid, he said, "it's going to be really hard to make significant headway on the spending side. So that means you've got to think about taxes."
Spending cuts were a big part of the solution the last time the nation faced such a towering debt. In the aftermath of World War II, with the debt exceeding the country's entire economic output, the government slashed military expenditures. Within two years, Washington was spending less than it took in. Fifteen percent inflation also helped by reducing the real value of the debt. When the country went to war again in Korea and then Vietnam, tax increases helped keep the budget largely in balance and the debt continued to fall.
Today's problem is more complex. Obama not only faces the fallout from the worst economic downturn in 30 years, but also inherited the debt piled up by his predecessor, Republican George W. Bush. Bush invaded Iraq and approved an expensive new prescription drug benefit for the elderly while pushing through one of the biggest tax cuts of the post-war era -- worth an estimated $1.6 trillion in foregone revenue by the time the provisions expire next year. This was the first time the United States had not adjusted its fiscal policy to meet its wartime needs, according to "The Price of Liberty," a book on war financing by Goldman Sachs vice chairman Robert D. Hormats.
After running surpluses in the late 1990s, the government began spending far more than it took in, forcing the Treasury to increase borrowing from China and other creditors. During the Bush administration, the portion of the debt held by the public jumped from just over $3 trillion to nearly $6 trillion. Federal rescue efforts in the face of last fall's financial meltdown have rapidly driven the debt higher. Today it stands at nearly $7.4 trillion, or about 52 percent of the overall U.S. economy.
"There's no question in my view that Bush was the most fiscally irresponsible president in the history of the republic," said David M. Walker, the comptroller general under Bush who now advocates for deficit reduction. Obama "was handed a bad deck," he said. "But the question is, are you making it better or not? And so far the answer is no."
Obama campaigned on a promise not to raise taxes for anyone earning less than $250,000 a year -- about 97 percent of taxpayers. As part of the pledge, he said he would keep some of the Bush tax cuts, including a new 10 percent rate for the lowest bracket, a higher tax credit for children and a lower penalty for married couples filing jointly. He planned to let other Bush tax cuts that benefit mainly the wealthy expire, a move that would raise rates for the top two income brackets.
With unemployment now expected to top 10 percent, the government will be forced to spend more on unemployment benefits, food stamps, Medicaid and other safety-net programs. With wages more deeply depressed, tax collections have fallen further than expected.
The result: deficits of well over $1 trillion through 2011, which will push the debt to 71 percent of the economy by the end of Obama's first term -- the highest since 1954 -- and cause the debt to keep rising in the years beyond.
[T]he fastest-growing budget category is one Obama cannot touch: interest payments on the debt. These are likely to rise as the world demands higher interest rates in return for continuing to sate Washington's voracious appetite for credit. The White House projects interest payments will quadruple by 2019, when debt service will account for nearly the entire budget deficit. At that point, much like a family that has run up big credit card balances, the debt will continue to grow even if the nation all but stops borrowing money.
"We are entering a dangerous debt cycle," said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget. "We don't know when interest rates will go up, but when they do, you can see that they will have a huge impact."