The $10 Trillion Hangover - Paying the Price for Eight Years of Bush

Original Link: http://www.harpers.org/archive/2009/01/0082337

By Joseph E. Stiglitz and Linda J. Bilmes

"In the eight years since George W. Bush took office, nearly every component of the U.S. economy has deteriorated. The nation’s budget deficits, trade deficits, and debt have reached record levels. Unemployment and inflation are up, and household savings are down. Nearly 4 million manufacturing jobs have disappeared and, not coincidentally, 5 million more Americans have no health insurance. Consumer debt has almost doubled, and nearly one fifth of American homeowners are likely to owe more in mortgage debt than their homes are actually worth. Meanwhile, as we have reported previously, the final price for the war in Iraq is expected to reach at least $3 trillion.

As bad as things are, though, this is just the beginning. The Bush Administration not only has depressed the economy and racked up unprecedented debt; it also has made expensive new commitments to the Medicare Part D prescription drug program, to disability compensation and education benefits for veterans, to replenishing the military equipment consumed in the wars in Iraq and Afghanistan, and simply to paying interest on the debt itself.
The president is not solely to blame for American profligacy, of course. Congress approved inequitable tax cuts and spending binges, and the Federal Reserve and other regulators, along with the mortgage industry and millions of consumers, share responsibility for the housing collapse. Nonetheless, the outgoing administration has made a series of unwise economic choices that together will add up to a burdensome legacy.
Using conservative assumptions, we calculate that the bill for Bush-era excess—the total new debt combined with the total new accrued obligations— amounts to $10.35 trillion. This legacy will have long-term consequences for America’s prosperity, but it also will weigh heavily and immediately on the Obama Administration, which will need to spend money fast to get the economy moving again."

Link: http://kelsocartography.com/blog?tag=linda-bilmes

The article has excellent exhibits/graphics showing: what drove the deficits; growing household and federal debts; National debt as a percentage of GDP from Truman to George W. Bush; major foreign lenders; and where the money went.

The $10.35 trillion bill consists of (in quotes):

"Increase in National Debt Debt has long been a fixture of American governance, of course, but—given the surplus President Bush inherited—even a conservative estimate of the Bush bill requires that we take into account the entirety at least of his addition to that debt. The Bush tax cuts lowered national revenues by about $1 trillion, even as the government spent nearly $900 billion in direct operations for the wars in Iraq and Afghanistan and added another $600 billion to the total spending on “regular” defense, a significant proportion of which is indirectly related to those wars. And because interest accrues on the outstanding debt, interest charges also will rise. It should be noted as well that this increase does not take into account another factor: had Clinton-era policies been kept in place the past eight years, the CBO estimates, the overall national debt actually would have significantly decreased. Cost: $4.9 trillion

Projected Deficit for 2009 The rapidly weakening economy means that tax revenues will fall off, even as unemployment benefits and other government spending rise. Congress also is likely to approve a significantly larger stimulus package, possibly in excess of $300 billion, and more spending on the bailouts already undertaken, as well as new bailouts and subsidies for struggling sectors such as the auto industry. Moreover, even assuming that the United States begins to withdraw combat troops from Iraq, we expect that the war’s costs will remain steady at best in 2009, as functions are transferred to private contractors. We also expect that Congress will extend the temporary fix of the alternative minimum tax and will enact some form of additional homeowner mortgage relief. For all these reasons, next year’s budget deficit easily could rise to a trillion dollars, so our estimate is a bare minimum. Cost: $0.75 trillion

Fannie Mae and Freddie Mac When the federal government took over these failing residential mortgage giants, it also assumed their $5.4 trillion in mortgage-backed securities and outstanding debt. Under conventional accounting standards, this entire amount should be counted as part of the national debt. It is difficult to predict, however, how much exposure the United States has really taken on. We have included what is likely to be the minimum additional debt that the CBO adds on for these agencies, which is the $1.6 trillion in risky unsecured debt. The final cost, however, will depend on how far housing prices fall, and how many houses go into foreclosure, which presents the incoming administration with a significant dilemma: if it spends less on stimulus it will need to spend more on Fannie Mae and Freddie Mac. Cost: $1.6 trillion

Debt from Other Bailouts Congress has already provided $700 billion in authority to purchase toxic mortgages and other assets through the Troubled Asset Relief Program. It also has committed another $800 billion to bailing out AIG, Bear Stearns, and other financial firms, and it most likely will extend this commitment to other core U.S. industries in the coming year. Although some of this cost will appear in the 2009 budget, much of it will not be accounted for until 2010 or later. Not all of the loans will go sour, so it is difficult to estimate the price tag on these programs. Cost: $0.5 trillion

Future Interest on New Debt The United States spends nearly $250 billion per year in net interest payments (interest paid on Treasury debt securities less interest received by the Social Security and other trust funds). The CBO projects that the net interest payable on the total debt will over the next decade exceed $3.35 trillion, of which about $1.5 trillion is directly attributable to the debt that we have taken on during the past eight years. Even this figure, however, understates the true amount of interest payable, because interest also will accrue on money that will need to be borrowed in the next ten years to pay for obligations incurred in the past eight years. Cost: $1.5 trillion

Medicare Part D The administration’s flagship prescription drug benefit program is expected to cost $800 billion over the next decade. It is possible, though, that the number will be larger. The program has been criticized because, unlike the department of Veterans Affairs, Medicare does not negotiate bulk price discounts with drug companies. In addition, the program coverage contains a “doughnut hole” whereby Part D stops paying for drugs after a senior receives prescriptions totaling $2,700, and doesn’t resume coverage until that senior has paid an additional $3,454 for drugs. Our estimate is based on the assumption that Congress will take steps to close the “doughnut hole” but also will take steps to encourage price negotiation with pharmaceutical companies. Cost: $0.8 trillion

Iraq and Afghanistan Veterans Entitlements For every U.S. serviceman or -woman killed in Iraq, fifteen more have been wounded, injured, or have contracted an illness serious enough to require medical evacuation. More than 350,000 U.S. veterans from the two wars have sought medical treatment from the Department of Veterans Affairs, and nearly 300,000 have filed applications for disability benefits (more than 90 percent of which are likely to be approved). The cost of providing medical care and disability benefits may eventually exceed even the cost of combat operations, and over just the next decade, using the most optimistic assumptions, taking care of these veterans is going to cost at least $59 billion. The president also reluctantly signed into law a measure that restored education benefits for new veterans in an updated G.I. Bill, which we estimate will cost $40 billion over the next decade. Cost: $0.1 trillion

Rebuilding National Defense The armed forces have been severely depleted by the efforts in Iraq and Afghanistan, in terms of personnel, training, and equipment. While we urge spending reductions in some areas of defense (e.g., space-weapons programs and other projects with huge cost overruns), there is no doubt that the military will require a substantial expenditure to “reset” basic military strength. This includes the replenishment of aircraft, vehicles, and weaponry; restoring the National Guard to its previous strength; depreciation of equipment used or abandoned in Iraq; and the costs related to a partial withdrawal from Iraq, including the dismantling of some bases. In addition, the Pentagon will need to spend considerably more over the next decade on military hospitals, recruiting, and bonuses. Cost: $0.2 trillion

The worst legacy of the past eight years is that despite colossal government spending, most Americans are worse off than they were in 2001. This is because money was squandered in Iraq and given as a tax windfall to America’s richest individuals and corporations, rather than spent on such projects as education, infrastructure, and energy independence, which would have made all of us better off in the long term."