Ten Trillion and Counting
CORRESPONDENT
Forrest Sawyer
ANNOUNCER: Tonight on FRONTLINE—
Pres. BARACK OBAMA: My budget reflects the stark reality of what we've inherited, a trillion-dollar deficit, a financial crisis and a costly recession.
ANNOUNCER: Government spending may jump-start the economy-
- We as a country have been living well beyond our means.
ANNOUNCER: -but does America already owe too much?
- The national debt is now over $11 trillion.
- The U.S. is on an unsustainable path.
ANNOUNCER: And are we running out of time?
- We have obligations which exceed the net worth of the American public.
FORREST SAWYER, Correspondent: How could we dig ourselves into such a hole?
ANNOUNCER: Tonight on FRONTLINE, correspondent Forrest Sawyer takes us inside the politics, the history and the hard reality of the national debt.
FORREST SAWYER, Correspondent: [voice-over] January 20th, 2009, seems like a long time ago. The crowd stretched from the Capitol to beyond the Washington Monument, the biggest gathering in the history of Washington, D.C. Everyone there and all of us watching the inauguration around the country knew that the American economy was in trouble, and we were hoping that Barack Obama would find a way to lead us out of it.
Pres. BARACK OBAMA: That we are in the midst of crisis is now well understood. Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost, jobs shed, businesses shuttered.
FORREST SAWYER: It was clear to anyone listening that day that the task before Barack Obama was daunting.
JACKIE CALMES, The New York Times: He inherits a situation so bad that you have to ask why would anyone want to be president now?
FORREST SAWYER: [on camera] What did he really inherit? If you look at the whole package, what does Barack Obama inherit?
JACKIE CALMES: Well, we have a financial system that is frozen, no credit. The unemployment rate is likely to hit double digits by the end of this year, a rate we haven't seen since 1982. But it's really the worst picture since World War II.
Pres. BARACK OBAMA: Today I say to you that the challenges we face are real, they are serious and they are many.
DAVID ROGERS, Politico: He's got not only the challenge of the economy, he has real political challenge in that people have lost confidence in Washington's ability to deal with some of this. We are in a mess. And he has to sort of pull these pieces together and he has to pull these pieces together, you know, with remarkable speed.
Pres. BARACK OBAMA: For everywhere we look, there is work to be done. The state of our economy calls for action, bold and swift.
FORREST SAWYER: [voice-over] Even before Obama took office, the government had committed hundreds of billions of dollars to shore up the economy.
Pres. BARACK OBAMA: We will build the roads and bridges, the electric grids and-
FORREST SAWYER: And Barack Obama spoke as if he was committed to spending even more.
Pres. BARACK OBAMA: We will harness the sun and the winds and the soil to fuel our cars and run our factories.
FORREST SAWYER: But for the president and the country, there is one unavoidable question. Where are we going to get the money to pay for all this?
Pres. BARACK OBAMA: All this we can do. All this we will do.
FORREST SAWYER: The answer lies here, in a room at an undisclosed location not far from the Capitol steps. This is where the U.S. government gets money it needs to pay its bills. It borrows it.
On this day, the government was auctioning $67 billion of debt obligations, Treasury securities that pay interest guaranteed by the "full faith and credit of the United States."
GREGG IP, The Economist: The government, like a household, has expenses, and then they have income. And when those expenses exceed the income each year, they run a deficit. If you have a deficit this year and then a deficit next year, those deficits start to add up, and that's what we call the debt. So the debt is the sum total of all the deficits we've accumulated since the revolution.
FORREST SAWYER: [on camera] And it's a lot of money.
GREGG IP: It's a lot of money, yes. A lot of it is now owned by foreigners, by the Saudis, by the Chinese, by the Japanese.
FORREST SAWYER: [voice-over] They lend us money because the government does not take in enough in taxes to pay for the services it provides. Americans like low taxes.
MAYA MacGUINEAS, Cmte. for a Responsible Federal Budget: That's just the reality, that we want it all. We want our tax cuts and we want them to be big. We want new spending programs. We want every person cared for. We want government investment. But we don't want to pay for it.
FORREST SAWYER: Even before this crisis, America was deeply in debt. The debt on inauguration day was over $10 trillion, nearly $35,000 for every man, woman and child in this country. Without borrowed money, the federal government would grind to a halt.
[www.pbs.org: Defining the debt]
GREG IP: We are living on the kindness of strangers, as it were, because frankly, there aren't enough savings in this country to finance those deficits.
FORREST SAWYER: [on camera] How bad could it be if we do nothing?
GREG IP: Well, first of all, you might have a situation where there is one day when the government says, "We need to sell several billion dollars of bonds," and nobody shows up- no money to pay the Social Security checks, no money to give to the states for their Medicaid programs. Cut, cut, cut, cut, cut. Let's imagine a scenario where the politicians would love to keep the government going, but they can't because there's nobody to lend us the money.
Pres. BARACK OBAMA: Now, there are some who question the scale of our ambitions, who suggest that our system cannot tolerate too many big plans.
FORREST SAWYER: [voice-over] But the president knows that his vision and the country's future cannot continue to be sustained by borrowing money.
DAVID WESSEL, The Wall Street Journal: The status quo is not going to work. Anybody who thinks about debt realizes that the U.S. government cannot go on every year borrowing more money than it did the year before and the U.S. economy cannot rely on ever increasing amounts of borrowing from other countries- China, Japan and Europe.
MATT MILLER, Author, The Tyranny of Dead Ideas: The American standard of living is really going to be at risk because we can't continue to essentially borrow from the Chinese to fund the lifestyle and consumption that we think we want to have in the U.S. We have to find a way to actually live on what we earn.
FORREST SAWYER: [on camera] There seems to be this huge contradiction. On the one hand, we have this looming national debt, which looks like a tsunami washing over us if we don't do something soon. And on the other hand, we've got this immediate problem and the government has to spend like crazy. And they're running in to each other.
MATT MILLER: Those two things are totally at odds, but that's the paradox of the situation that we're in now, which is government has got to run big deficits to stimulate the economy. We're going to have to run deficits at sizes that would have been unthinkable, that are really historic, for a couple of years because government's the only entity with the wherewithal to prop up demand in the economy when businesses and consumers are all pulling back.
FORREST SAWYER: [voice-over] Not since the Great Depression have Americans watched the passage of power from one president to the next with such a mixture of concern and hope. For President Obama, our economic troubles are now his burden. So much depends on the decisions he must make. For former president Bush, he leaves office with his own burden, a legacy of the country and the economy in crisis.
Eight years ago, the passage of power to George Bush could not have been more different. He was the first president in 30 years to assume office with a budget surplus. President Bill Clinton had forged agreements with Congress that turned large deficits into growing surpluses.
GENE SPERLING, Dir., National Economic Council, 1997-00: In 2001, we not only had our fourth year of consecutive surpluses, but we were looking at surpluses as far as the eye can see.
FORREST SAWYER: The centerpiece of George Bush's economic agenda was cutting taxes.
Pres. GEORGE W. BUSH: Enough is enough, folks. It's time to give our folks some tax relief in America.
FORREST SAWYER: The president was committed to returning some of the budget surplus he had inherited back to the American people in the form of a tax cut.
Pres. GEORGE W. BUSH: We always have got to remember whose money it is we're talking about. It's not the government's money, it's the people's money.
ALICE RIVLIN, Dir., Office of Management & Budget, 1994-96: When the new administration took over, they had this substantial surplus. They decided that it should be turned back to the people, and they had campaigned on that, with a very substantial tax cut- too big, in my opinion, but a sort of plausible thing to do at the time.
FORREST SAWYER: After only three months in office, President Bush signed a sweeping tax bill that was projected over 10 years to cut taxes by nearly $1.3 trillion.
GREGG IP: He pushed through his first major initiative, this very large tax cut, over a trillion dollars, which was going to go disproportionately to the wealthy. And I think that in that tax cut, we began to see a few of the signs of what Bush's economic legacy would be.
FORREST SAWYER: [on camera] You are really critical of President Bush, aren't you.
GREGG IP: I am.
FORREST SAWYER: At heart, why?
GREGG IP: Because I think that time and again, he put politics ahead of economics. If there was a politically smart way of doing something and an economically smart way of doing something, he always chose the politically smart way.
FORREST SAWYER: [voice-over] Tax cutting has been the politically smart way for Republicans ever since Ronald Reagan established the modern Republican brand, when he pushed through the largest tax cut since World War II. Republicans proclaimed themselves the party of small government and tax cuts. But Ronald Reagan was also an economic realist.
MATT MILLER: You know, Reagan cut taxes in the first big year of his term in 1981, and then came back and people forget he had enormous tax increases once it was clear the deficits were spiraling out of control.
FORREST SAWYER: Realizing that his tax cut had been too large and with the deficit rising, Reagan agreed to effectively scale back his tax cut. He signed one of the largest peacetime tax increases since the Depression.
Tax hikes would never be part of George W. Bush's agenda, perhaps because his political instincts were honed at the side of his father, George Herbert Walker Bush. While running for office, candidate Bush uttered words that would haunt his presidency.
Vice Pres. GEORGE H.W. BUSH (R), Presidential Nominee: Congress will push me to raise taxes, and I'll say no. And they'll push, and I'll say no. And they'll push again, and I'll say to them, "Read my lips, no new taxes."
FORREST SAWYER: With that phrase, President Bush sealed his political fate. In office less than two years, he was confronting a stubborn recession and a steadily escalating budget deficit. He called for a tax increase to cut the deficit and trim the national debt.
Pres. GEORGE H.W. BUSH: These are the times that try men's souls. There's a cancer gnawing away at our nation's health. That cancer is the budget deficit. Year after year, it mortgages the future of our children.
NEWT GINGRICH (R-GA), House Minority Whip, 1989-94: "Read my lips, no new taxes." I believed him. I thought that was a firm pledge to the American people.
Pres. GEORGE H.W. BUSH: It is time to end the talk about the deficit.
NEWT GINGRICH: Instead, he decided to go sign a tax increase.
Pres. GEORGE H.W. BUSH: And it's time, I think past time, to put the interests of the country first,
NEWT GINGRICH: That violated every aspect of the conservative movement. I thought it was what distinguished the Reagan Republicans from the old-fashioned traditional Republicans.
FORREST SAWYER: George Bush lost his bid for reelection to Bill Clinton.
Pres. GEORGE H. W. BUSH: I just called Governor Clinton over in Little Rock and offered my congratulations.
FORREST SAWYER: George W. Bush was at his father's side when he conceded defeat in the 1992 presidential election. The lesson for the son was clear: A modern Republican is a tax cutter.
DAVID WESSEL, The Wall Street Journal: His son comes to office saying, "What's the point in fiscal discipline? The voters never reward you for it." So the second President Bush treated fiscal discipline as if it was some sort of quaint anachronism, something that his father's generation had to worry about and he didn't.
JACKIE CALMES, The New York Times: He took too strongly to heart the lesson he saw of his father's failure, which is, "You don't anger the base of the party, the very conservative anti-tax base of the party." And the problem with that calculation is, you know, stuff happens.
FORREST SAWYER: Eight months after President Bush was inaugurated, planes crashed into the World Trade Center, the Pentagon and a field in Pennsylvania. 9/11 threatened the economic fortunes of the country. For many, it called into question the wisdom of Bush's tax cut, but his party was solidly behind him.
[on camera] Now, way back in 2000, there were surpluses projected. And that had come after some good luck with the economy and some hard work. And then came along this massive tax cut. Was that in retrospect a mistake?
Sen. JUDD GREGG (R), New Hampshire: No. Absolutely not. The surpluses that were projected weren't lost because of the tax cut. They were lost because of 9/11 and the effect that that had on the economy. You know, you've got to remember 9/11 was a cataclysmic event for our nation and it readjusted our nation in a lot of ways. But one of the ways it caused us to have to readjust was that we went into a very severe economic slide.
FORREST SAWYER: [voice-over] At a time of economic uncertainty, the president was declaring a war on terror.
Pres. GEORGE W. BUSH: On my orders, the United States military has begun strikes against al Qaeda terrorist training camps and military installations of the Taliban regime in Afghanistan.
FORREST SAWYER: Wars are expensive.
GREGG IP, The Economist: Bush knew at the time that we had long-term economic challenges in this country, and he continued to promise more tax cuts and more goodies, long past the point when we knew that the budget surpluses were gone and we had deficits as far as the eye could see.
FORREST SAWYER: Assistant to the president for economic policy in Bush's second term, Allan Hubbard suggests another rationale behind President Bush's spending and tax-cutting philosophy.
ALLAN HUBBARD, Asst. to President for Economic Policy, 2005-07: The only way to control spending- and I truly believe this. The only way to control spending is that you- you've got to minimize taxes because if you minimize taxes, they know the deficit can't be too big. And that's what keeps pressure on them to reduce spending.
FORREST SAWYER: It's known in Washington as the "starve the beast" theory. Government won't grow if there is no money to pay for it to keep growing.
MATT MILLER, Sr. Fellow, Center for American Progress: "Starve the beast" has been the Republican strategy really since Ronald Reagan. If you keep cutting taxes, that will put pressure on the system to cut spending. Now, the irony of that is no one really likes to cut spending, Republicans or Democrats, mostly because the major government programs - Social Security, Medicare, military, civil service, pensions, defense - those are all popular, broadly supported programs.
FORREST SAWYER: [on camera] But if you're going to reduce the amount of money that they take in, doesn't that mean you can't spend like a drunken sailor?
MATT MILLER: It does. But the Republicans like the tax cut part of that argument. They don't like the spending cut part of that argument because it turns out it's politically unpopular to actually cut or even slow the growth of a lot of these major popular programs.
DAVID WESSEL: The "starve the beast" notion as an empirical, practical thing is not true. It turns out that you can cut revenues and keep spending because the government seems to be able to borrow endless amounts of money.
FORREST SAWYER: [voice-over] And the government was now borrowing at an accelerated rate. But nothing seemed to shake the president's belief in tax cuts.
Pres. GEORGE W. BUSH: Somebody told me the funniest thing. They said there are some in Washington saying that the tax cut caused the recession. I don't know what economics textbook they're reading. The best way to come out of a recession is to say to the small business person, "We'll let you keep your own money." When we cut taxes on all rates, we say to the sole proprietor or the limited partner, "It's your money, you spend it in order to expand the job base in America."
There's going to be people who say that we can't have the tax cuts, and I challenge their economics when they say that raising taxes will help the country recover. Not over my dead body will they raise your taxes!
JACKIE CALMES, The New York Times: He went all over the country campaigning for another round of big tax cuts on dividends, capital gains, hugely popular with the business community.
FORREST SAWYER: President Bush was campaigning for another tax cut even as he was threatening to invade Iraq.
Pres. GEORGE W. BUSH: We're confronting the outlaw regime in Iraq that is arming to threaten the civilized world. Even as we confront these dangers, you need to know I know we have needs here at home, especially the need for a vigorous and growing economy. So I will continue to press the Congress to make tax cuts.
DAVID WESSEL: The prevailing wisdom in the Bush administration was that no tax cut is too much. And Paul O'Neill said, "Wait a minute. If you're going to plan on a big, expensive war, is this really the time to be cutting taxes?"
FORREST SAWYER: Paul O'Neill was Bush's first Treasury secretary.
PAUL O'NEILL, Secretary of the Treasury, 2001-02: As President Bush was getting ready to recommend another tax cut beginning in early in 2002, I said we shouldn't have another tax cut.
FORREST SAWYER: [on camera] Did