3. DEFICITS DON’T MATTER

    1. Quoted in Bob Woodward, “In His Debut in Washington’s Power Struggles, Gingrich Threw a Bomb,” The Washington Post, December 24, 2011.

    2. Government Accountability Office, Budget Policy: Prompt Action Necessary to Avert Long-Term Damage to the Economy, OCG-92-2, June 5, 1992, pp. 1, 4.

    3. Ibid., p. 6.

    4. John B. Judis, “The Red Menace,” The New Republic, October 26, 1992: 26–29, p. 26.

    5. Ibid., p. 29.

    6. Government revenues fell from 19.6 percent of GDP in 1981 to 17.3 percent in 1984; they grew later in the decade, but never exceeded 18.4 percent of GDP. OMB, Fiscal Year 2012 Budget of the U.S. Government: Historical Tables, Table 1.2.

    7. Iwan Morgan, The Age of Deficits: Presidents and Unbalanced Budgets from Jimmy Carter to George W. Bush (University Press of Kansas, 2009), p. 153.

    8. Ron Suskind, The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O’Neill (Simon & Schuster, 2004), p. 291.

    9. See Corey Robin, The Reactionary Mind: Conservatism from Edmund Burke to Sarah Palin (Oxford University Press, 2011), especially the Introduction and chapter 1. See also Albert O. Hirschman, The Rhetoric of Reaction: Perversity, Futility, Jeopardy (Belknap Press, 1991).

  10. On Social Security and the business community, see Jacob Hacker, The Divided Welfare State: The Battle over Public and Private Social Benefits in the United States (Cambridge University Press, 2002), pp. 136–37, 140–42. The Republican Party in general became more moderate and the ideological gap between the parties narrowed until the 1960s. Nolan McCarty, Keith T. Poole, and Howard Rosenthal, Polarized America: The Dance of Ideology and Unequal Riches (MIT Press, 2006), pp. 26–27.

  11. Dwight D. Eisenhower, Letter to Edgar Newton Eisenhower, November 8, 1954. Quoted in Jacob S. Hacker and Paul Pierson, Winner-Take-All Politics: How Washington Made the Rich Richer—And Turned Its Back on the Middle Class (Simon & Schuster, 2010), p. 189. Eisenhower believed that government action was necessary to correct for the failings of the private sector. Kim Phillips-Fein, Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan (W. W. Norton, 2009), pp. 56–57.

  12. On the history of business opposition to the New Deal, see Phillips-Fein, note 11, above.

  13. See Daniel J. Balz and Ronald Brownstein, Storming the Gates: Protest Politics and the Republican Revival (Little, Brown, 1996), pp. 174–75.

  14. Ronald Reagan, “A Time for Choosing,” speech delivered on October 27, 1964, available at http://www.reagan.utexas.edu/​archives/reference/timechoosing.html; Lewis F. Powell, “Attack on American Free Enterprise System,” Memorandum to Eugene B. Sydnor, Jr., August 23, 1971.

  15. Citizens for Tax Justice, “Top Federal Income Tax Rates Since 1913,” November 2011, available at http://www.ctj.org/pdf/regcg.pdf.

  16. See Daniel A. Smith, “Howard Jarvis, Populist Entrepreneur: Reevaluating the Causes of Proposition 13,” Social Science History 23, no. 2 (Summer 1999): 173–210.

  17. Phillips-Fein, note 11, above, pp. 179–83.

  18. Morgan, note 7, above, p. 79; Ronald Reagan, “Reflections on the Failure of Proposition #1,” National Review, December 7, 1973.

  19. David A. Stockman, The Triumph of Politics: How the Reagan Revolution Failed (Harper & Row, 1986), pp. 49–50.

  20. Ronald Reagan, Inaugural Address, January 20, 1981, available at http://www.reaganlibrary.com/pdf/​Inaugural_Address_012081.pdf.

  21. Stockman, note 19, above, pp. 53–54.

  22. Ibid., p. 68; William Greider, “The Education of David Stockman,” The Atlantic, December 1981.

  23. Stockman, note 19, above, pp. 52–54.

  24. Ibid., pp. 340–51.

  25. Martin Feldstein, “American Economic Policy in the 1980s: A Personal View,” chapter 1 in Martin Feldstein, ed., American Economic Policy in the 1980s (University of Chicago Press, 1994), pp. 27–29.

  26. The 1981 tax cut was expected at the time to reduce revenues by $749 billion in just one year. The later tax increases were together estimated to increase revenues by $348 billion, but several of those estimates covered multiple years. (The largest tax increase, the 1983 Social Security Amendments, increased revenues by $165 billion over seven years.) Allen Schick, The Federal Budget: Politics, Policy, Process, 3rd ed. (Brookings Institution Press, 2007), p. 164. When enacted, the 1981 tax cut was expected to reduce revenues by an average of 2.89 percent of GDP in its first four years. All the other tax acts of the Reagan administration were together expected to increase revenues by an average of 1.94 percent of GDP in their first four years. Jerry Tempalski, “Revenue Effects of Major Tax Bills,” Treasury Department Office of Tax Analysis Working Paper 81, September 2006, Table 2, pp. 16–20.

  27. The 1980s tax increases had substantial Republican support. The 1982 tax increase, for example, was supported by majorities of Republicans in both houses. Morgan, note 7, above, pp. 97–98.

  28. Stockman, note 19, above, p. 376.

  29. Balz and Brownstein, note 13, above, p. 117.

  30. Ibid., pp. 118–26, 147.

  31. Thomas Ferguson, “Legislators Never Bowl Alone: Big Money, Mass Media, and the Polarization of Congress,” paper presented at the INET Conference, Bretton Woods, April 2011, p. 34; Balz and Brownstein, note 13, above, pp. 145–46.

  32. In 1985–1988, Gingrich raised $1,590 million to Michel’s $1,567 million; in 1989–1992, although Michel was still the party’s floor leader, Gingrich raised $3,522 million to Michel’s $1,353 million. Ferguson, note 31, above, Table 4. It’s not clear that ideological extremism is always good for a politician’s war chest, however. Nolan McCarty, Keith Poole, and Howard Rosenthal have shown that moderates generally can raise money as effectively as extremists, perhaps because those contributors interested in access to elected officials balance those contributors with ideological motivations. McCarty et al., note 10, above, chapter 5. Still, it could very well be the case that hard-line stances and controversies help ideological extremists raise money by increasing their appeal to ideologically motivated contributors. In addition, large “soft money” contributions (unlimited contributions made to organizations that are technically not affiliated with candidates) tend to come from donors with ideological motivations.

  33. Balz and Brownstein, note 13, above, pp. 126–30.

  34. George H. W. Bush, 1988 Republican National Convention Acceptance Address, August 18, 1988, available at http://www.americanrhetoric.com​/speeches/georgehbush1988rnc.htm.

  35. On the 1990 budget negotiations, see Morgan, note 7, above, pp. 137–49; Balz and Brownstein, note 13, above, pp. 130–40.

  36. Quoted in Morgan, note 7, above, p. 143.

  37. The renegotiated bill shifted the tax burden toward the wealthy, in particular by increasing the top income tax rate to 31 percent—an increase that was not in the original agreement. Ibid., pp. 141–47.

  38. For example, the top income tax rate increased from 28 percent to 31 percent. Of the total deficit reduction, 64 percent was due to spending cuts and 36 percent to tax increases. CBO, The 1990 Budget Agreement: An Interim Assessment, December 1990, pp. 6–7.

  39. Technically, PAYGO governed mandatory spending and taxes; discretionary spending was restricted through annual caps.

  40. Schick, note 26, above, pp. 32, 81. On the PAYGO rule, see ibid., pp. 57–59.

  41. Balz and Brownstein, note 13, above, pp. 77–78.

  42. Quoted in ibid., p. 15.

  43. Ibid., pp. 179–83.

  44. See Morgan, note 7, above, pp. 163–64.

  45. In January 1993, the CBO projected a 1993 deficit of $310 billion that would fall until 1995 before rising again; the standardized-employment deficit, however, which omits the effect of economic cycles, was projected to remain flat until 1995 and rise thereafter. CBO, The Economic and Budget Outlook: Fiscal Years 1994–1998, January 1993, Summary Table 3, p. xvi.

  46. On the January 7 meeting and the incoming Clinton administration’s economic plans, see Robert E. Rubin and Jacob Weisberg, In an Uncertain World: Tough Choices from Wall Street to Washington (Random House, 2003), pp. 118–31; Bill Clinton, My Life (Alfred A. Knopf, 2004), pp. 458–63; Bob Woodward, The Agenda: Inside the Clinton White House (Simon & Schuster, 1994), pp. 68–82.

  47. Although this was the argument at the time, it’s not clear that interest rates were all that high. The average yield on ten-year Treasury notes was 7.0 percent in 1992 and had been falling since 1981. At the same time, inflation had been falling since 1982, so real interest rates were not necessarily falling. Since the early 1990s, nominal yields have generally fallen while inflation has been stable, indicating that real interest rates may have been high at the time. In any case, the consensus among economic policymakers was that interest rates were too high.

  48. Rubin and Weisberg, note 46, above, p. 120. According to Rubin, Fed chair Alan Greenspan had estimated that each $10 billion in annual deficit reduction would reduce long-term interest rates by 0.1 percentage point.

  49. Woodward, note 46, above, p. 73.

  50. Morgan, note 7, above, pp. 171–75.

  51. See ibid., p. 175.

  52. After the passage of the Omnibus Budget Reconciliation Act in 1993 until the end of the Clinton presidency, real GDP grew at an average annual rate of 4.0 percent (measured from 1993 Q4 through 2000 Q4). BEA, National Income and Product Accounts, Table 1.1.1. The yield on ten-year Treasuries fell to 5.3 percent in 1998 before beginning to rise again because of the economic boom. Federal Reserve Statistical Release H.15.

  53. OMB, note 6, above, Table 8.4. Anders Åslund has calculated the “peace dividend” at 2.8 percent of GDP in 1998–1999. Anders Åslund, Building Capitalism: The Transformation of the Former Soviet Bloc (Cambridge University Press, 2002), Table 10.1, p. 401.

  54. See Morgan, note 7, above, pp. 179, 185–86.

  55. One of the bills raised the debt ceiling, which the Treasury Department was on course to reach in mid-November. Treasury Secretary Robert Rubin, however, decided to borrow money from various federal trust funds, staving off default and enabling Clinton to veto the debt ceiling increase. Rubin and Weisberg, note 46, above, pp. 168–72.

  56. Morgan, note 7, above, p. 188.

  57. Jacob S. Hacker and Paul Pierson, Off Center: The Republican Revolution and the Erosion of American Democracy (Yale University Press, 2005), pp. 146–47; Ferguson, note 31, above, pp. 6–7; Eric Heberlig, Marc Hetherington, and Bruce Larson, “The Price of Leadership: Campaign Money and the Polarization of Congressional Parties,” Journal of Politics 68, no. 4 (November 2006): 992–1005, pp. 994–95.

  58. Hacker and Pierson, note 57, above, pp. 142–43.

  59. Ferguson, note 31, above. Nolan McCarty, Keith Poole, and Howard Rosenthal show in detail that Congress has become increasingly polarized, but they argue that internal party pressure is unlikely to explain the upturn in polarization in recent decades. McCarty et al., note 10, above, pp. 54–59. Their account focuses instead on increasing income stratification: the shift of high-income groups toward the Republican Party and low-income groups toward the Democratic Party, which they attribute to the increasing importance of income on partisan affiliations. Ibid., pp. 74–76. This explanation also results in a Republican Party that is likely to focus on economic policies that benefit the wealthy, such as lower taxes and less redistribution.

  60. Ferguson, note 31, above, p. 7; Ryan Grim and Arthur Delaney, “The Cash Committee: How Wall Street Wins on the Hill,” The Huffington Post, December 29, 2009.

  61. Quoted in Balz and Brownstein, note 13, above, p. 154.

  62. Bruce Bartlett, “ ‘Starve the Beast’: Origins and Development of a Budgetary Metaphor,” The Independent Review 12, no. 1 (Summer 2007): 5–26, pp. 8–9, 11–13. The term “starve the beast” was first used by Republicans in this context in 1985. Ibid., p. 6. The empirical evidence indicates that the “starve the beast” strategy does not actually work; that is, lowering tax revenues has not resulted in lower spending, just in higher deficits. For a review, see Bruce Bartlett, “Do Tax Cuts Starve the Beast?,” Bartlett’s Notations (blog), The Fiscal Times, July 14, 2010. One theoretical possibility is that deficits just haven’t been big enough to produce the pressure necessary to cut spending, but that at some point they will have the desired effect.

  63. ATR was founded in 1985 to support the Reagan administration’s tax reform program. See Nina J. Easton, Gang of Five: Leaders at the Center of the Conservative Crusade (Simon & Schuster, 2000), p. 161.

  64. Robert Dreyfuss, “Grover Norquist: ‘Field Marshal’ of the Bush Plan,” The Nation, May 14, 2001.

  65. Drake Bennett, “Grover Norquist, the Enforcer,” Bloomberg Businessweek, May 26, 2011.

  66. Americans for Tax Reform, “Federal Taxpayer Protection Pledge Questions and Answers,” available at http://www.atr.org/federal-taxpayer-protection​-questions-answers-a6204.

  67. Bennett, note 65, above.

  68. Easton, note 63, above, p. 278.

  69. Hacker and Pierson, note 11, above, pp. 209–10.

  70. Balz and Brownstein, note 13, above, p. 155.

  71. Susan Page, “Norquist’s Power High, Profile Low,” USA Today, June 1, 2001.

  72. Catherine Rampell, “Tax Pledge May Scuttle a Deal on Deficit,” The New York Times, November 18, 2011.

  73. Easton, note 63, above, pp. 279–80, 364–65; Balz and Brownstein, note 13, above, pp. 181–82.

  74. Dreyfuss, note 64, above; Page, note 71, above.

  75. Quoted in Bennett, note 65, above.

  76. Balz and Brownstein, note 13, above, p. 200.

  77. On July 20, 2011, The Washington Post quoted Norquist as saying, “Not continuing a tax cut is not technically a tax increase,” seemingly making it possible for pledge signers to vote for a deal that extended some but not all tax cuts. “Out from Under the Anti-Tax Pledge,” The Washington Post (editorial), July 20, 2011. Norquist quickly clarified that while passively allowing a tax cut to expire without a vote would not violate the pledge, voting for a plan that involved the expiration of any tax cuts would violate the pledge. Grover G. Norquist, “Read My Lips: No New Taxes,” The New York Times, July 21, 2011.

  78. Hacker and Pierson, note 57, above, chapters 4–5. For example, Representative Marge Roukema retired after surviving two primary challenges and facing a third without the support of the party leadership. Ibid., pp. 109–10.

  79. Pew Research Center for the People & the Press, Distrust, Discontent, Anger and Partisan Rancor: The People and Their Government, April 18, 2010, p. 20. The number of Republicans with trust in government averaged more than 40 percent during the Reagan, Bush I, and Bush II administrations and less than 30 percent in the Carter, Clinton, and Obama administrations. Democratic attitudes vary within a narrower range (from 26 percent for Bush II to 34 percent for Reagan and Clinton) and display less correlation with the president’s political party. Ibid., p. 4.

  80. Ibid., pp. 85, 70, 64–65.

  81. Ibid., p. 64.

  82. Morris P. Fiorina and Samuel J. Abrams, “Political Polarization in the American Public,” Annual Review of Political Science 11 (2008): 563–88, pp. 569–74; Ferguson, note 31, above, pp. 15–16; Hacker and Pierson, note 57, above, pp. 38–43; Lydia Saad, “In 2010, Conservatives Still Outnumber Moderates, Liberals,” Gallup, June 25, 2010. Self-identified conservatives grew from 37 percent in 2008 to 42 percent in 2010; still, this is only barely higher than the 40 percent level of 2003–2004. As early as the mid-1980s, political scientists Thomas Ferguson and Joel Rogers pointed out that even the election of Ronald Reagan in 1980 and his landslide reelection in 1984 were not accompanied by any significant shift toward conservative positions among the public. Thomas Ferguson and Joel Rogers, Right Turn: The Decline of the Democrats and the Future of American Politics (Hill & Wang, 1986), chapter 1.

  83. On opinions regarding government services and spending, see American National Election Studies, The ANES Guide to Public Opinion and Electoral Behavior, available at http://electionstudies.org/nesguide/nesguide.htm, Table 4A.5.

  84. Richard A. Viguerie and David Franke, America’s Right Turn: How Conservatives Used New and Alternative Media to Take Power (Bonus Books, 2004), p. 94. On the evolution of conservative direct mail, see ibid., chapters 7–8.

  85. Legendary Republican strategist Karl Rove built his own career as a direct mail consultant in the 1980s and 1990s before becoming the chief political adviser to George W. Bush. James Moore and Wayne Slater, Bush’s Brain: How Karl Rove Made George W. Bush Presidential ( John Wiley & Sons, 2003), pp. 146–51.

  86. On talk radio, see Balz and Brownstein, note 13, above, pp. 163–72.

  87. Zev Chafets, “Late-Period Limbaugh,” The New York Times, July 6, 2008.

  88. “The Top Talk Radio Audiences,” Talkers Magazine, updated Spring 2011, available at http://talkers.com/top-​talk-radio-audiences/. After Limbaugh, the other seven (based on Spring 2011 data) were Sean Hannity, Michael Savage, Glenn Beck, Mark Levin, Dave Ramsey, Neal Boortz, and Laura Ingraham. All except Ramsey can uncontroversially be described as conservatives.

  89. Jacques Steinberg, “Fox News, Media Elite,” The New York Times, November 8, 2004; Jacques Steinberg, “Fox News Finds Its Rivals Closing In,” The New York Times, June 28, 2008.

  90. Balz and Brownstein, note 13, above, pp. 183–85.

  91. Sam Howe Verhovek, “An Angry Bush Ends His Ties to Rifle Group,” The New York Times, May 11, 1995.

  92. Brody Mullins, “Chamber Ad Campaign Targets Consumer Agency,” The Wall Street Journal, September 8, 2009.

  93. Eric Lipton, Mike McIntire, and Don Van Natta, Jr., “Top Corporations Aid U.S. Chamber of Commerce Campaign,” The New York Times, October 21, 2010.

  94. According to quantitative analysis, however, the current Supreme Court is the most conservative in at least half a century. Adam Liptak, “Court Under Roberts Is Most Conservative in Decades,” The New York Times, July 24, 2010.

  95. House Budget Committee, The Path to Prosperity: Restoring America’s Promise: Fiscal Year 2012 Budget Resolution, p. 10. The passage reads, “Mismanagement and overspending have left the nation on the brink of bankruptcy. Only recently, millions of American families saw their dreams destroyed in a financial disaster caused by misguided policies, perverse incentives, and irresponsible leadership. This crisis squandered the nation’s savings and crippled its economy.”

  96. Fiorina and Abrams, note 82, above, p. 565; Ferguson, note 31, above, pp. 6–8. On polarization in Congress, see McCarty et al., note 10, above, especially chapter 2.

  97. Lydia Saad, “Americans Still Split About Whether Their Taxes Are Too High,” Gallup, April 18, 2011.

  98. For details, see Morgan, note 7, above, pp. 193–97.

  99. George W. Bush, 2000 Republican National Convention Acceptance Address, August 3, 2000, available at http://www.nytimes.com/library/​politics/camp/080400wh-bush-speech.html.

100. Al Gore, 2000 Democratic National Convention Acceptance Address, August 17, 2000, available at http://www.washingtonpost.com/wp-srv/onpolitics​/elections/goretext081700.htm. The Clinton-Gore plan to “save Social Security first” would have improved the Social Security and Medicare trust funds’ balance by effectively crediting budget surpluses to the trust funds, but it would not in itself have done anything about the long-term growth in Social Security and Medicare spending. Morgan, note 7, above, p. 200.

101. Vital Statistics of the United States, 2003, Volume 1, Natality, Table 1-1, available at http://www.cdc.gov/nchs​/data/statab/natfinal2003.annvol1_01.pdf.

102. 2011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, Table V.A3, p. 90. From 1970 to 2010, life expectancy at age 65 has increased from 13.1 to 17.5 years for men and from 17.1 to 19.9 years for women.

103. 1992 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, pp. 21, 27.

104. CBO, The Economic and Budget Outlook: Fiscal Years 1993–1997, January 1992, p. 58. The actual 2002 figure was roughly 23 percent. OMB, note 6, above, Tables 13.1, 8.5, 8.7. The difference is partly due to Medicare spending reductions enacted in 1993 and 1997.

105. CBO, The Economic and Budget Outlook: Fiscal Years 1997–2006, May 1996, p. 69.

106. CBO, The Long-Term Budget Outlook, October 2000, Figure 3, p. 8, and Table 3, p. 14.

107. OMB, note 6, above, Tables 1.1, 13.1. The $312 billion surplus does not include interest paid to the Social Security trust funds by the rest of the government (to pay off previous borrowing from the trust funds); with those interest payments, the surplus was $539 billion.

108. See Daniel N. Shaviro, Taxes, Spending, and the U.S. Government’s March Toward Bankruptcy (Cambridge University Press, 2007), p. 61.

109. It is true that the accounting rules are not particularly strict, and many pension plans are underfunded (even though they are allowed to assume relatively high future rates of return on their investments), but that is the basic concept.

110. Over the next seventy-five years (the period over which Social Security’s finances are conventionally measured), the deficit was 1.89 percent of total taxable payroll. 2000 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, p. 24. The Social Security trust fund annual reports did not include a present value estimate of the seventy-five-year deficit until the 2003 report. In that report, the deficit was 1.92 percent of taxable payroll and $3.5 trillion in present value terms. 2003 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, p. 10.

111. In 1999, the CBO already projected Medicare spending growing from 2.4 percent of GDP to 5.8 percent in 2030, with Social Security only growing from 4.3 percent to 6.1 percent. CBO, The Long-Term Budget Outlook: An Update, December 14, 1999, Table 1, p. 10. Medicare is designed to draw on general revenues, so it does not have a stand-alone deficit, but higher spending requires that the program draw more money from general revenues, adding to the overall deficit.

112. Rubin and Weisberg, note 46, above, p. 164.

113. In May 2001, Senator Jim Jeffords left the Republican Party and began caucusing with the Democrats, giving them a 51–49 majority in the Senate. However, the Republicans were able to attract the few Democratic votes necessary to pass their budgetary proposals. From 2003 to 2007 the Republicans had majorities in both houses of Congress.

114. CBO, The Budget and Economic Outlook: Fiscal Years 2002–2011, January 2001, Table 1-1, p. 2. The projected 2010 surplus in the CBO’s baseline would climb to $806 billion by May 2001. CBO, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2002, May 2001, Table 1, p. 12. In retrospect, the CBO’s economic forecast was too optimistic, but it was no more optimistic than forecasts by private sector economists. In January 2001, the CBO forecast average real GDP growth of 3.0 percent for the 2001–2010 period; the Blue Chip consensus forecast (an average of private sector economists’ forecasts) was for average real GDP growth of 3.3 percent. CBO, The Budget and Economic Outlook, January 2001, Table 2-2, p. 30.

115. Bush’s tax cut proposals garnered 50–60 percent support in the abstract. Compared to using the surplus for Social Security, Medicare, or other spending priorities, however, tax cuts fared dismally in opinion polls. Polls also indicated a strong preference for tax cuts targeted at “middle income Americans” rather than “across the board” tax cuts. Hacker and Pierson, note 57, above, pp. 49–53. See also Morgan, note 7, above, pp. 221–22.

116. Dreyfuss, note 64, above. For example, the Tax Relief Coalition, a group of businesses and business organizations, lobbied hard for the 2001 tax cuts, even though they affected only income and estate taxes, not corporate taxes.

117. This was the vote on the final conference report. Major congressional actions are available at http://thomas.loc.gov/cgi-bin​/bdquery/z?d107:HR01836:@@@R.

118. The largest as a share of GDP was the 1981 Reagan tax cut; the second largest was the 1964 Kennedy-Johnson tax cut. In 2010, when fully phased in, EGTRRA was projected to reduce tax revenues by $176 billion, or 1.1 percent of GDP (as then projected by the CBO), making it larger than the Revenue Act of 1978. In real dollar terms, EGTRRA was the second-largest tax cut in modern history. We exclude the major tax cuts enacted as a result of the end of World War II. CBO, “Pay-As-You-Go Estimate, H.R. 1836: Economic Growth and Tax Relief Reconciliation Act of 2001,” June 4, 2001; Tempalski, note 26, above, Table 2, pp. 16–20.

119. For a summary, see CBO, “Pay-As-You-Go Estimate, H.R. 1836,” June 4, 2001. The estate tax repeal was phased in for 2010 only.

120. Under the “Byrd rule” in the Senate, a bill that goes through reconciliation cannot increase deficits in any year after the period specifically covered by the initial budget resolution.

121. CBO, An Analysis of the President’s Budgetary Proposals, May 2001, p. 6. On the distributional impact of the phase-ins, see Morgan, note 7, above, p. 225.

122. CBO, “Pay-As-You-Go Estimate, H.R. 1836,” June 4, 2001. The GDP estimate is from CBO, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2002, May 2001, Table 5, p. 16. Actually, it’s even more complicated because some tax cuts were phased out before 2010; if those were extended to 2010 (which some eventually were), the 2010 tax cut would become even bigger.

123. Taxpayers must calculate their tax liability under both the regular income tax and the AMT and pay whichever is greater. The 2001 tax cuts, by reducing ordinary income taxes, meant that more people would have to pay the AMT. Therefore, the official assumption (based on current law) was that AMT revenues would increase, partially offsetting the reductions in the ordinary income tax. In practice, this only meant that future actions to patch the AMT would cost even more in foregone revenue than they would have otherwise. See Leonard E. Burman, William G. Gale, and Jeffrey Rohaly, “The AMT: Projections and Problems,” Tax Notes, July 7, 2003: 105–17; Hacker and Pierson, note 57, above, pp. 61–62.

124. Morgan, note 7, above, p. 229.

125. At the time, the Center on Budget and Policy Priorities estimated that the 2001 tax cut would cost $4.1 trillion in its second decade (from 2012 through 2021), not counting additional interest on the larger national debt. Joel Friedman, Richard Kogan, and Robert Greenstein, “New Tax-Cut Law Ultimately Costs as Much as Bush Plan,” Center on Budget and Policy Priorities, revised June 27, 2001.

126. CBO, The Budget and Economic Outlook: Fiscal Years 2004–2013, January 2003, Summary Table 1, p. xvi. The CBO was projecting surpluses to return in 2007, but this was solely because of off-budget (Social Security trust fund) surpluses. On-budget surpluses would only return in 2012, but that assumed that the 2001 tax cut would expire.

127. Hacker and Pierson, note 57, above, pp. 53–54.

128. CBO, “Cost Estimate, H.R. 2: Jobs and Growth Tax Relief Reconciliation Act of 2003,” May 23, 2003.

129. Morgan, note 7, above, p. 230.

130. Tax Policy Center, Table T08-0157, Individual Income and Estate Tax Provisions in the 2001–08 Tax Cuts with AMT Patch Extended, Distribution of Federal Tax Change by Cash Income Percentile, 2010, available at http://www.taxpolicycenter.org/numbers/​displayatab.cfm?Docid=1866&DocTypeID=2. We chose the 2010 impact because this was the last year before the tax cuts were scheduled to expire; we chose the version with the extended AMT patch because the AMT has been patched.

131. Tax Policy Center, Table T08-0156, Individual Income and Estate Tax Provisions in the 2001–08 Tax Cuts with AMT Patch Extended, Distribution of Federal Tax Change by Cash Income Level, 2010, available at http://www.taxpolicycenter.org/numbers/​displayatab.cfm?Docid=1865&DocTypeID=1.

132. Tax Policy Center, Table T08-0157, note 130, above.

133. 76.1 percent of all taxpaying households pay more in payroll taxes than in income taxes, including the employer share of payroll taxes. 50.6 percent of all taxpaying households pay more in payroll taxes than in income taxes when only counting the employee share of the payroll tax. These calculations are based on 2011, when the payroll tax was unusually low because of the December 2010 tax cut. Tax Policy Center, Table T11-0192, Distribution of Tax Units That Pay More in Payroll Taxes than Individual Income Taxes, by Cash Income Percentile, Current Law, 2011, available at http://www.taxpolicycenter.org/numbers​/displayatab.cfm?Docid=3073&DocTypeID=2.

134. While many middle-class households have investments, a large proportion of those investments are in their houses—investments largely shielded from capital gains taxes—or in retirement savings accounts, which also enjoy tax preferences.

135. Douglas W. Elmendorf, Jason Furman, William G. Gale, and Benjamin H. Harris, “Distributional Effects of the 2001 and 2003 Tax Cuts: How Do Financing and Behavioral Responses Matter?,” Brookings Institution, June 2008. The authors model the financing of the tax cuts either as an equal-dollar loss for all households or as a loss that is proportional to income; on these assumptions, either 17 percent or 22 percent of households would benefit from the tax cuts. As they say, “To be sure, if one assumes that the financing occurs entirely through spending reductions and that the foregone spending is worthless to individuals, then the standard distributional analysis applies. However, despite decades of stump speeches about unnecessary government spending, the political process has been persistently unable to identify significant outlays that voters will blithely forego.” Their analysis also incorporates behavioral effects of the tax cuts, which increase the proportion of households made better off to 34 percent. Ibid., Table 5.

136. Emmanuel Saez, “Striking It Richer: The Evolution of Top Incomes in the United States (Updated with 2008 Estimates),” July 17, 2010, available at http://elsa.berkeley.edu/~saez/saez-UStopincomes-2008.pdf, Figure 2.

137. We only include fiscal years that were entirely during periods of economic expansion; we exclude FY 1991 because the economy was in recession until March 1991; we exclude FY 2001 and 2002 because the economy was in recession until November 2001, which was during the 2002 fiscal year. In addition, after correcting for the effect of the economic cycle, tax revenues still fell from 20.1 percent of GDP in 2000 to 16.5 percent in 2004; cyclically adjusted revenues ranged from 19.5 percent to 20.1 percent of GDP from 1998 through 2000, but only from 15.4 percent to 18.9 percent from 2003 through 2009. (We omit 2001 from the comparison because the first Bush tax cut took place during the 2001 fiscal year.) CBO, Measuring the Effects of the Business Cycle on the Federal Budget: An Update, September 1, 2009. Finally, the Bush tax cuts were not fully phased in during part of the 2001–2007 expansion; had they been fully phased in at the beginning, average revenues would have been lower.

138. George W. Bush, “What the Congress Can Do for America,” The Wall Street Journal, January 3, 2007.

139. GDP data are from BEA, National Income and Product Accounts, Table 1.1.6. Growth is measured from the first quarter following the end of a recession to the last quarter preceding the beginning of the next recession.

140. In 2005, the CBO (then headed by a Republican appointee, Douglas Holtz- Eakin) estimated that the economic effects of a 10 percent cut in income taxes would offset between 1 percent and 22 percent of the revenue loss in the first five years; in the following five years, the economic effects might offset up to 32 percent of the revenue loss, but might also add 5 percent to the revenue loss. CBO, “Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates,” Economic and Budget Issue Brief, December 1, 2005. A paper coauthored by Gregory Mankiw, a former chair of President Bush’s Council of Economic Advisers, calculates that 32.4 percent of the static revenue loss of a capital gains tax cut and 14.7 percent of the static revenue loss of a labor tax cut could be offset in present value terms (ignoring short-term Keynesian effects). N. Gregory Mankiw and Matthew Weinzierl, “Dynamic Scoring: A Back-of-the-Envelope Guide,” Journal of Public Economics 90 (2006): 1415–33, p. 1430. An offset of 32.4 percent is a lot, but far less than 100 percent. Even then, Mankiw and Weinzierl assume that government spending falls to keep the budget in balance. Ibid., p. 1417. If instead the tax cuts are financed by additional debt, their ultimate effect can be to lower economic growth in the long term, depending on the eventual consequences of the larger debt. Eric M. Leeper and Shu-Chun Susan Yang, “Dynamic Scoring: Alternative Financing Schemes,” Journal of Public Economics 92 (2008): 159–82, pp. 166–69.

141. The Joint Committee on Taxation estimated that a 10 percent cut in individual income tax rates would reduce economic growth in the long run if the tax cut were financed by increased borrowing. Joint Committee on Taxation, “Exploring Issues in the Development of Macroeconomic Models for Use in Tax Policy Analysis,” JCX-19-06, June 16, 2006.

142. In 2007, the CBO estimated the 2010 impact of the tax cuts, including interest payments, at $269 billion. Peter R. Orszag, Letter to the Honorable John M. Spratt, Jr., July 20, 2007.

143. Through 2008, the Bush tax cuts accounted for $1.7 trillion in deficits and over $200 billion in additional interest costs. Kathy A. Ruffing and James R. Horney, “Economic Downturn and Bush Policies Continue to Drive Large Projected Deficits,” Center on Budget and Policy Priorities, May 10, 2011, p. 8. For 2009 through 2011, the CBO estimated a total impact of $729 billion, but that was before the December 2010 tax cut extension. Orszag, note 142, above. The 2010 extension added almost $200 billion to the 2011 impact of the tax cuts, not counting the new payroll tax cut and another AMT patch. CBO, “Estimate of Changes in Revenues and Direct Spending for S.A. 4753, an Amendment to H.R. 4853, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,” December 10, 2010.

144. An analysis by the Pew Charitable Trusts broke down the components of the increase in the 2011 national debt since the CBO’s projection in January 2001. The largest factor was lower revenues due to economic changes and technical reestimates (28 percent). The second largest was the 2001/2003 tax cuts (13 per- cent); the December 2010 tax cuts, which largely extended the 2001/2003 tax cuts, contributed 3 percent, while other tax cuts contributed 5 percent, for a total of 21 percent attributable to tax cuts. That does not include additional interest payments because of the larger debt created by those tax cuts. (The 2009 stimulus bill, by contrast, was responsible for only 6 percent of the increase in the debt.) Pew Fiscal Analysis Initiative, The Great Debt Shift: Drivers of Federal Debt Since 2001, April 2011, Figure 3, p. 5.

145. Ibid.; Ruffing and Horney, note 143, above; Teresa Tritch, “How the Deficit Got This Big,” The New York Times, July 23, 2011; Chad Stone, “What’s Driving Projected Debt?,” Off the Charts (blog), Center for Budget and Policy Priorities, May 20, 2011. Brian Riedl of the Heritage Foundation has argued that focusing on the Bush tax cuts is arbitrary, since the projected deficit could also be blamed on Social Security, Medicare, or other programs. Brian Riedl, “The Bush Tax Cuts and the Deficit Myth,” The Wall Street Journal, July 13, 2010. The Bush tax cuts, however, were a policy choice made after the long-term deficits in Social Security and Medicare were clearly visible, yet without making any effort to offset the tax cuts in any way. Riedl argues that deficits must be the fault of increasing spending because tax revenues remain roughly stable at around 18 percent of GDP. But this argument ignores the fact that tax cuts—including the Bush tax cuts—are the very mechanism that keeps tax revenues from growing much higher than 18 percent of GDP for very long.

146. OMB, note 6, above, Table 1.2.

147. Defense spending grew from 3.0 percent to 4.3 percent of GDP—half of the total increase in GDP terms. Ibid., Table 8.4. As of January 2011, appropriations through 2010 were $1,104 billion, with appropriations for 2011 running at an annual rate of $159 billion. CBO, The Budget and Economic Outlook: Fiscal Years 2011 to 2021, January 2011, Box 3-2, p. 77. This does not include additional interest payments on the larger national debt, which came to $64 billion through 2008. Ruffing and Horney, note 143, above, p. 8. The appropriations include $126 billion for war-related activities not specifically associated with Afghanistan and Iraq. Joseph Stiglitz and Linda Bilmes have estimated the true cost of the Iraq War at over $3 trillion. Joseph E. Stiglitz and Linda J. Bilmes, The Three Trillion Dollar War: The True Cost of the Iraq Conflict (W. W. Norton, 2008). This figure, however, includes economic losses suffered by Americans that do not add to the government debt. See Peter Orszag, “Estimated Costs of U.S. Operations in Iraq and Afghanistan and of Other Activities Related to the War on Terrorism,” testimony before the House Budget Committee, October 24, 2007, pp. 10–14.

148. Voting information for the Authorization for Use of Military Force Against Iraq Resolution of 2002 is available at http://thomas.loc.gov/cgi-bin/bdquery /z?d107:HJ00114:@@@R.

149. Dennis S. Ippolito, Why Budgets Matter: Budget Policy and American Politics (Pennsylvania State University Press, 2004), p. 175.

150. Richard W. Stevenson, “Bush Unveils Plan to Cut Tax Rates and Spur Economy,” The New York Times, January 8, 2003.

151. Elisabeth Bumiller, “White House Cuts Estimate of Cost of War with Iraq,” The New York Times, December 31, 2002; Matthew Engel, “Cost of War Put at $200bn, but That’s Nothing, Says US Adviser,” The Guardian (London), September 16, 2002.

152. Morgan, note 7, above, p. 235.

153. Quoted in James Surowiecki, “A Cut Too Far,” The New Yorker, April 21, 2003.

154. Nick Gillespie, “An Alliance for Freedom?,” Reason, August-September 2008.

155. See Jonathan Oberlander, The Political Life of Medicare (University of Chicago Press, 2003), pp. 175–76.

156. CBO, “Estimate of Effect on Direct Spending and Revenues of Conference Agreement on H.R. 1,” November 20, 2003.

157. Robert Pear, “Inquiry Confirms Top Medicare Official Threatened Actuary over Cost of Drug Benefits,” The New York Times, July 7, 2004. The administrator, Thomas Scully, resigned after the bill passed to become a lobbyist for health care companies.

158. The seventy-five-year deficits of the three major components of Medicare, in present value terms, are: Part A (Hospital Insurance), $3.1 trillion; Part B (Medical Insurance), $13.9 trillion; and Part D (Prescription Drug Coverage), $7.5 trillion. (Part C refers to Medicare Advantage plans, which are provided by private insurers but subsidized by Medicare.) 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, Tables III.B9, III.C15, III.C23, pp. 83, 130, 146.

159. CBO, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2006, March 2005, pp. 47–49. Participants diverting money into individual accounts would presumably receive lower guaranteed benefits when they retired. But money going into individual accounts would no longer be available to pay promised benefits to current retirees, requiring additional borrowing. The shortfall could have been reduced by lowering benefits for current retirees, but the president did not explicitly propose such a plan.

160. In 2007, Social Security ran a surplus of $81 billion, not counting interest received from the rest of the federal government. Without that surplus, the 2007 government deficit would have been $242 billion. The 2007 surplus was the sixth largest in history after 2000–2002 and 2005–2006. OMB, note 6, above, Table 13.1.

161. CBO, The Budget and Economic Outlook: Fiscal Years 2008 to 2018, January 2008, Summary Table 1, p. xii.

162. CBO, The Long-Term Budget Outlook, December 2007, Figure 1-2, p. 4.

163. Douglas W. Elmendorf, “CBO’s Analysis of the Major Health Care Legislation Enacted in March 2010,” testimony before the Health Subcommittee of the House Energy and Commerce Committee, March 30, 2011, Table 1, p. 2.

164. OMB, note 6, above, Tables 13.1 and 7.1. To calculate program deficits in any year, we take the actual trust fund surplus or deficit and subtract any interest received from the rest of the government and (for Medicare Parts B and D) any transfers from general government revenues; this yields the program’s true impact on the overall federal deficit in that year. Including interest payments from the rest of the government (but not transfers from general revenues), the programs together ran a surplus over the same period. The $270 billion figure does not include additional interest payments, so the true impact on the 2007 national debt is slightly larger.

165. 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, Table III.C19, p. 139. To calculate the Medicare Part D deficit, we take all income except for transfers from general revenue and subtract all expenditures.

166. Almost one-quarter of that $597 billion is due to the Medicare prescription drug program. Ibid.

167. OMB, note 6, above, Table 7.1. Government debt as a percentage of GDP averaged 36.7 percent from 1958 through 2007.

168. CBO, The Budget and Economic Outlook, January 2008, Summary Table 1, p. xii. By law, the CBO baseline projection must follow certain rules that make it unrealistic. Most importantly, it must assume that current law remains unchanged; in 2007, this meant assuming that the Bush tax cuts would expire on schedule and that the AMT would be allowed to hit middle-class households. Despite this problem, because it is constrained to follow a consistent set of rules, the CBO baseline projection is often the best way to compare the government’s fiscal position at different points in time.

169. We recommend Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (Pantheon, 2010).

170. Job losses are changes in nonfarm employment from January 2008 through February 2010, seasonally adjusted, from the Bureau of Labor Statistics, Current Employment Statistics Survey.

171. Unemployment data are from the Bureau of Labor Statistics, Current Population Survey.

172. BEA, National Income and Product Accounts, Table 1.1.6.

173. Revenues were 14.9 percent of GDP in 2009, the lowest since they were 14.4 percent in 1950.

174. OMB, Fiscal Year 2012 Budget of the U.S. Government, p. 24. The Treasury Department estimated that future dividends paid by Fannie and Freddie would reduce the net costs of the bailout to $73 billion. Ibid. The CBO estimated that, including the ongoing costs of subsidies granted by Fannie and Freddie, the total cost to the government was over $300 billion. Deborah Lucas, “The Budgetary Cost of Fannie Mae and Freddie Mac and Options for the Future Federal Role in the Secondary Mortgage Market,” testimony to the House Budget Committee, June 2, 2011, p. 11.

175. CBO, “Cost Estimate, H.R. 5140: Economic Stimulus Act of 2008,” February 11, 2008.

176. Douglas W. Elmendorf, Letter to the Honorable Nancy Pelosi, February 13, 2009, Table 2. $288 billion is the total impact of Division B, Title I, including both direct spending (in this case, tax credits) and revenues.

177. In a Wall Street Journal survey, thirty-eight economists thought that the 2009 stimulus had a positive impact on economic growth and jobs; six thought it had a negative impact. Phil Izzo, “Economists Credit Fed for Alleviating Crisis,” The Wall Street Journal, March 12, 2010. See also the private sector forecasts listed in Council of Economic Advisers, The Economic Impact of the American Recovery and Reinvestment Act of 2009, Seventh Quarterly Report, July 1, 2011, Table 7, p. 12.

178. CBO, The Budget and Economic Outlook: An Update, August 2009, Summary Table 1, p. x.

179. Federal Reserve Statistical Release H.15.

180. See Jane Mayer, “Covert Operations,” The New Yorker, August 30, 2010; Vanessa Williamson, Theda Skocpol, and John Coggin, “The Tea Party and the Remaking of Republican Conservatism,” Perspectives on Politics 9, no. 1 (2011): 25–43, pp. 28–30.

181. Looking at data that precede the appearance of the Tea Party, Campbell and Putnam find that the best predictors of becoming a Tea Party supporter are being a Republican and wanting religion to play a larger role in politics. Other prior predictors are being active in politics, being white, and having a “low regard for immigrants and blacks.” David E. Campbell and Robert D. Putnam, “Crashing the Tea Party,” The New York Times, August 16, 2011.

182. Nate Silver, “Poll Shows More Americans Have Unfavorable Views of Tea Party,” FiveThirtyEight (blog), The New York Times, March 30, 2011.

183. Pew Research Center, note 79, above, p. 66.

184. Silver, note 182, above; Nate Silver, “Freshmen Republicans Push House Toward Right,” FiveThirtyEight (blog), The New York Times, July 12, 2011.

185. On Norquist’s influence in the 2011–2012 Congress, see Bennett, note 65, above.

186. CBO, “Estimate of Changes in Revenues and Direct Spending for S.A. 4753,” December 10, 2010. The total fiscal impact through FY 2013 (which includes the last quarter of 2012) was $917 billion, of which $56 billion went to unemployment insurance benefits. The act was estimated to increase tax revenues slightly in later years, but those increases were contingent on certain investment incentives not being extended again.

187. See Bruce Bartlett, “Doing Away with the Debt Ceiling,” Economix (blog), The New York Times, August 1, 2011.

188. Lori Montgomery and Paul Kane, “Obama, Congressional Leaders Gather at White House to Try to Save Debt Deal,” The Washington Post, July 22, 2011. According to reports, Boehner agreed to $800 billion in tax increases but walked out when Obama asked for $1.2 trillion. It is important to note, however, that these tax increases were net decreases compared to current law because the “increases” were relative to a baseline in which all of the Bush tax cuts would be extended.

189. Carl Hulse and Jackie Calmes, “Push Intensifies for Larger Deal on Debt Impasse,” The New York Times, July 20, 2011. Similar to the Obama-Boehner negotiations, the Gang of Six plan would have “increased” tax revenues, but only on top of a baseline that assumed the extension of the Bush tax cuts. Compared to letting the tax cuts expire, its net effect would have been to reduce taxes by $1.5 trillion. “A Bipartisan Plan to Reduce Our Nation’s Deficits,” available at http://www.washingtonpost.com/r/2010–​2019/WashingtonPost/2011/07​/19/National-Politics/Graphics​/Gang_of_Six_Document.pdf.

190. Jennifer Steinhauer and Robert Pear, “Lawmakers Aim to Stop Defense Cuts if Debt Panel Fails,” The New York Times, November 4, 2011.

191. CBO, Budget and Economic Outlook, January 2011. $6.7 trillion is the CBO’s baseline projection (Table 1-1, p. 2) adjusted to reflect the drawdown of troops from Iraq and Afghanistan, the continuation of Medicare reimbursement rates, and continued indexation of the alternative minimum tax (Table 1-7, pp. 22–23). $11.5 trillion also assumes the extension of all other expiring tax provisions.

192. The $900 billion in initial spending cuts were entirely in discretionary spending programs, not the major entitlement programs. The $1.2 trillion in automatic cuts do apply to Medicare (though not Social Security or Medicaid); those cuts, however, apply to provider reimbursements, not to participants’ benefits.

193. Quoted in Jennifer Steinhauer, “Debt Bill Is Signed, Ending a Fractious Battle,” The New York Times, August 2, 2011.

4. WHAT DOES THE FEDERAL GOVERNMENT DO?

    1. Quoted in “The ‘Misunderestimated’ President?,” BBC News, January 7, 2009. See also “The Best of George W. Bush,” YouTube, available at http://www.youtube.com/watch?v=uO46ii3W07U (“It’s a budget with a lot of line items; there’s a lot of pages; there’s a lot of numbers.”).

    2. Michael Cooper, “Hurricane Cost Seen as Ranking Among Top Ten,” The New York Times, August 30, 2011.

    3. Robert P. King, “Fed’s Weather Information Could Go Dark,” The Palm Beach Post, April 21, 2005; Timothy Noah, “Santorum’s Mighty Wind,” Slate, August 2, 2005.

    4. Mike Lillis, “Cantor in Tricky Spot on Disaster Aid,” The Hill, August 31, 2011; “Chris Christie: Send Aid Now; Cut Later,” Associated Press, August 31, 2011.

    5. Unless otherwise noted, all figures for 2010 and prior years are from OMB, Fiscal Year 2012 Budget of the United States Government: Historical Tables, Tables 1.1, 1.2, 2.1, 2.2, 2.3, 3.1, 3.2, 6.1, 7.1, 8.1, 8.4, and 8.5.

    6. Frank Newport, “Americans Blame Wasteful Government Spending for Deficit,” Gallup, April 29, 2011; Kaiser Family Foundation/Harvard School of Public Health, The Public’s Health Care Agenda for the 112th Congress: Chartpack, January 2011, p. 7. The Gallup poll allowed people to say the deficit should be reduced equally through spending cuts and tax increases; 48 percent preferred mostly or only spending cuts, 37 percent preferred an equal balance, and 11 percent preferred mostly or only tax increases. The KFF/Harvard poll did not provide such an option; 57 percent preferred mainly spending cuts, 14 percent preferred mainly tax increases, and 19 percent preferred no action. It’s not clear whether this is a new phenomenon or not. The American National Election Studies longitudinal surveys do not specifically include this question. The proportion of people who think the government should reduce services and spending peaked in 1994, fell until 2000, and has been growing since; the proportion of people who think the government wastes a lot of tax money peaked in 1980, generally fell until 2002, and has been climbing rapidly since. American National Election Studies, The ANES Guide to Public Opinion and Electoral Behavior, Tables 4A.5, 5A.3.

    7. Frank Newport and Lydia Saad, “Americans Oppose Cuts in Education, Social Security, Defense,” Gallup, January 26, 2011; Washington Post–ABC News poll, April 14–17, 2011, available at http://www.washingtonpost.com/wp-srv/politics /polls/postpoll_04172011.html, question 17; Kaiser Family Foundation/Harvard School of Public Health, note 6, above, p. 8.

    8. “American Public Vastly Overestimates Amount of U.S. Foreign Aid,” WorldPublicOpinion.org, November 29, 2010. It’s true that if you ask people to estimate the budgetary share of different programs separately, they are likely to overestimate them. Still, a factor of 25 is a lot. In an earlier poll, after hearing that foreign aid consumed only 1 percent of the federal budget, over 80 percent of respondents said that was too little or about right—implying that if Americans knew how little we spend on foreign aid, they wouldn’t want to cut that, either. Program on International Policy Attitudes, Americans on Foreign Aid and World Hunger: A Study of U.S. Public Attitudes, February 2, 2001. Total “international affairs” (Function 150) spending in 2010 was $45 billion, or 1.3 percent of federal spending. Only half of this spending, however, goes to traditional economic development and humanitarian assistance; the other half is aid linked to U.S. foreign policy goals, including economic assistance for countries like Afghanistan and Iraq and programs that help our allies buy military equipment and services. Gordon Adams and Cindy Williams, Buying National Security: How America Plans and Pays for Its Global Role and Safety at Home (Routledge, 2010), chapters 3–4.

    9. On discretionary and mandatory spending in general, see Allen Schick, The Federal Budget: Politics, Policy, Process, 3rd ed. (Brookings Institution Press, 2007), pp. 57–62.

  10. Mandatory spending is also known as direct spending.

  11. We chose 1962 because it is the first year for which OMB publishes this breakdown of total federal spending.

  12. CBO, The Budget and Economic Outlook: An Update, August 2011, Table 1-2, pp. 4–5. This is the CBO’s baseline projection, which assumes cuts to Medicare reimbursement rates that are politically unlikely to occur. See ibid., p. 25.

  13. Kaiser Family Foundation/Harvard School of Public Health, note 6, above, p. 9. Even when respondents were told to assume that Congress would be reducing the deficit by cutting spending, 47 percent still said they would support no cuts in Medicaid and 39 percent would support only minor cuts. The number of Medicaid beneficiaries is expected to rise to 97 million by 2021. CBO, The Budget and Economic Outlook: Fiscal Years 2011 to 2021, January 2011, p. 62.

  14. Averages for the 1960s cover 1962–1969 because OMB figures for this breakdown of government outlays go back only to 1962. The decade before the financial crisis is 1999–2008.

  15. Defense spending averaged 3.2 percent of GDP from 1996 through 2002—the period after the decline of defense spending following the end of the Cold War but before the invasion of Iraq.

  16. Erika Bolstad and Curtis Morgan, “Budget Ax May Fall on Hurricane Hunter Planes,” Miami Herald, September 1, 2011.

  17. Employment figures exclude the Postal Service and are from December of each year (to avoid the impact of temporary Census-related hiring). Bureau of Labor Statistics, Current Employment Statistics.

  18. On the history of the major government insurance programs, see Jacob S. Hacker, The Divided Welfare State: The Battle over Public and Private Social Benefits in the United States (Cambridge University Press, 2002).

  19. David A. Moss, When All Else Fails: Government as the Ultimate Risk Manager (Harvard University Press, 2002).

  20. In general, full Medicare eligibility requires ten years of employment in Medicare- covered employment (that is, employment for which you pay the Medicare payroll tax).

  21. 2011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, p. 2; 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, p. 4.

  22. The full retirement age was gradually increased beginning with people born in 1938, and is 66 for people born in 1943–1954; it will start increasing again for people born in 1955, and will reach 67 for people born in 1960 or later. John A. Svahn and Mary Ross, “Social Security Amendments of 1983: Legislative History and Summary of Provisions,” Social Security Bulletin 46, no. 7 ( July 1983): 3–48, p. 30.

  23. Social Security Online, Monthly Statistical Snapshot, July 2011, Table 2.

  24. Social Security and Medicare are both progressive programs on balance. Social Security combines a slightly regressive payroll tax (meaning that the poor pay a larger share of their incomes than the rich) with a significantly progressive benefit formula (meaning that the poor receive larger benefits than the rich). Medicare combines a progressive funding mechanism (a flat payroll tax, plus additional funding from general revenues) with equal benefits for all, regardless of past contributions. Whether a progressive system benefits the person in the middle of the distribution depends on the amount and shape of inequality. Today, with inequality at the highest levels of the past century, it is highly likely that median-income families are benefited by progressive tax-and-transfer policies. See Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913–1998,” Quarterly Journal of Economics 118, no. 1 (February 2003): 1–39; Emmanuel Saez, “Striking It Richer: The Evolution of Top Incomes in the United States (Updated with 2008 Estimates),” July 17, 2010, available at http://elsa.berkeley.edu/~saez /saez-UStopincomes-2008.pdf.

  25. Bureau of Consumer Financial Protection Budget, Congressional Justification, available at http://www.consumerfinance.gov/wp-content/uploads/2011/02 /CFPB-2012-CJ.pdf; National Endowment for the Arts, Appropriations Request for Fiscal Year 2012, February 2011, available at http://www.nea.gov /about/Budget/NEA-FY12-Appropriations-Request.pdf.

  26. IMF, World Economic Outlook Database, April 2011.

  27. Peter Suderman, “If You Focus on the Deficit, Then Tax Increases Are on the Table,” Reason, April 27, 2011.

  28. Bruce Bartlett, “I’d Rather Be an Unlucky Ducky,” Economix (blog), The New York Times, September 27, 2011; Terry Miller and Kim R. Holmes, 2011 Index of Economic Freedom (Heritage Foundation and Wall Street Journal, 2011), p. 6; IMF, World Economic Outlook Database, April 2011.

  29. Franklin D. Roosevelt, State of the Union Address to the Congress, January 6, 1941.

  30. Moss, note 19, above, pp. 154, 162–69.

  31. United States Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2010, Current Population Reports P60-239, September 2011, Table 8, p. 26.

  32. Moss, note 19, above.

  33. See Daniel N. Shaviro, Taxes, Spending, and the U.S. Government’s March Toward Bankruptcy (Cambridge University Press, 2007), chapter 2.

  34. Tax expenditures were first identified as such by Stanley Surrey, then an official at the Treasury Department, in the 1960s. The concept of tax expenditures has been frequently criticized, most often because tax expenditures have to be measured against some “normal” tax code. Still, while there are valid disagreements over whether some provisions should count as tax expenditures (for example, is the fact that you pay capital gains tax only when you sell an asset, and not each year that it appreciates, a tax expenditure or just the normal way to administer an income tax?), most analysts agree that the concept is useful. See Leonard E. Burman, Christopher Geissler, and Eric J. Toder, “How Big Are Total Individual Income Tax Expenditures, and Who Benefits from Them?,” American Economic Review: Papers and Proceedings 98 (2008): 79–83, p. 79.

  35. Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2010–2014, JCS-3-10, December 15, 2010, p. 39. This is the “static” revenue loss due to the tax expenditure, which does not take into account changes in behavior that would result from its elimination. The deduction for mortgage interest dates back to 1913, before federal policies to promote homeownership. Suzanne Mettler, The Submerged State: How Invisible Government Policies Undermine American Democracy (University of Chicago Press, 2011), p. 16. Today, however, it is routinely defended as an incentive for homeownership.

  36. Donald B. Marron, “How Large Are Tax Expenditures?,” Tax Notes (March 28, 2011): 1597; Leonard E. Burman and Marvin Phaup, “Tax Expenditures, the Size and Efficiency of Government, and Implications for Budget Reform,” NBER Working Paper 17268, August 2011, pp. 6–7. The Joint Committee on Taxation does not provide a total estimate, probably because the aggregate effect of the tax expenditures differs from the sum of their individual effects because of interactions between them. An earlier analysis of tax expenditures in the individual income tax code showed that their aggregate impact was larger than the sum of their individual impacts due to interaction effects. Burman et al., note 34, above, p. 80.

  37. In 2009, for example, the mortgage interest tax deduction saved families making over $100,000 a total of $53 billion ($3,800 per family); all other families saved only $24 billion ($1,100 per family). Joint Committee on Taxation, note 35, above, Table 3. In aggregate, tax expenditures account for about 11.4 percent of after-tax income for top-quintile households but only 6.8 percent of after-tax income for middle-quintile households. Burman et al., note 34, above, p. 82.

  38. Whether this counts as a tax expenditure is open to debate (it depends on whether your definition of the baseline tax system allows deductions for interest expenses), but it certainly encourages companies to borrow money.

  39. Mettler, note 35, above, pp. 41–43.

  40. Rachel Johnson, James Nunns, Jeffrey Rohaly, Eric Toder, and Roberton Williams, “Why Some Tax Units Pay No Income Tax,” Tax Policy Center, July 2011.

  41. CNN Opinion Research Poll, April 9–10, 2011, available at http://i2.cdn.turner.com/cnn/2011/images/04/14/rel6f.pdf, question 19.

  42. See Bruce Bartlett, “Americans Support Higher Taxes. Really,” Capital Gains and Games (blog), June 29, 2011.

  43. The 7.4 percent average is for fiscal years 2002—the first year for which large components of the 2001 tax cut were in effect—through 2010.

  44. Individual income taxes averaged 8.7 percent of GDP in fiscal years 1992–2000 and 7.6 percent of GDP in fiscal years 2003–2007. We exclude fiscal years 1991, 2001, and 2002 because the economy was in recession for part of each of those years.

  45. Self-employed people also pay the same payroll taxes.

  46. In addition, beginning in 2013, a higher Medicare payroll tax rate will be charged on earnings above certain thresholds designed to affect high-income taxpayers.

  47. The tax system as a whole remains modestly progressive, however. For example, in 2010, top-quintile households earned 53.5 percent of pre-tax income and paid 68.6 percent of federal taxes, while middle-quintile households earned 13.9 percent of pre-tax income and paid 9.8 percent of federal taxes. Tax Policy Center, Table T11-0094, Distribution of Cash Income and Federal Taxes by Filing Status and Family Type, Under Current Law, by Cash Income Percentile, 2010, available at http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=2975&DocTypeID=7.

  48. David Kocieniewski, “Where Pay for Chiefs Outstrips U.S. Taxes,” The New York Times, August 31, 2011.

  49. See David Leonhardt, “The Paradox of Corporate Taxes,” The New York Times, February 1, 2011; David Kocieniewski, “U.S. Business Has High Tax Rates but Pays Less,” The New York Times, May 2, 2011.

  50. David Kocieniewski, “G.E.’s Strategies Let It Avoid Taxes Altogether,” The New York Times, March 24, 2011; Jesse Drucker, “The Tax Haven That’s Saving Google Billions,” Bloomberg Businessweek, October 21, 2010.

  51. This may be due in part to the fact that pass-through entities, where tax is paid only on the individual level and not on the company level, are becoming increasingly popular in the United States. The high corporate tax rate in the United States may also be inducing companies to shift their income to other countries. See Tax Policy Center, “International Taxation,” in The Tax Policy Briefing Book: A Citizens’ Guide to the 2008 Election and Beyond, available at http://www.taxpolicycenter.org/briefing-book/.

  52. Over the past decade, the United States has had the eighth-lowest corporate taxes among thirty-one OECD countries, measured as a percentage of GDP. Taxes averaged 2.5 percent of GDP over the 2000–2008 period, compared to an average of 3.5 percent for the OECD. Data are not yet available for 2009 for all countries; data are not available for the entire period for Chile and Mexico. OECD. StatExtracts, Revenue Statistics.

  53. For overviews of this debate, see Alan J. Auerbach, “Who Bears the Corporate Tax? A Review of What We Know,” chapter 1 in James M. Poterba, ed., Tax Policy and the Economy, vol. 20 (MIT Press, 2006); Rosanne Altshuler, Benjamin H. Harris, and Eric Toder, “Capital Income Taxation and Progressivity in a Global Economy,” Virginia Tax Review 30 (2010): 355–88, pp. 360–70.

  54. Again, we exclude fiscal years where the economy was in recession for part of the year. The average tax level in fiscal years 2003–2007 was 17.3 percent. The economy expanded from April 1958 to April 1960, leaving only one full fiscal year of expansion (1959), when taxes were 16.2 percent of GDP.

  55. OECD. StatExtracts, Revenue Statistics. Among all OECD countries, the only ones with lower total tax rates as a percentage of GDP in 2009 were Chile and Mexico. Arguably, we pay less in taxes because we have to pay more to the private sector for health care (because the government pays for a smaller share of our health care than in comparable countries). On the other hand, however, our government pays more for health care in absolute terms than most other comparable governments. David A. Squires, “The U.S. Health System in Perspective: A Comparison of Twelve Industrialized Nations,” Commonwealth Fund, Issues in International Health Policy, July 2011, Exhibit 3, p. 4.

  56. In 2010, according to OECD data, the United States had the second-largest general government budget deficit (including all levels of government) as a share of GDP of thirty-two OECD countries, trailing only Ireland (and surpassing Greece). OECD Economic Outlook No. 89, 2011, Annex Table 27. The table does not include Chile and Mexico.

  57. The Treasury has to continually redeem bonds issued in earlier years that are maturing. So if there is a deficit, the Treasury has to issue new bonds to replace the old ones and issue more new bonds to cover the deficit. The increase in debt in a given year does not exactly equal the deficit in that year because the Treasury has cash in its bank account and has balances in other accounts used by various lending programs. As with any business, the Treasury can fill a budget gap in part by drawing down its account balances, which reduces the amount of money it has to borrow. CBO, Budget and Economic Outlook, January 2011, pp. 19–20.

  58. Since 1941, the average effective nominal interest rate paid by the government has been 4.8 percent. OMB, note 5, above, Tables 3.1, 7.1. Readers who care about economics will realize that these interest rates should be put in real (inflation-adjusted) terms. The average maturity of federal debt is about five years. “Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association,” February 1, 2011. In 2010, inflation expectations for the next five years were about 1.4–1.8 percent, depending on the measure of inflation, meaning that the real interest rate was about 0.6–1.0 percent. CBO, The Budget and Economic Outlook, January 2011, Table 2-1, p. 29. In the long term, the CBO expects the real interest rate on federal debt to be about 2.7 percent in its extended-baseline scenario. CBO, 2011 Long-Term Budget Outlook, p. 24.

  59. CBO, The Budget and Economic Outlook: An Update, August 2011, Table 1-2, pp. 4–5. This is from the CBO’s baseline projection, which is optimistic for a number of reasons.

  60. There is a wide range of views on the causes of the Great Depression and the relative importance of fiscal policy. Milton Friedman and Anna Jacobson Schwartz argue that the main problem was a contraction in the supply of money. Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (Princeton University Press, 1963). Ben Bernanke stresses the negative effects of bank closures. Ben S. Bernanke, Essays on the Great Depression (Princeton University Press, 2000). Barry Eichengreen and Peter Temin place more emphasis on the Federal Reserve’s belief in the gold standard and attempts to avoid policies, like increasing the money supply, that could have caused a devaluation of the dollar. Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919–1939 (Oxford University Press, 1992); Peter Temin, Lessons from the Great Depression (MIT Press, 1989). In all of these views, however, fiscal policy did not help stimulate the economy during the early 1930s.

  61. The effect of automatic stabilizers was $363 billion in 2010. CBO, The Effect of Automatic Stabilizers on the Federal Budget, April 2011, Table 1, p. 3.

  62. The budgetary impact of the American Recovery and Reinvestment Act was $441 billion in 2010. Douglas W. Elmendorf, Letter to the Honorable Harry Reid, February 11, 2009, p. 2. Automatic stabilizers are explicitly defined to exclude the budgetary impact of legislation. See CBO, The Effect of Automatic Stabilizers on the Federal Budget, April 2011, p. 1.

  63. For ease of understanding, in this section we discuss long-term trends and their impact on annual deficits and the national debt. An alternative way of assessing the government’s long-term fiscal condition is to estimate the “fiscal gap”: the difference between future revenues and spending, over a long or infinite horizon, in present value terms. On the fiscal gap and other measures of long-term budgetary balance, see Shaviro, note 33, above, chapter 5. For estimates of the current fiscal gap, see Alan J. Auerbach and William G. Gale, “Tempting Fate: The Federal Budget Outlook,” Brookings Institution, June 30, 2011.

  64. These rules were initially established in the Congressional Budget and Impoundment Control Act of 1974 and the Balanced Budget and Emergency Deficit Control Act of 1985. In addition, the CBO baseline projects that spending for overseas contingency operations will grow at the rate of inflation, even though current policy is for the number of troops deployed to Iraq and Afghanistan to fall. See CBO, The Budget and Economic Outlook: An Update, August 2011, p. 17.

  65. Our adjusted baseline projection incorporates the CBO’s projection of robust economic growth in the 2013–2016 period that will return the economy to its full potential by 2017. The CBO’s economic forecast is not appreciably more optimistic or pessimistic than those of the Federal Reserve or private sector forecasters. Ibid., pp. 32–36.

  66. A deficit of 1 percent of GDP is sustainable in the long term because average annual economic growth is likely to be significantly higher than 1 percent. A deficit of 1 percent of GDP is arguably a good thing if it is used to finance investments that increase productivity growth. See Robert Pollin, “The Case Against Deficit Hawks: Austerity Is Not a Solution: Why the Deficit Hawks Are Wrong,” Challenge, November-December 2010: 6–36, p. 28. Pollin targets a structural deficit of 2–3 percent of GDP on these grounds.

  67. The CBO’s economic forecast assumes that government policy will follow current law, including the expiration of the Bush tax cuts. CBO, The Budget and Economic Outlook: An Update, August 2011, p. 36. Therefore, any contractionary impact of allowing the tax cuts to expire—which could lower tax revenues and increase deficits—is already accounted for in these projections.

  68. This scenario assumes that other miscellaneous tax cuts are allowed to expire. For other forecasts that assume extension of all tax cuts, see Auerbach and Gale, note 63, above; CBO, 2011 Long-Term Budget Outlook, June 2011 (alternative fiscal scenario).

  69. Per capita health care spending in the United States was $7,538 in 2008; the average for the richest fifteen countries in the OECD was $3,923 (converted on a purchasing power parity basis). Kaiser Family Foundation, “Health Care Spending in the United States and Selected OECD Countries,” April 2011, available at http://www.kff.org/insurance/snapshot/OECD042111.cfm. On life expectancy, quality of care, and outcomes, see Gerard F. Anderson and Bianca K. Frogner, “Health Spending in OECD Countries: Obtaining Value per Dollar,” Health Affairs 27, no. 6 (November-December 2008): 1718–27, Exhibit 3, p. 1723; Karen Davis, Cathy Schoen, and Kristof Stremikis, Mirror, Mirror, on the Wall: How the Performance of the U.S. Health Care System Compares Internationally, Commonwealth Fund, June 2010; Squires, note 55, above.

  70. See, for example, Atul Gawande, “The Cost Conundrum,” The New Yorker, June 1, 2009.

  71. There is some evidence that even though higher cost sharing makes people cut back on health care, overall costs go up anyway because they end up needing more emergency care. See Atul Gawande, “The Hot Spotters,” The New Yorker, January 24, 2011.

  72. See Uwe E. Reinhardt, “Competition’s Shortcomings in Curtailing Health Care Costs,” Economix (blog), The New York Times, November 5, 2010. In general, it appears that hospitals are more concentrated than health plans and that concentration among hospitals, not concentration among health plans, is associated with higher prices. Glenn A. Melnick, Yu-Chu Shen, and Vivian Yaling Wu, “The Increased Concentration of Health Plan Markets Can Benefit Consumers Through Lower Hospital Prices,” Health Affairs 30, no. 9 (2011): 1728–33, Exhibit 2, p. 1731.

  73. Steffie Woolhandler, Terry Campbell, and David U. Himmelstein, “Costs of Health Care Administration in the United States and Canada,” The New England Journal of Medicine 349 (2003): 768–75, Table 1, p. 771; James G. Kahn, Richard Kronick, Mary Kreger, and David N. Gans, “The Cost of Health Insurance Administration in California: Estimates for Insurers, Physicians, and Hospitals,” Health Affairs 24, no. 6 (2005): 1629–39, Exhibit 5, p. 1637.

  74. Uwe E. Reinhardt, Peter S. Hussey, and Gerard F. Anderson, “U.S. Health Care Spending in an International Context: Why Is U.S. Spending So High, and Can We Afford It?,” Health Affairs 23, no. 3 (2004): 10–25, pp. 12–15.

  75. Sheila Smith, Joseph P. Newhouse, and Mark S. Freeland, “Income, Insurance, and Technology: Why Does Health Spending Outpace Economic Growth?,” Health Affairs 28, no. 5 (2009): 1276–84, p. 1276.

  76. Changes in insurance coverage and in the costs of inputs (capital, labor, materials, and energy), by contrast, have been relatively small factors. Ibid., Exhibit 1, p. 1280. The precise impacts of income, insurance, and technology are difficult to disaggregate because rising incomes and expanding insurance coverage both contribute to increased use of new technologies.

  77. OECD, Health Data 2011, Frequently Requested Data, available at http://www.oecd.org/document/16/0,3746,​en_2649_37407_2085200_1_1_1_37407,00.html. The U.S. ranked nineteenth in life expectancy in 1990 and fell to twenty-third by 2007 (the last year for which data are available for all OECD countries).

  78. The CBO’s long-term forecasts assume that the underlying annual rate of excess cost growth will be 1.7 percent in the early 2020s and declining thereafter; individual forecasts adjust this rate for government health care programs based on specific policy assumptions. CBO, 2011 Long-Term Budget Outlook, June 2011, pp. 43–45.

  79. Ibid., pp. 45–46. The 2035 figure includes health insurance subsidies authorized by the Affordable Care Act of 2010. The CBO’s extended-baseline scenario, which conforms closely to current law, projects 2035 federal health care spending at 9.4 percent of GDP. The alternative fiscal scenario, which is intended to be more realistic, projects 2035 health care spending at 10.4 percent. Ibid., Table 1-2, p. 8.

  80. CBO projections assume that the rate of health care inflation does slow down modestly over the next few decades; projections by the chief actuary for Medicare and Medicaid are slightly more pessimistic over the next twenty-five years. See ibid., pp. 42–43; Auerbach and Gale, note 63, above, pp. 11–12 and Table 3. The chief actuary’s predictions are more optimistic than those of the CBO over a seventy-five-year horizon.

  81. CBO, 2011 Long-Term Budget Outlook, June 2011, pp. 10–11.

  82. For Social Security’s historical contribution to the budget balance, see OMB, note 5, above, Table 13.1. Social Security currently contributes to the federal deficit even though the program is still running an annual surplus. The current surplus exists only because of interest that the trust funds earn on the balances they have accumulated over the past decades. Surpluses in past years were lent to the rest of the federal government; the interest received by the trust funds comes from the rest of the federal government and therefore cannot be counted when measuring the overall government deficit (the difference between the amounts of cash flowing in and out of the government). Separately, some people argue that Social Security cannot ever contribute to the federal deficit because, by law, benefits must be paid out of the Social Security trust funds and therefore when those trust funds are exhausted (except for incoming payroll taxes), benefits will have to be reduced. In our opinion, even if this were to occur (which we find politically unlikely), automatic benefit cuts of 1.4 percent of GDP are no better than a deficit of 1.4 percent of GDP. A deficit gives us various options, including higher taxes, lower benefits, reductions in other spending, or more borrowing; automatic benefit cuts force us to choose one option, even if it is worse than the others.

  83. 2011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, pp. 114–15.

  84. CBO, 2011 Long-Term Budget Outlook, June 2011, p. 53. The Social Security trust funds are currently running an annual surplus because of the interest they earn on trust fund balances.

  85. 2011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, Table VI.F4, p. 187.

  86. We begin with our ten-year projections, discussed above, and then extend them using the same principles applied by the CBO in its long-term budget forecasts. CBO, 2011 Long-Term Budget Outlook, June 2011. For spending, we generally use the CBO’s alternative fiscal scenario. For revenues, we assume that revenues will grow after 2021 at a rate projected by the CBO, with a different 2021 starting point depending on whether we assume the extension of the tax cuts scheduled for expiration. For more details, see the Appendix.

  87. Economist James Galbraith argues that large primary deficits can be sustained indefinitely and that the CBO (and other economists) think they are unsustainable only because they overestimate the interest rate that the government will have to pay on its debts. If, as Galbraith assumes, the government pays a negative real interest rate on its debts, then the debt itself will get smaller each year, allowing for a primary deficit. James K. Galbraith, “Is the Federal Debt Unsustainable?,” Levy Economics Institute of Bard College Policy Note 2011/2. For example, if the debt is 100 percent of GDP, the real interest rate is –1 percent, the primary deficit is 4 percent, and real GDP growth is 3 percent, then the debt will remain at 100 percent of GDP. Unfortunately, the federal government has historically paid a positive real interest rate on borrowing. Since 1948, the average effective real interest rate has been 1.7 percent; since 1982 (the first year after the period of high inflation at the end of the 1970s), it has been 3.7 percent. (The real interest rate is calculated using the GDP price deflator as the measure of inflation. BEA, National Income and Product Accounts, Table 1.1.4.) The CBO assumes a long-term real interest rate of 2.7 percent. CBO, 2011 Long-Term Budget Outlook, June 2011, pp. 23–24.

  88. We begin with our “optimistic” long-term projection (in which all tax cuts expire), described in note 86, above, and the Appendix. We adjust this projection by assuming that health care spending will be constant at its 2021 level indefinitely.

  89. A significant number of doctors in some specialties already do not accept Medicare at all or do not accept new patients on Medicare. Julie Connelly, “Doctors Are Opting Out of Medicare,” The New York Times, April 1, 2009.

  90. CBO, 2011 Long-Term Budget Outlook, June 2011, p. 42. Whether government- paid health care or private-paid health care has seen higher excess cost growth depends on how far back in time you look. From 1985 to 2007, excess cost growth averaged 1.4 percent per year for Medicare, 1.3 percent for Medicaid, and 1.9 percent for all other health care.

  91. Ibid., p. 47.

  92. CBO, Long-Term Analysis of a Budget Proposal by Chairman Ryan, April 5, 2011, Figure 1, p. 22. This increase is relative to projected spending on the same health care under the existing Medicare program.

  93. In 2009, U.S. per capita GDP was surpassed among OECD countries only by the tiny financial haven Luxembourg and oil-rich Norway. OECD. StatExtracts, National Accounts.

  94. Citizens for Tax Justice, “Top Federal Income Tax Rates Since 1913,” November 2011, available at http://www.ctj.org/pdf/regcg.pdf.

  95. It’s more clear that poor people are helped by a high-tax/high-benefit world than that rich people are helped by a low-tax/low-benefit world. Given the problems in the individual health insurance market right now, you would have to be very rich before you would want to gamble on being able to buy health insurance after the age of sixty-five. More generally, since most people are risk-averse, insurance benefits some people above the midpoint of the income distribution (because it reduces the risk of large losses), even if it has a negative expected value in dollar terms.

  96. In 207 b.c., the general Xiang Yu destroyed his boats after crossing a river and then ordered his troops to smash their cooking pots, ensuring that they could survive only by defeating the enemy. Hernán Cortés did something similar in 1519 during the conquest of Mexico.

5. WHY WORRY

    1. “Memorandum from Merrill Lynch,” Merrill Lynch, September 28, 2008, available at http://www.oireachtas.ie/viewdoc.asp?​fn=/documents/Committees30thDail/PAC/Reports/​DocumentsReGruarantee/document3.pdf, p. 2.

    2. Thomas Jefferson, Letter to William Plumer, July 21, 1816, in The Thomas Jefferson Papers, Series 1: General Correspondence, 1651–1827, Library of Congress. This often quoted passage continues: “We see in England the consequences of the want of it: their laborers reduced to live on a penny in the shilling of their earnings, to give up bread, and resort to oatmeal and potatoes for food; and their landowners exiling themselves to live in penury and obscurity abroad, because at home the government must have all the clear profits of their land, in fact they see the principle [sic] of the island transferred to the public creditors, all it’s [sic] profits going to them for the interest of their debts.”

    3. On Jefferson’s concept of corruption, see James D. Savage, Balanced Budgets and American Politics (Cornell University Press, 1988), pp. 91–97.

    4. On the symbolic importance of balanced budgets and budget deficits throughout American history, see ibid., chapter 1.

    5. Barack Obama, “Weekly Address: Cutting the Deficit and Creating Jobs,” July 2, 2011.

    6. Michelle Levi, “Boehner: Government Needs to Tighten Its Belt,” Political Hotsheet (blog), CBS News, March 8, 2009.

    7. Rand Paul, The Tea Party Goes to Washington (Center Street, 2011).

    8. If the real interest rate on government debt is higher than the real growth rate and the government keeps its primary budget perfectly in balance, the debt-to-GDP ratio will grow indefinitely. If, by contrast, the real growth rate is higher than the real interest rate, then it is possible to run primary deficits indefinitely and keep the debt-to-GDP ratio stable. Historically, interest rates on Treasury debt have been slightly higher than GDP growth rates. Since 1980, the average effective (nominal) interest rate on government debt has been 6.5 percent and the average nominal GDP growth rate has been 5.8 percent. OMB, Fiscal Year 2012 Budget of the U.S. Government: Historical Tables, Tables 3.1, 7.1; BEA, National Income and Product Accounts, Table 1.1.5.

    9. Taxes change incentives and therefore change people’s actions from what they would be without taxes. In some instances, this can be seen as a distortion, particularly if the government has an incentive to maximize tax revenue. See, for example, Geoffrey Brennan and James M. Buchanan, The Power to Tax: Analytic Foundations of a Fiscal Constitution (Cambridge University Press, 2006). In other situations, so-called Pigovian taxes (after the economist Arthur Pigou) may be used to discourage activities that create negative externalities (that is, activities whose private costs are lower than their social costs, as can be the case with pollution). See William J. Baumol, “On Taxation and the Control of Externalities,” American Economic Review 62, no. 3 ( June 1972): 307–22.

  10. The Treasury Department does make coins and sell those to the public, but the amount of money involved is trivial.

  11. Because the Federal Reserve buys Treasury securities on the market, the demand it supplies for Treasuries can indirectly help the government finance its debt and can contribute to inflation. Still, this is significantly different from a situation where the government prints money to directly finance its operations.

  12. Michael Warren, “Romney Addresses the Organized Tea Party,” The Weekly Standard, November 4, 2011.

  13. Institutional investors generally think that most companies should have some debt for at least two reasons. First, the tax code allows companies to deduct interest payments on borrowed money but not to deduct dividends paid to shareholders; this creates a financial incentive to borrow money. Second, the need to make regular interest payments is sometimes thought to discipline corporate managers, who will not have excess cash to spend on unwise, empire-building investments or on perks for themselves.

  14. The “Bridge to Nowhere” was a proposed bridge to connect Ketchikan, Alaska, to Gravina Island, which had only a few residents (and an airstrip) and was served by a ferry. Congress dedicated more than $200 million to help pay for the bridge until the provision was removed due to public outrage. Instead, however, the same money was given to the state of Alaska to use as it saw fit; the state at first allocated it to the same bridge before later changing plans. Patrick J. Lyons, “The Bridge to Nowhere Gets Nowhere,” The New York Times, September 21, 2007.

  15. As discussed later in this chapter, increased government borrowing can make it harder for households and businesses to borrow money; but in a recession, fewer households and businesses want to borrow more money, reducing demand for loans, so this effect is unlikely to occur.

  16. Carl Hulse, “House G.O.P. Pushes $61 Billion in Cutbacks,” The New York Times, February 15, 2011.

  17. House Budget Committee, The Path to Prosperity: Restoring America’s Promise: Fiscal Year 2012 Budget Resolution, p. 10.

  18. James Oliphant, “Opponents of Raising Debt Ceiling Risk Government Breakdown, Study Says,” Los Angeles Times, July 14, 2011.

  19. There have been various proposals to introduce bankruptcy procedures that would apply to debt issued by sovereign governments. See Anne O. Krueger, A New Approach to Sovereign Debt Restructuring, International Monetary Fund, April 2002; Kenneth Rogoff and Jeromin Zettelmeyer, “Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976–2001,” IMF Staff Papers 49, no. 3 (2002): 470–507.

  20. As discussed in chapter 2, in 1933, Congress abrogated gold indexation clauses, eliminating the rights of bondholders to be repaid in gold rather than in U.S. dollars.

  21. It can also be a question of what law the government’s bonds are issued under, because the government has the power to change that law. This is another reason why it is advantageous to issue bonds in your own currency and in your own domestic markets—and why investors may be more hesitant about buying bonds issued by a sovereign nation in its own currency.

  22. In that case, there could still be a contractionary impact on the domestic economy if, for example, the country that defaults is dependent on exports to the countries that hold its bonds.

  23. S&P downgraded Treasury debt on August 5, 2011. By August 10, the yield on ten-year Treasury bonds had fallen to 2.17 percent, the lowest level recorded by the Federal Reserve except for a few days in December 2008, at the peak of the financial crisis. Federal Reserve Statistical Release H.15.

  24. For example, in July 2011, Macroeconomic Advisers (a leading consulting firm) forecast that the yield on the ten-year Treasury note would rise to 8.75 percent by 2021, due largely to deficit concerns. “The Coming Fiscal Contraction: Short-Term Pain for Long-Term Gain,” Macroadvisers (blog), July 6, 2011.

  25. During the debt ceiling crisis, some people suggested that the government could avoid default on its bonds by using incoming tax revenues to make required interest and principal payments, while not making other payments required by law or by contract. While this might temporarily forestall a default on Treasury bonds, failing to make legally required payments also counts as a default, and would have negative implications for the government’s credit. Other people recommended that the president invoke the Fourteenth Amendment and order the Treasury to issue new debt in violation of the debt ceiling, or even that the Treasury create special trillion-dollar, platinum coins to fund the government. In any case, it would be best to avoid the need for such expediencies.

  26. Barack Obama, “Remarks by the President at the First Meeting of the Fiscal Commission,” April 27, 2010.

  27. Mitt Romney, No Apology: The Case for American Greatness (St. Martin’s, 2010), p. 166. That passage was highlighted on the “fiscal responsibility” page of his campaign website, available at http://www.mittromney.com/​issues/fiscal-responsibility.

  28. “U.S. Net International Investment Position at Yearend 2010,” BEA press release, June 28, 2011.

  29. See Alan J. Auerbach, Jagadeesh Gokhale, and Laurence J. Kotlikoff, “Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy,” Journal of Economic Perspectives 8, no. 1 (Winter 1994): 73–94. For a summary and discussion, see Daniel Shaviro, Do Deficits Matter? (University of Chicago Press, 1997), pp. 119–44.

  30. In 1994, Auerbach, Gokhale, and Kotlikoff estimated that future generations would have to pay lifetime net tax rates of 71 percent. Auerbach et al., note 29, above, Table 3, p. 86. In 1995, using the same approach, the CBO estimated this figure at 78 percent. CBO, Who Pays and When? An Assessment of Generational Accounting, November 1995, Table 1, p. 20.

  31. Douglas W. Elmendorf and N. Gregory Mankiw, “Government Debt,” chapter 25 in John B. Taylor and Michael Woodford, eds., Handbook of Macroeconomics, vol. 1 (Elsevier, 1999), p. 1624.

  32. Grandchildren may also be in favor of programs that transfer money to their grandparents. When James explained how Social Security works to his five-year-old daughter, she said, “That sounds like the best program ever.”

  33. Real per capita disposable income (in 2005 dollars) has grown from $9,000 at the end of World War II to over $32,000 in 2011. BEA, National Income and Product Accounts, Table 7.1. This is not to say that everyone in society becomes better off, only that society as a whole becomes better off, at least materially.

  34. John W. Kendrick, Productivity Trends in the United States (Princeton University Press, 1961), Chart 4, p. 69.

  35. Even in its worst decade, the 1980s, productivity still went up by 1.4 percent per year. All productivity statistics are labor productivity (output per hour worked) in the nonfarm business sector, from the Bureau of Labor Statistics, Major Sector Productivity and Costs Index.

  36. The growth rate of median household income has already slowed significantly, but that is largely because of increasing inequality. From 1990 to 2010, real median household income grew at an annual rate of 0.1 percent, while real mean household income grew at 0.6 percent per year and real per capita disposable income grew at 1.6 percent per year. Census Bureau, Historical Income Tables, Table H-6; BEA, National Income and Product Accounts, Table 7.1.

  37. Real personal consumption expenditures are from 2007 Q4 to 2009 Q2. BEA, National Income and Product Accounts, Table 2.3.3. Nonfarm employment is from December 2007 to August 2009; as of the summer of 2011, total job losses were still close to seven million. Bureau of Labor Statistics, Current Employment Survey.

  38. CBO, Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from April 2011 Through June 2011, August 2011, Table 1, p. 3. The CBO estimates the impact of ARRA in 2010 Q3 at 1.4– 3.6 million jobs. As of 2010 Q3, actual job losses since the beginning of the recession were still over eight million, so without ARRA total job losses would have been 9–11 million. Private sector economists’ estimates also showed a positive impact of the 2009 stimulus. Menzie Chinn, “Assessing the Stimulus, One Year In: A View from the Mainstream,” Econbrowser (blog), February 17, 2010.

  39. According to Robert Rubin, then director of the National Economic Council, Greenspan projected that each $10 billion in annual deficit reduction would lower long-term interest rates by one-tenth of a percentage point. Robert E. Rubin and Jacob Weisberg, In an Uncertain World: Tough Choices from Wall Street to Washington (Random House, 2003), p. 120. In retrospect, it’s not clear that interest rates were that high. In 1992, the average yield on ten-year Treasuries was 7.0 percent, the lowest level since 1973. Federal Reserve Statistical Release H.15. At the same time, inflation had also fallen dramatically since the 1970s and early 1980s, so real interest rates were not particularly low. This may have been an example of how consensus policy beliefs can shift without corresponding shifts in fundamentals.

  40. On the conditions under which this can hold, see “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation,” chapter 3 in IMF, World Economic Outlook: Recovery, Risk, and Rebalancing, October 2010. (The answer is yes, at least in the short term.) See also Simon Johnson, “Fiscal Contraction Hurts Economic Expansion,” Economix (blog), The New York Times, June 23, 2011. Alberto Alesina and Silvia Ardagna have identified examples where deficit reduction had an expansionary impact on the economy. Alberto Alesina and Silvia Ardagna, “Large Changes in Fiscal Policy: Taxes Versus Spending,” chapter 2 in Jeffrey R. Brown, ed., Tax Policy and the Economy, vol. 24 (University of Chicago Press, 2010). However, Arjun Jayadev and Mike Konczal argue that in the vast majority of those examples, either the economy was already growing strongly prior to deficit reduction, or the deficit reduction hurt growth, or both. Arjun Jayadev and Mike Konczal, “The Boom Not the Slump: The Right Time for Austerity,” Roosevelt Institute working paper, August 23, 2010.

  41. In 2011, through August, unemployment averaged 9.0 percent. The average for the expansionary years of 2002–2007 was 5.3 percent. The CBO estimates the long-term “natural” rate of unemployment to be 5.2 percent. CBO, The Budget and Economic Outlook: An Update, August 2011, p. 46.

  42. Walter F. Mondale, Address Accepting the Presidential Nomination at the Democratic National Convention in San Francisco, July 19, 1984, available at http://www.presidency.ucsb.​edu/ws/index.php?pid=25972#axzz1c0A8u84D.

  43. The average through October was 2.9 percent. By comparison, the average ten-year Treasury yield for the decade preceding the financial crisis (1998–2007) was 4.9 percent. The average from April 1953 (the earliest data available from the Federal Reserve) through 2007 was 6.5 percent. Federal Reserve Statistical Release H.15.

  44. Robert Pollin, “The Case Against Deficit Hawks: Austerity Is Not a Solution: Why the Deficit Hawks Are Wrong,” Challenge, November-December 2010: 6–36, Table 1, p. 12. The interest rate on five-year Treasuries was 2.27 percent during the first seventeen months following the cyclical trough in 2009 compared to an average of 7.55 percent for the seventeen-month periods following previous cyclical troughs since 1970; inflation was 1.59 percent compared to 4.89 percent during previous recoveries, so the lower nominal rate is not solely due to lower inflation.

  45. Stan Collender, “Bond Vigilantes Are Now Deficit Cheerleaders,” Roll Call, August 3, 2010.

  46. “The Coming Fiscal Contraction: Short-Term Pain for Long-Term Gain,” Macroadvisers (blog), July 6, 2011. Macroeconomic Advisers acknowledged that, at the time, the bond market itself did not anticipate higher interest rates due to government budget deficits. In order to create a simulation that would show an impact of deficits on interest rates, they assumed “that investors, seeing no political progress on deficit reduction, gradually abandon their current expectations in favor of ones consistent with the baseline outcome of a persistent rise in interest rates.”

  47. The House budget resolution, for example, claimed that “90 percent is often a trigger point for economic decline.” House Budget Committee, note 17, above.

  48. For advanced economies, they say, “The observations [from 1946 through 2009] with debt to GDP over 90 percent have median growth roughly 1 percent lower than the lower debt burden groups and mean levels of growth almost 4 percent lower. . . . Over the past two centuries, debt in excess of 90 percent has typically been associated with mean growth of 1.7 percent versus 3.7 percent when debt is low (under 30 percent of GDP), and compared with growth rates of over 3 percent for the two middle categories (debt between 30 and 90 percent of GDP).” Carmen M. Reinhart and Kenneth S. Rogoff, “Growth in a Time of Debt,” American Economic Review: Papers and Proceedings 100, no. 2 (May 2010): 573–78, p. 575.

  49. See ibid., Figure 2. The United States does show particularly poor growth when its debt exceeds 90 percent of GDP, but that is because federal government debt only exceeded 90 percent during the demobilization period after World War II, which included a short but severe recession.

  50. Ibid., p. 573.

  51. This is the policy recommended by Macroeconomic Advisers as well as by Peter Orszag, Laura D’Andrea Tyson, Larry Summers, and Paul Krugman. Peter Orszag, “Link U.S. Payroll Tax Holiday to Unemployment Rate,” Bloomberg, June 30, 2011; Laura D’Andrea Tyson, “What’s a Crisis and What Isn’t,” Economix (blog), The New York Times, July 1, 2011; Lawrence Summers, “How to Avoid a Lost Decade,” The Washington Post, June 12, 2011; Paul Krugman, “NEC and NEC,” The Conscience of a Liberal (blog), The New York Times, July 8, 2011.

  52. Greek economic statistics are from IMF, World Economic Outlook Database, April 2011. National debt is net government debt. Greek-German spreads are available at http://www.bloomberg.com/​apps/quote?ticker=.GRE GER10:IND.

  53. The interest rate quoted was for ten-year government bonds. Bloomberg, L.P.

  54. See, for example, Paul Krugman, “Those Elusive Bond Vigilantes,” The Conscience of a Liberal (blog), The New York Times, April 20, 2011.

  55. Such a devaluation of the dollar could take the form of rising domestic prices, a fall in the value of the dollar relative to other countries or, most likely, both. If the central bank feels pressured to print money in order to finance fiscal deficits, this may become destabilizing and damaging to economic prosperity. For example, Joseph Gagnon and Marc Hinterschweiger argue there is essentially no default risk for the United States, yet unsustainable debt levels could lead to “a drift into ever-higher inflation and interest rates, ever-lower growth or deeper recession, and eventually hyperinflation along with rapid currency depreciation.” Joseph E. Gagnon and Marc Hinterschweiger, The Global Outlook for Government Debt over the Next 25 Years: Implications for the Economy and Public Policy (Peterson Institute for International Economics, 2011), p. 35.

  56. Kelly Evans, “Jay-Z, the New Alan Greenspan,” Real Time Economics (blog), The Wall Street Journal, November 6, 2007.

  57. The same pattern occurred in the summer of 2011. Even during the rockiest days of negotiations over the debt ceiling, the yield on ten-year Treasury notes fell, in part because of concerns about the European sovereign debt crisis.

  58. In July 2011, even when it seemed most likely that Congress might not increase the debt ceiling, ten-year Treasury yields did not go up as a result.

  59. The United States’ current ability to finance both its trade and government budget deficits may be due in part to the inability of emerging market countries to generate attractive financial assets for investment—which could change. See Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas, “An Equilibrium Model of ‘Global Imbalances’ and Low Interest Rates,” American Economic Review 98, no. 1 (2008): 358–93.

  60. Barry Eichengreen, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (Oxford University Press, 2011), pp. 150–52. The international economy has previously used multiple major reserve currencies; for example, both the dollar and the pound were widely held reserve currencies after World War I. Ibid., pp. 30–33. On the challenges facing the euro and the renminbi (the name for China’s currency in general), see ibid., pp. 130–33, 143–45.

  61. Ibid., pp. 124–26.

  62. Irish economic statistics are from IMF, World Economic Outlook Database, April 2011. National debt is net government debt.

  63. Michael Lewis, “When Irish Eyes Are Crying,” Vanity Fair, March 2011.

  64. See “Ireland’s Banking Crisis: Timeline,” The Telegraph (London), March 31, 2011.

  65. John Murray Brown, Joshua Chaffin, and Tony Barber, “Europe Signs Up to Irish Rescue,” The Financial Times, November 21, 2010; John McDermott, “Moody’s Downgrades Ireland to Ba1 from Baa3,” Alphaville (blog), The Financial Times, July 12, 2011.

  66. See chapter 4 and the Appendix.

  67. See Congressional Budget Office, CBO’s Economic Forecasting Record: 2010 Update, July 2010. The CBO has been roughly as accurate as the Blue Chip consensus forecast, which is an average of several dozen private sector forecasts; when they miss, the CBO and the Blue Chip consensus tend to miss in the same direction. Simon Johnson is a member of the Panel of Economic Advisers of the CBO.

  68. According to the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the slowdown that began in March 2001 might not have qualified as a recession without the September 11 attacks. NBER, “The Business-Cycle Peak of March 2001,” November 26, 2001, available at http://www.nber.org/cycles/november2001/.

  69. See Kevin A. Hassett and R. Glenn Hubbard, The Magic Mountain: A Guide to Defining and Using a Budget Surplus (AEI Press, 1999), p. 12.

  70. Bureau of Economic Analysis, National Income and Product Accounts, Table 1.1.6.

  71. Trillions of dollars were committed as contingent liabilities; as it turned out, the government’s actual direct losses on the Troubled Asset Relief Program and the bailouts of Fannie Mae and Freddie Mac were probably only in the hundreds of billions of dollars. Our assessment is that these rescue efforts were overly generous to the financial institutions that the government pulled back from the brink of collapse (and the executives who mismanaged those institutions to the brink of disaster), but we agree that it was necessary for the government to protect the financial system. See Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (Pantheon, 2010), chapter 6.

  72. The $1 trillion figure includes both the 2008 and 2009 stimulus bills.

  73. For a definition and discussion of fiscal space, see Jonathan D. Ostry, Atish R. Ghosh, Jun I. Kim, and Mahvash S. Qureshi, “Fiscal Space,” IMF Staff Position Note SPN/10/11, September 1, 2010.

  74. James M. Boughton, “Was Suez in 1956 the First Financial Crisis of the Twenty-First Century?,” Finance and Development 38, no. 3 (September 2001).

  75. Ostry et al., note 73, above, p. 16.

  76. Yields are for ten-year bonds. Data are from Bloomberg, L.P.

  77. Ostry et al., note 73, above, Table 4. The probability that the United States has fiscal space exceeding 50 percent of GDP is estimated at 52–71 percent; the probability that its fiscal space exceeds 100 percent of GDP is estimated at 1–3 percent. (These figures are based on general government debt, which includes state and local government debt.) The fiscal space estimate is based on each country’s past record of reducing deficits in response to increases in the national debt. If a country’s political leaders no longer have the willingness to make similar adjustments in the future—and markets recognize this—that country will have less fiscal space than implied by its historical record.

  78. As discussed above, this is the change between early 2008 and mid-2009 in the projection for the 2018 national debt; we use 2018 because it is the last year included in the CBO’s ten-year forecast prior to the peak of the financial crisis.

  79. For our assessment of the Dodd-Frank Act, see Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, paperback ed. (Vintage, 2011), Epilogue.

  80. The House Appropriations Committee report accompanying the reduction in the budget of the Securities and Exchange Commission emphasized, “With the federal debt exceeding $14 trillion, the committee is committed to reducing the cost and size of government.” But the SEC is funded entirely by fees levied in the industry, and if its budget goes down, it is those fees that go down—not the federal budget deficit. James B. Stewart, “As a Watchdog Starves, Wall St. Is Tossed a Bone,” The New York Times, July 16, 2011, p. A1.

  81. The ultimate demise of the British Empire, for example, was closely linked to the financial burden of fighting World Wars I and II. On this (and much more), see Niall Ferguson, Empire: The Rise and Demise of the British World Order and the Lessons for Global Power (Basic Books, 2004).

  82. Appropriations through 2010 were $1,104 billion. CBO, The Budget and Economic Outlook: Fiscal Years 2011 to 2021, January 2011, Box 3–2, p. 77. As of August 2011, the CBO’s realistic projection for 2011 through 2021 was for an additional $606 billion in direct appropriations, which would bring the total to over $1.7 trillion. CBO, The Budget and Economic Outlook: An Update, August 2011, Table 1-8, pp. 26–27. (We take the total outlays in the baseline forecast and subtract the likely reductions due to the expected drawdown of troops.) These figures do not include the cost of interest payments on the additional debt.

  83. For comparative deployment levels, see Tim Kane, “Global U.S. Troop Deployment, 1950–2005,” Heritage Center for Data Analysis CDA06–02, May 24, 2006.

  84. Sixty-eight million people were enrolled in Medicaid in 2010; nine million people were enrolled in CHIP in 2011. CBO, The Budget and Economic Outlook, January 2011, pp. 62–63.