How the U.S. Government Amassed $31 Trillion in Debt
In the 1990s, America reaped a so-called peace dividend. It reduced spending on the military, believing it would never have to invest as much in national security as it had when the Soviet Union was a threat. At the same time, a dot-com boom delivered the highest federal tax receipts, as a share of the economy, in several decades.
What is the debt ceiling? The debt ceiling, also called the debt limit, is a cap on the total amount of money that the federal government is authorized to borrow via U.S. Treasury securities, such as bills and savings bonds, to fulfill its financial obligations. Because the United States runs budget deficits, it must borrow huge sums of money to pay its bills.
What is at stake? Once the government exhausts its extraordinary measures and runs out of cash, it would be unable to issue new debt and pay its bills. The government could wind up defaulting on its debt if it is unable to make required payments to its bondholders. Such a scenario would be economically devastating and could plunge the globe into a financial crisis.
Can the government do anything to forestall disaster? There is no official playbook for what Washington can do. But options do exist. The Treasury could try to prioritize payments, such as paying bondholders first. If the United States does default on its debt, which would rattle the markets, the Federal Reserve could theoretically step in to buy some of those Treasury bonds.
Why is there a limit on U.S. borrowing? According to the Constitution, Congress must authorize borrowing. The debt limit was instituted in the early 20th century so that the Treasury would not need to ask for permission each time it had to issue debt to pay bills.
As the 20th century ended, America’s coffers were flush with tax revenue and light on military obligations, a combination that many leaders thought would hold up well into the future.
It did not last a year.
The dot-com bubble burst, cutting into tax revenue. The Sept. 11, 2001, terrorist attacks spurred a furious rearmament push in Washington, as President George W. Bush mobilized wars in Iraq and Afghanistan.
Mr. Bush, a Republican, broke from historical precedent and did not raise taxes or issue war bonds to pay for those conflicts. (War bonds tend to pay lower interest than other government bonds, adding less to the debt.) Neither did his successor, President Barack Obama, who inherited those conflicts. The resulting spending added trillions of dollars to the national debt.
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The Defense Department estimated last year that the direct costs for the wars in Iraq, Syria and Afghanistan exceeded $1.6 trillion. Brown University researchers, who add indirect costs, particularly care for veterans of those wars and interest on the money borrowed to finance the military, found that the total cost was much higher: just under $6 trillion for all of America’s “War on terror” efforts in the wake of Sept. 11.
As military spending surged, federal revenue declined as a share of the economy. That decline was a direct result of tax cuts that Mr. Bush signed in 2001 and 2003. Those tax cuts were temporary, but in 2012, Mr. Obama struck a deal with congressional Republicans to make more than four-fifths of them permanent.
Article source: https://www.nytimes.com/2023/01/22/business/economy/federal-debt-history.html