In the early 2000s, the U.S.'s fiscal health was looking just great. The government actually had a surplus for four years running -- from 1998 through 2001. The Congressional Budget Office saw times being so grand that it actually predicted that the national debt would be wiped away -- all the way to zero -- by 2008. It even estimated that the U.S. would be $2.3 trillion in the black by 2011. How quickly things can go awry!
A fantastic infographic contained in a report called "The Great Debt Shift" by the Pew Fiscal Analysis initiative shows how things went wrong (click to enlarge):
Here's how to read this: First, check out the bottom right-downward sloping line -- that's the CBO's 2001 estimate. If only things had turned out that way! Instead, the top right upward-curving line is what actually happened. All the stuff in the middle is an explanation of what created all of the unforeseen debt.
Let's start with the biggest problem: the awful tax revenue depleting economy of the first decade of the 21st century. That's the big red segment. Since the economy didn't do as well as anticipated -- really throughout the entire time period, not just during the recent recession -- taxes didn't live up to the CBO's expectations.
It's interesting to note that, looking at the CBO's 2001 estimate, the Bush tax cuts ("2001/2003 Tax Cuts") would not have led to bigger deficits, in a vacuum. The problem was that they weren't done in a vacuum. While decreasing taxes, the government also ramped up its spending. It spent a lot on things like the Middle East wars, other defense, non-defense spending, and Medicare Part D. Of course, the CBO estimate occurred before 9/11. And unfortunately, when you borrow more money, you pay more interest. So our interest costs (top light blue segment) also soared.
There are a few morals to this story. First, don't assume peacetime will last forever: it won't. Wars will come and go, and they are expensive. Second, it's more prudent to be pessimistic about economic growth than optimistic. It's easier to refund a surplus during period of economic growth than to raise taxes to close a deficit during a recession. Finally, you can't spend more if you intend to cut your revenue. Washington needed to either leave taxes where they were and spend more, or leave spending where it was and cut taxes. It did both, and now we have an out-of-control debt problem.
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