Ten Trillion and CountingCORRESPONDENT ANNOUNCER: Tonight on FRONTLINE Pres. BARACK OBAMA: My budget reflects the stark reality of what we've inherited, a trillion-dollar deficit, a financial crisis and a costly recession. ANNOUNCER: Government spending may jump-start the economy- - We as a country have been living well beyond our means. ANNOUNCER: -but does America already owe too much? - The national debt is now over $11 trillion. - The U.S. is on an unsustainable path. ANNOUNCER: And are we running out of time? - We have obligations which exceed the net worth of the American public. FORREST SAWYER, Correspondent: How could we dig ourselves into such a hole? ANNOUNCER: Tonight on FRONTLINE, correspondent Forrest Sawyer takes us inside the politics, the history and the hard reality of the national debt. FORREST SAWYER, Correspondent: [voice-over] January 20th, 2009, seems like a long time ago. The crowd stretched from the Capitol to beyond the Washington Monument, the biggest gathering in the history of Washington, D.C. Everyone there and all of us watching the inauguration around the country knew that the American economy was in trouble, and we were hoping that Barack Obama would find a way to lead us out of it. Pres. BARACK OBAMA: That we are in the midst of crisis is now well understood. Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost, jobs shed, businesses shuttered. FORREST SAWYER: It was clear to anyone listening that day that the task before Barack Obama was daunting. JACKIE CALMES, The New York Times: He inherits a situation so bad that you have to ask why would anyone want to be president now? FORREST SAWYER: [on camera] What did he really inherit? If you look at the whole package, what does Barack Obama inherit? JACKIE CALMES: Well, we have a financial system that is frozen, no credit. The unemployment rate is likely to hit double digits by the end of this year, a rate we haven't seen since 1982. But it's really the worst picture since World War II. Pres. BARACK OBAMA: Today I say to you that the challenges we face are real, they are serious and they are many. DAVID ROGERS, Politico: He's got not only the challenge of the economy, he has real political challenge in that people have lost confidence in Washington's ability to deal with some of this. We are in a mess. And he has to sort of pull these pieces together and he has to pull these pieces together, you know, with remarkable speed. Pres. BARACK OBAMA: For everywhere we look, there is work to be done. The state of our economy calls for action, bold and swift. FORREST SAWYER: [voice-over] Even before Obama took office, the government had committed hundreds of billions of dollars to shore up the economy. Pres. BARACK OBAMA: We will build the roads and bridges, the electric grids and- FORREST SAWYER: And Barack Obama spoke as if he was committed to spending even more. Pres. BARACK OBAMA: We will harness the sun and the winds and the soil to fuel our cars and run our factories. FORREST SAWYER: But for the president and the country, there is one unavoidable question. Where are we going to get the money to pay for all this? Pres. BARACK OBAMA: All this we can do. All this we will do. FORREST SAWYER: The answer lies here, in a room at an undisclosed location not far from the Capitol steps. This is where the U.S. government gets money it needs to pay its bills. It borrows it. On this day, the government was auctioning $67 billion of debt obligations, Treasury securities that pay interest guaranteed by the "full faith and credit of the United States." GREGG IP, The Economist: The government, like a household, has expenses, and then they have income. And when those expenses exceed the income each year, they run a deficit. If you have a deficit this year and then a deficit next year, those deficits start to add up, and that's what we call the debt. So the debt is the sum total of all the deficits we've accumulated since the revolution. FORREST SAWYER: [on camera] And it's a lot of money. GREGG IP: It's a lot of money, yes. A lot of it is now owned by foreigners, by the Saudis, by the Chinese, by the Japanese. FORREST SAWYER: [voice-over] They lend us money because the government does not take in enough in taxes to pay for the services it provides. Americans like low taxes. MAYA MacGUINEAS, Cmte. for a Responsible Federal Budget: That's just the reality, that we want it all. We want our tax cuts and we want them to be big. We want new spending programs. We want every person cared for. We want government investment. But we don't want to pay for it. FORREST SAWYER: Even before this crisis, America was deeply in debt. The debt on inauguration day was over $10 trillion, nearly $35,000 for every man, woman and child in this country. Without borrowed money, the federal government would grind to a halt. [www.pbs.org: Defining the debt] GREG IP: We are living on the kindness of strangers, as it were, because frankly, there aren't enough savings in this country to finance those deficits. FORREST SAWYER: [on camera] How bad could it be if we do nothing? GREG IP: Well, first of all, you might have a situation where there is one day when the government says, "We need to sell several billion dollars of bonds," and nobody shows up- no money to pay the Social Security checks, no money to give to the states for their Medicaid programs. Cut, cut, cut, cut, cut. Let's imagine a scenario where the politicians would love to keep the government going, but they can't because there's nobody to lend us the money. Pres. BARACK OBAMA: Now, there are some who question the scale of our ambitions, who suggest that our system cannot tolerate too many big plans. FORREST SAWYER: [voice-over] But the president knows that his vision and the country's future cannot continue to be sustained by borrowing money. DAVID WESSEL, The Wall Street Journal: The status quo is not going to work. Anybody who thinks about debt realizes that the U.S. government cannot go on every year borrowing more money than it did the year before and the U.S. economy cannot rely on ever increasing amounts of borrowing from other countries- China, Japan and Europe. MATT MILLER, Author, The Tyranny of Dead Ideas: The American standard of living is really going to be at risk because we can't continue to essentially borrow from the Chinese to fund the lifestyle and consumption that we think we want to have in the U.S. We have to find a way to actually live on what we earn. FORREST SAWYER: [on camera] There seems to be this huge contradiction. On the one hand, we have this looming national debt, which looks like a tsunami washing over us if we don't do something soon. And on the other hand, we've got this immediate problem and the government has to spend like crazy. And they're running in to each other. MATT MILLER: Those two things are totally at odds, but that's the paradox of the situation that we're in now, which is government has got to run big deficits to stimulate the economy. We're going to have to run deficits at sizes that would have been unthinkable, that are really historic, for a couple of years because government's the only entity with the wherewithal to prop up demand in the economy when businesses and consumers are all pulling back. FORREST SAWYER: [voice-over] Not since the Great Depression have Americans watched the passage of power from one president to the next with such a mixture of concern and hope. For President Obama, our economic troubles are now his burden. So much depends on the decisions he must make. For former president Bush, he leaves office with his own burden, a legacy of the country and the economy in crisis. Eight years ago, the passage of power to George Bush could not have been more different. He was the first president in 30 years to assume office with a budget surplus. President Bill Clinton had forged agreements with Congress that turned large deficits into growing surpluses. GENE SPERLING, Dir., National Economic Council, 1997-00: In 2001, we not only had our fourth year of consecutive surpluses, but we were looking at surpluses as far as the eye can see. FORREST SAWYER: The centerpiece of George Bush's economic agenda was cutting taxes. Pres. GEORGE W. BUSH: Enough is enough, folks. It's time to give our folks some tax relief in America. FORREST SAWYER: The president was committed to returning some of the budget surplus he had inherited back to the American people in the form of a tax cut. Pres. GEORGE W. BUSH: We always have got to remember whose money it is we're talking about. It's not the government's money, it's the people's money. ALICE RIVLIN, Dir., Office of Management & Budget, 1994-96: When the new administration took over, they had this substantial surplus. They decided that it should be turned back to the people, and they had campaigned on that, with a very substantial tax cut- too big, in my opinion, but a sort of plausible thing to do at the time. FORREST SAWYER: After only three months in office, President Bush signed a sweeping tax bill that was projected over 10 years to cut taxes by nearly $1.3 trillion. GREGG IP: He pushed through his first major initiative, this very large tax cut, over a trillion dollars, which was going to go disproportionately to the wealthy. And I think that in that tax cut, we began to see a few of the signs of what Bush's economic legacy would be. FORREST SAWYER: [on camera] You are really critical of President Bush, aren't you. GREGG IP: I am. FORREST SAWYER: At heart, why? GREGG IP: Because I think that time and again, he put politics ahead of economics. If there was a politically smart way of doing something and an economically smart way of doing something, he always chose the politically smart way. FORREST SAWYER: [voice-over] Tax cutting has been the politically smart way for Republicans ever since Ronald Reagan established the modern Republican brand, when he pushed through the largest tax cut since World War II. Republicans proclaimed themselves the party of small government and tax cuts. But Ronald Reagan was also an economic realist. MATT MILLER: You know, Reagan cut taxes in the first big year of his term in 1981, and then came back and people forget he had enormous tax increases once it was clear the deficits were spiraling out of control. FORREST SAWYER: Realizing that his tax cut had been too large and with the deficit rising, Reagan agreed to effectively scale back his tax cut. He signed one of the largest peacetime tax increases since the Depression. Tax hikes would never be part of George W. Bush's agenda, perhaps because his political instincts were honed at the side of his father, George Herbert Walker Bush. While running for office, candidate Bush uttered words that would haunt his presidency. Vice Pres. GEORGE H.W. BUSH (R), Presidential Nominee: Congress will push me to raise taxes, and I'll say no. And they'll push, and I'll say no. And they'll push again, and I'll say to them, "Read my lips, no new taxes." FORREST SAWYER: With that phrase, President Bush sealed his political fate. In office less than two years, he was confronting a stubborn recession and a steadily escalating budget deficit. He called for a tax increase to cut the deficit and trim the national debt. Pres. GEORGE H.W. BUSH: These are the times that try men's souls. There's a cancer gnawing away at our nation's health. That cancer is the budget deficit. Year after year, it mortgages the future of our children. NEWT GINGRICH (R-GA), House Minority Whip, 1989-94: "Read my lips, no new taxes." I believed him. I thought that was a firm pledge to the American people. Pres. GEORGE H.W. BUSH: It is time to end the talk about the deficit. NEWT GINGRICH: Instead, he decided to go sign a tax increase. Pres. GEORGE H.W. BUSH: And it's time, I think past time, to put the interests of the country first, NEWT GINGRICH: That violated every aspect of the conservative movement. I thought it was what distinguished the Reagan Republicans from the old-fashioned traditional Republicans. FORREST SAWYER: George Bush lost his bid for reelection to Bill Clinton. Pres. GEORGE H. W. BUSH: I just called Governor Clinton over in Little Rock and offered my congratulations. FORREST SAWYER: George W. Bush was at his father's side when he conceded defeat in the 1992 presidential election. The lesson for the son was clear: A modern Republican is a tax cutter. DAVID WESSEL, The Wall Street Journal: His son comes to office saying, "What's the point in fiscal discipline? The voters never reward you for it." So the second President Bush treated fiscal discipline as if it was some sort of quaint anachronism, something that his father's generation had to worry about and he didn't. JACKIE CALMES, The New York Times: He took too strongly to heart the lesson he saw of his father's failure, which is, "You don't anger the base of the party, the very conservative anti-tax base of the party." And the problem with that calculation is, you know, stuff happens. FORREST SAWYER: Eight months after President Bush was inaugurated, planes crashed into the World Trade Center, the Pentagon and a field in Pennsylvania. 9/11 threatened the economic fortunes of the country. For many, it called into question the wisdom of Bush's tax cut, but his party was solidly behind him. [on camera] Now, way back in 2000, there were surpluses projected. And that had come after some good luck with the economy and some hard work. And then came along this massive tax cut. Was that in retrospect a mistake? Sen. JUDD GREGG (R), New Hampshire: No. Absolutely not. The surpluses that were projected weren't lost because of the tax cut. They were lost because of 9/11 and the effect that that had on the economy. You know, you've got to remember 9/11 was a cataclysmic event for our nation and it readjusted our nation in a lot of ways. But one of the ways it caused us to have to readjust was that we went into a very severe economic slide. FORREST SAWYER: [voice-over] At a time of economic uncertainty, the president was declaring a war on terror. Pres. GEORGE W. BUSH: On my orders, the United States military has begun strikes against al Qaeda terrorist training camps and military installations of the Taliban regime in Afghanistan. FORREST SAWYER: Wars are expensive. GREGG IP, The Economist: Bush knew at the time that we had long-term economic challenges in this country, and he continued to promise more tax cuts and more goodies, long past the point when we knew that the budget surpluses were gone and we had deficits as far as the eye could see. FORREST SAWYER: Assistant to the president for economic policy in Bush's second term, Allan Hubbard suggests another rationale behind President Bush's spending and tax-cutting philosophy. ALLAN HUBBARD, Asst. to President for Economic Policy, 2005-07: The only way to control spending- and I truly believe this. The only way to control spending is that you- you've got to minimize taxes because if you minimize taxes, they know the deficit can't be too big. And that's what keeps pressure on them to reduce spending. FORREST SAWYER: It's known in Washington as the "starve the beast" theory. Government won't grow if there is no money to pay for it to keep growing. MATT MILLER, Sr. Fellow, Center for American Progress: "Starve the beast" has been the Republican strategy really since Ronald Reagan. If you keep cutting taxes, that will put pressure on the system to cut spending. Now, the irony of that is no one really likes to cut spending, Republicans or Democrats, mostly because the major government programs - Social Security, Medicare, military, civil service, pensions, defense - those are all popular, broadly supported programs. FORREST SAWYER: [on camera] But if you're going to reduce the amount of money that they take in, doesn't that mean you can't spend like a drunken sailor? MATT MILLER: It does. But the Republicans like the tax cut part of that argument. They don't like the spending cut part of that argument because it turns out it's politically unpopular to actually cut or even slow the growth of a lot of these major popular programs. DAVID WESSEL: The "starve the beast" notion as an empirical, practical thing is not true. It turns out that you can cut revenues and keep spending because the government seems to be able to borrow endless amounts of money. FORREST SAWYER: [voice-over] And the government was now borrowing at an accelerated rate. But nothing seemed to shake the president's belief in tax cuts. Pres. GEORGE W. BUSH: Somebody told me the funniest thing. They said there are some in Washington saying that the tax cut caused the recession. I don't know what economics textbook they're reading. The best way to come out of a recession is to say to the small business person, "We'll let you keep your own money." When we cut taxes on all rates, we say to the sole proprietor or the limited partner, "It's your money, you spend it in order to expand the job base in America." There's going to be people who say that we can't have the tax cuts, and I challenge their economics when they say that raising taxes will help the country recover. Not over my dead body will they raise your taxes! JACKIE CALMES, The New York Times: He went all over the country campaigning for another round of big tax cuts on dividends, capital gains, hugely popular with the business community. FORREST SAWYER: President Bush was campaigning for another tax cut even as he was threatening to invade Iraq. Pres. GEORGE W. BUSH: We're confronting the outlaw regime in Iraq that is arming to threaten the civilized world. Even as we confront these dangers, you need to know I know we have needs here at home, especially the need for a vigorous and growing economy. So I will continue to press the Congress to make tax cuts. DAVID WESSEL: The prevailing wisdom in the Bush administration was that no tax cut is too much. And Paul O'Neill said, "Wait a minute. If you're going to plan on a big, expensive war, is this really the time to be cutting taxes?" FORREST SAWYER: Paul O'Neill was Bush's first Treasury secretary. PAUL O'NEILL, Secretary of the Treasury, 2001-02: As President Bush was getting ready to recommend another tax cut beginning in early in 2002, I said we shouldn't have another tax cut. FORREST SAWYER: [on camera] Did you walk into the Oval Office at any point, you and the president, and say, "Mr. President, I've got to put it on the line, for the country and for your administration, this is a terrible idea"? PAUL O'NEILL: I said, "Here are the reasons why we shouldn't do this." FORREST SAWYER: To him? PAUL O'NEILL: Absolutely to him, multiple times. FORREST SAWYER: What was the president's response? PAUL O'NEILL: You know, he just- he didn't respond. FORREST SAWYER: Nothing? PAUL O'NEILL: No. FORREST SAWYER: He had to say a word or two. PAUL O'NEILL: No. Absolutely not. The president didn't really want to hear what I thought, which was his right. I was happy to be fired at the end of November of 2002. I didn't want to be part of something I thought was fundamentally wrong. I would not have wanted to go and testify to the Congress that this was all a wonderful idea when I thought it was a terrible idea. And unfortunately, I turned out to be right. [www.pbs.org: More of this interview] Pres. GEORGE W. BUSH: My fellow citizens, at this hour, American and coalition forces are in the early stages of military operations to disarm Iraq, to free its people, and to defend the world from grave danger. FORREST SAWYER: [voice-over] America was now at war on two fronts. DAVID WESSEL: In the past, when presidents go to war, eventually, they have said, "OK, this is really important. We have to pay for it. We're either going to have to cut spending or we're going to have to raise taxes." Even Lyndon Johnson, after delaying, raised taxes to pay for the Vietnam war. President Bush never did that. MATT MILLER: The idea that you would cut taxes at a time of war, especially for the best-off people in America, is really unprecedented because that means we've put the entire tab for the Iraqi war and then- the Afghanistan war and then the Iraqi war on our children's tab. Or to look at it another way, we borrowed money from China to give tax cuts to the best-off people in our society and leave our kids paying the bill for a war that we chose to fight. That was really unprecedented. DAVID LEONHARDT, The New York Times: Not only that, but when there were efforts by people within the administration to prepare the American people for a little bit of these costs, they were quickly swatted back. And the central example here is Larry Lindsey, who was President Bush's top West Wing adviser coming into office. And he said the Iraq war is going to be fairly expensive. I forget the exact number he used, but I think it was $50 billion, and he was essentially fired for using that number. Now, in retrospect, we know that was a vast, vast understatement of how much the Iraq war cost. But it seems pretty clear that there was not a huge amount of interest in doing an honest reckoning of how much this war was likely to cost. GREG IP, The Economist: They tried not even including the cost of that war in their budgets. They would say, "We'll deal with that with supplementals." And supplementals are basically budget bills which are set outside the normal budget process. And so from the get-go, there was a refusal to even do the accounting in an honest way about what these wars were costing us. FORREST SAWYER: Bush's campaign for a second round of tax cuts met with resistance even from members of his own party. In Washington, Senate Republicans did not have the 60 votes needed to pass the tax cut and block a certain Democratic filibuster. So George Bush's party used a little known parliamentary maneuver called reconciliation that allows passage of a budget bill by a simple majority of 51 votes. DAVID ROGERS, Politico: Reconciliation was always used for deficit reduction. The design of reconciliation was to make tough decisions about savings, deficit reduction. The idea is that this is so important to reduce the deficit that we will not require the 60 votes. That's the premise of it. What the Bush people did was turn that on its head and it was allowed to be used for tax cuts. FORREST SAWYER: [on camera] Basically, it's an end around- DAVID RODGERS: Exactly. FORREST SAWYER: -the 60 votes that are required in the Senate. DAVID RODGERS: That's right. That's what happened. FORREST SAWYER: So it's just a political maneuver. DAVID RODGERS: Yeah. They had a friendly parliamentarian. FORREST SAWYER: [voice-over] Vice President Cheney presided over the Senate as it voted on the tax cut. Vice Pres. DICK CHENEY: On this vote, the yeas are 50, the nays are 50. The Senate being equally divided, the vice president votes in the affirmative, and the conference report to accompany HR2- FORREST SAWYER: One of the largest tax cuts in American history was passed with Vice President Dick Cheney casting the deciding vote. Two wars, two enormous tax cuts, deficits and national debt rising, but the Bush administration was not done. Pres. GEORGE W. BUSH: Now I'm honored and pleased to sign this historic piece of legislation, the Medicare Prescription Drug Improvement and Modernization Act of 2003. FORREST SAWYER: Commonly known as Medicare part D, or the prescription drug benefit for seniors. Medicare itself is the government program that pays the cost of medical coverage for people over 65. Like Social Security, it's extremely popular among a very large part of the voting public, seniors. DAVID WESSEL: When Medicare was invented in the '60s, medicine, prescription drugs, were not a big part of health care spending. Over the years, medicine became a bigger part of health care spending, so there was a lot of pressure on Medicare to be expanded to cover prescription drugs, a totally reasonable thing to do. But there was no way to pay for it. FORREST SAWYER: But the Bush administration pushed for passage of Medicare part D anyway. Rep. BILLY TAUZIN (R), Louisiana: Health care is not a partisan issue! FORREST SAWYER: It was one of the most contentious congressional debates in recent time. Rep. BILLY TAUZIN: -something that seniors desperately need- Rep. ROBERT ANDREWS (D), New Jersey: Shame on the Republican Party for turning its back and releasing a torrent of red ink. Rep. MIKE PENCE (R), Indiana: -creating an all new, massive federal entitlement- FORREST SAWYER: Republicans railed against the huge cost. Rep. TED STRICKLAND (D), Ohio: This bill was written by and for the pharmaceutical companies! Rep. JOHN DINGELL (D), Michigan: -no competition whatsoever! FORREST SAWYER: Democrats called it a sell-out to the big drug companies. Rep. PHIL GINGREY (R), Georgia: Who is going to provide the prescription drugs, the chocolate chip cookie company? Give me a break! Rep. TED STRICKLAND: Shame! Shame! Rep. ELIOT ENGEL (D), New York: Shame on this Congress for betraying our seniors and ramming this bill through in the middle of the night. FORREST SAWYER: Voting in the House lasted until 6:00 in the morning. Rep. JOHN DINGELL: No wonder they want to do this at 2:00 o'clock in the morning! FORREST SAWYER: It finally passed by five votes. [on camera] Why would a small government conservative initiate a program that is so massive? JACKIE CALMES, The New York Times: Politics. FORREST SAWYER: What do you mean? JACKIE CALMES: There's no group that votes at the rate and in the numbers as those over 55, and 65 and over certainly. And Democrats, as well as Republicans, want to please seniors, and that's why our entire budget is tilted towards programs for seniors. FORREST SAWYER: [voice-over] The reason that the Bush administration could pass Medicare part D was that the Republican Congress in 2002 had let a rule called "pay as you go" lapse. It was a rule established by the first President Bush and a Democratic Congress to enforce fiscal discipline. GREGG IP: His father endured some very serious political pain to do the right thing to get the deficit down. And one of the steps was that a rule called "pay-go," or pay as you go. And this rule basically meant that if you wanted to introduce a new tax cut or a new spending program, you had to find a way to pay for it with an offsetting tax increase or spending cut. Well, in 2002, that rule expired. ALICE RIVLIN, Dir., Office of Management & Budget, 1994-96: In the Clinton years, we had the "pay-go" rule, pay as you go, and that meant we couldn't pass a lot of good-sounding ideas, including Medicare prescription drugs. It's not that nobody thought of that in the '90s. A lot of people thought of it. But we couldn't pay for it. To pay for it, we would have had to have done a tax increase or cut out some other spending in major proportions, and nobody wanted to do that, so we didn't do it. FORREST SAWYER: But the Bush administration did do it. With "pay-go" no longer restraining spending, they had pushed through Medicare part D, a program that's projected over time to cost as much as $8 trillion. DAVID WESSEL: They did not come up with a way to raise taxes or cut spending somewhere else to pay for it, so they just passed this thing. It goes into law. It's a promise to elderly people that we'll pay- subsidize their drugs, and we borrow every year to pay for it. And in the end, it's more expensive than the war in Iraq because the war in Iraq ends at some point. Certainly, it will end now that Obama's president. But the prescription drug benefit will go on forever. FORREST SAWYER: It will go on forever because it's a promise made by the federal government to its citizens. Seniors are entitled to this benefit, just the as they are entitled to Social Security and Medicare itself. These entitlements are all enormously popular, but they're also enormously expensive. Medicare part D alone will cost $60 billion this year. JACKIE CALMES: The expense of that over time, unfunded liabilities for the government, at a time when more people are reaching retirement age and qualifying for Medicare, added more to the long-term obligations of the government than all of Social Security. FORREST SAWYER: Medicare part D was the largest spending bill the president signed, but there were dozens of others. During his first five years as president, with a Republican-controlled House and Senate, George Bush never vetoed a spending bill. Fiscal conservatives in his own party accused him of being the biggest spender since World War II. NEWT GINGRICH (R-GA), Speaker of the House 1995-99: Six years of that was a disaster. I mean, you had spending bills coming up that were an embarrassment. I mean, any Republican who had spent their career talking about fiscal discipline, lower taxes, the private sector, had to be deeply, deeply angry about what the Republicans in the House and Senate were doing. Sen. JUDD GREGG: The Republican Party, who always stood for fiscal restraint, smaller government, lower taxes- but there's no question we didn't do a good job on restraining the growth of government and we spent a lot of money we didn't have. FORREST SAWYER: [on camera] So Senator, what happened to the Republican Party during those eight years? Sen. JUDD GREGG: Well, what happened was that conservatives, when they took the majority position in the government, decided to use the government in a very aggressive conservative way to promote conservative programs and to spend money for conservative initiatives. FORREST SAWYER: Isn't that sort of not the conservative position? Sen. JUDD GREGG: Absolutely. I think you'll find I voted against almost all that spending. GREGG IP: The Republicans in Congress took the politically expedient route. They abandoned anything that was remotely similar to their small government heritage and they voted for more spending, lower taxes, new entitlements. And they allowed to fall by the wayside all of the little, you know, rules that Congress had lived with for previous decades which had helped create the semblance of the culture of fiscal discipline. FORREST SAWYER: [voice-over] George Bush delivered on his promise to give the American people back their money. But today, the surplus he inherited is gone. The deficit this year is huge, and we borrow more and more. DAVID WESSEL: I think President Bush's legacy, in his mind, is not economic. It's that we didn't have a second terrorist attack. He protected us from another 9/11. And I think he prizes that above the fact that he squandered an opportunity of prosperity to try and resolve some of our long-term fiscal issues and to prepare for bad times like we have now. FORREST SAWYER: Barack Obama's first night as president was a celebration of hope after his historic ascent to the presidency. With large Democratic majorities in Congress, the new president seemed poised to bring the change he promised to Washington. But as night turned to day, the picture grew darker. The next morning, he began daily crisis meetings with his economic team. For weeks, they had been preparing a blueprint for a massive package of tax cuts and spending, a stimulus plan. CLIVE CROOK, The Financial Times: The fiscal situation was a mess when he arrived. A really serious recession was already in place, capable of becoming a depression. This is a heck of a problem that Obama's inherited. NEWSCASTER: There are new numbers out today that tell us the housing market is in dismal shape. NEWSCASTER: Here's today claim to bleakness- 20,000 jobs cut at Caterpillar, 8,000 jobs cut by Sprint/Nextel- NEWSCASTER: President Obama went to Capitol Hill to make a pitch to the Republican minority. MATT MILLER: We've got a financial meltdown. We've got a stock market collapse. We've got a banking crisis where the banking system has totally imploded. NEWSCASTER: The grim financial numbers got even worse today. NEWSCASTER: Last week, unemployment claims hit- MATT MILLER: Businesses are scared to death and they're laying off people. Consumers are worried they're going to loose their job or someone in their family's going to lose their job, and so they're not spending. NEWSCASTER: Economists predicted the numbers would be bad, but this is even worse than expected. MATT MILLER: You've really got a situation where unless government steps in a tries to plug that gap, then we won't get through this immediate crisis. Pres. BARACK OBAMA: Good evening, everybody. Please be seated. The most important things we can do for our budget crisis right now is to make sure that the economy doesn't continue to tank, and that's why passing the economic recovery plan right now is the right thing to do, even though I recognize that it's expensive. Look, I would love to not to have to spend money right now. You know, this notion that, somehow, I came in here just ginned up to spend $800 billion- you know, that wasn't how I envisioned my presidency beginning. Rep. TOM PRICE (R), Georgia: Madam Speaker, you really can't be serious. FORREST SAWYER: And he may not have envisioned the fight that followed. Rep. TOM PRICE: This would be humorous if it wasn't so sad. Got this at 11:00 o'clock last night, over a thousand pages. What's in it? Have you read it? We found $30 million for mice! Rep. DAVID SCOTT (D), Georgia: You say you haven't read it? I would say you have read it. You come down here and poked holes about it, saying, "This is what's wrong with it, that's what's wrong with it." FORREST SAWYER: This bitterly partisan fight over his stimulus plan was exactly what Obama had campaigned against. Rep. JACK KINGSTON (R), Georgia: Thirty billion for a rat in San Francisco! Mickey Mouse is going to be envious. Rep. DAVID OBEY (D), Wisconsin: I wish the other side would make up their mind whether it's mice or rats, neither of which are in this bill, if they will read it. Sen. TOM COBURN (R), Oklahoma: This is a skunk! This bill stinks! MICHAEL DUFFY, Time Magazine: Deeply embedded in Obama's pitch for why he should be the president was a proposal that he was going to make Washington change, that he was going to get Republicans and Democrats to work together to stop the bickering, to come together in a more centrist fashion. Sen. LINDSEY GRAHAM (R), South Carolina: Republicans spent too much of your money. Guilty as charged. This is not the solution! Rep. JOHN BOEHNER (R-OH), Minority Leader: The government can't solve this problem, the American people have to solve it. FORREST SAWYER: Battle lines were drawn around familiar arguments over the role of government, and taxes and spending. Rep. JOHN BOEHNER: Obviously, Republicans, we've got ideas that lowering tax rates and allowing people to keep more of what they earn will allow them to spend that money, invest that money or save it, all of which are good for the economy. Rep. DAN BURTON (R), Indiana: We've got to cut spending and we need to cut taxes. That's the solution to the problems. Pres. BARACK OBAMA: I value the constructive criticism, but don't come to the table with the same tired arguments and worn ideas that helped to create this crisis. DAVID LEONHARDT, The New York Times: The political dynamics here are a little bit tricky for Republicans. If things start to go well, either politically or economically, the Republicans are going to get essentially no credit. And so that really pushes them politically, I think, to be more of an opposition party, rather than constructive partners. FOREST SAWYER: [on camera] So hope that things go badly? DAVID LEONHARDT: I don't think they're hoping that things go badly. I'm just saying that there's not much in it for them to add 20 votes to the president's package. FORREST SAWYER: [voice-over] When the votes were counted in the Senate, only three Republicans voted with the president, and in the House not one. Rep. NANCY PELOSI (D-CA), Speaker of the House: The nays are 183. The conference report is adopted. Without objection, a motion to reconsider is laid upon the table. MICHAEL DUFFY: I think the lesson of the stimulus is you can actually offer $400 billion worth of tax cuts to Republicans, and still they won't vote for your stimulus package. I think that's the lesson. Whether he makes that kind of an offer to Republicans again will be one of the interesting signs or tells about what he learned from the stimulus package experience. DAVID WESSEL: This is the easy part. If you can't get people to vote for giving money away, tax cuts and spending, imagine how it's going to be when you're taking things away and you're getting organized opposition. So it does not bode well for the bipartisan "hold our hands," "let's squeeze Social Security and Medicare for the good of our children" operation. FORREST SAWYER: By the time the bill was signed, Barack Obama had added another $787 billion to the national debt, and since then, hundreds of billions more for banks, home owners, auto makers, financial institutions. DAVID LEONHARDT: There are really serious economic challenges that we're facing right now, and no one knows how bad this is going to get in the short term. But history is very clear that the way you take on these deep recessions is with government action, and so we have no choice but to very aggressively deal with this crisis now, and we have to try to pay the bills in the long term. FORREST SAWYER: According to the Office of Management and Budget, this year the deficit will be over $1.7 trillion, pushing the national debt to almost $13 trillion, the most it's ever been. But more important to economists, it is larger as a share of the overall U.S. economy than it's been in 50 years. DAVID WALKER, U.S. Comptroller General, 1998-08: There's no question that our deficits and debt levels are going to get worse in the short term. FORREST SAWYER: [on camera] And that's a good thing, as far as- DAVID WALKER: And it's acceptable. It's not a good thing, it's acceptable. President Obama has to assure the American people that he will do what it takes to turn the economy around. But he also needs to tell the American people the truth and let them understand that while we'll get through the current recession, it's not the big one. The big one would be a meltdown in the federal government's finances, and we need to start taking steps to diffuse the ticking time bomb that threatens our future. Pres. BARACK OBAMA: we have lived through an era where too often short-term gains were prized over long-term prosperity, where we failed to look beyond the next payment, the next quarter or the next election. A surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future. And all the while, critical debates and difficult decisions were put off for some other time on some other day. Well, that day of reckoning has arrived, and the time to take charge of our future is here. [www.pbs.org: Watch this program on line] FORREST SAWYER: [voice-over] The future is clouded by one inescapable fact: more Americans are living longer. As the population ages, by law, the government is obligated to spend more and more. JACKIE CALMES, The New York Times: This year, the first of the Baby Boomers, roughly 73 million of them, are turning 62. They're claiming early retirement for Social Security. Three years from now, before Barack Obama's first term is over, they'll turn 65 and start making their claims on Medicare. Pres. BARACK OBAMA: To preserve our long-term fiscal health, we must also address the growing costs in Medicare and Social Security. JACKIE CALMES: Back in the '80s, I would write, "We've got this coming tsunami, this demographic tsunami where the Baby Boomers are going to start retiring, and it's going to overwhelm our budget." It's here. FORREST SAWYER: This is the picture of the future that has so many people so concerned. Today, just over 40 percent of the federal budget pays for Social Security, Medicare and Medicaid, the big entitlement programs. But according to Congressional Budget Office projections, here is how that spending grows over the next 25 years and beyond. Eventually, there is no money available in the budget to pay for anything else because of the spending on entitlements, especially Medicare and Medicaid. ALICE RIVLIN, Economist, Brookings Institution: We are on an unsustainable course right now because we have made more promises under three main programs, Medicare, Medicaid and Social Security - principally the medical programs - than can be fulfilled at any sensible set of tax rates. So we've got a problem. Pres. BARACK OBAMA: So I ask this Congress to join me in doing whatever proves necessary- ALICE RIVLIN: What are we going to do? Are we going to cut all the other things the government does? It's a really serious problem, and it has not been seriously addressed. [www.pbs.org: More about entitlements] Pres. BARACK OBAMA: We must also address the crushing cost of health care. FORREST SAWYER: Five weeks into his presidency, Barack Obama set the stakes. Pres. BARACK OBAMA: I suffer no illusions that this will be an easy process. Once again, it will be hard. FORREST SAWYER: Obama calculates that the health of the nation, and the success of his presidency, depends on whether he can persuade these men and women to transform health care in America. Pres. BARACK OBAMA: So let there be no doubt. Health care reform cannot wait, it must not wait, and it will not wait another year! FORREST SAWYER: [on camera] As politically difficult as it's going to be to make any change, in the health care system, and Medicare and Medicaid, why take that fight on now, when you have this lurching economy which could be heading toward the darkest of recessions? DAVID LEONHARDT: Health care, in terms of the long-run fiscal condition, is easily our biggest problem. And so kicking it down the road just raises all kinds of risks. If, on the one hand, we are spending massive amounts of money to stimulate the economy now, and on the other, we feel like that over the long term, we need to bring our deficit down, there is nothing more important we can do to bring our deficit down than take on health care. NEWSCASTER: President Obama sends his first budget to Congress today- FORREST SAWYER: On February 26th, two days after his address to the nation, the president delivered his budget plan for 2010. NEWSCASTER: The president is proposing to spend more than $3.5 trillion dollars- NEWSCASTER: That is the size of the budget next year, the largest in history, being sent- NEWSCASTER: -a budget that would take America in a fundamentally new direction. NEWSCASTER: -and ambitious and costly programs for the environment, education and health care. FORREST SAWYER: On health care, the budget commits more than $630 billion as a "first crucial step" to reform. NEWSCASTER: He wants to cut back on Medicare spending while putting hundreds of billions- NEWSCASTER: President Obama's 10-year spending plan sets aside more than $600 billion as a down payment on health care reform. FORREST SAWYER: Obama's budget team argues that spending to reform health care will, in the long run, save money. PETER ORSZAG, Dir., Office of Management & Budget: I think what's very clear, the single most important thing we can do on our long-term entitlement problem is to reduce the rate of growth of health care costs. Everything else is almost a footnote. FORREST SAWYER: Peter Orszag is Obama's budget director. PETER ORSZAG: If health care costs grow at the same rate over the next four decades as they did over the past four decades, Medicare and Medicaid - those are the two federal health insurance programs - go from 5 percent of the economy today to 20 percent of the economy by 2050. So if you're looking at where the money is, it's in health care. And this budget is the most aggressive budget that I have ever seen in terms of moving towards a more efficient health care system. FORREST SAWYER: But first Obama has to forge unprecedented cooperation among interest groups and politicians who have been battling over health care reform for decades. On March 5th, he gathered many of them at the White House. Pres. BARACK OBAMA: The greatest threat to America's fiscal health is not Social Security, though that's a significant challenge. It's not the investments that we've made to rescue our economy during this crisis. By a wide margin, the biggest threat to our nation's balance sheet is the skyrocketing cost of health care. It's not even close. FORREST SAWYER: [on camera] The people we talked to say, "Look, this is- this is a tough, tough problem, and you're going to have to do either higher taxes or lower benefits or some combination of both to be able to really wrestle this problem down." Do you agree? PETER ORSZAG: Well, actually, I have a different perspective because so much of the cost of health care now doesn't actually- in terms of, quote, "benefits," doesn't actually make beneficiaries healthier. FOREST SAWYER: Understood. But I want to be very clear. When it comes to both Social Security, Medicare and Medicaid, higher taxes and/or lower benefits are not off the table? PETER ORSZAG: No, they're not off the table. But I again want to come back on Medicare and Medicaid We can no longer afford an overall health care system in which the thought is more is always better, because it's not. The evidence is very clear that's just not factually true. Let me give you an example. Last six months of life in Medicare at the Mayo Clinic costs you and me today $25,000 for each Medicare beneficiary, at the Mayo Clinic. Medicare beneficiaries, last six months of life at UCLA Medical, $50,000 a year. And I can tell you that we have no idea what we're getting in exchange for the extra $25,000 a year at UCLA Medical because the quality indicators, if anything, are all higher at the Mayo Clinic. [www.pbs.org: More of Orszag's interview] Pres. BARACK OBAMA: So it's not going to be easy and- FORREST SAWYER: But even as the president tried to keep the focus on health care- Pres. BARACK OBAMA: -and fulfill the promise of health care in our time- FORREST SAWYER: -questions about the overall size of the budget and the budget deficits threatened to drown him out. Sen. JUDD GREGG (R), New Hampshire: There is no fiscal restraint in this budget. Rep. KEVIN BRADY (R), Texas: Looks like someone's cooking the books to hide- Rep. PAUL RYAN (R), Wisconsin: If we did nothing, the deficit would drop faster than it is in this budget. Rep. DEVIN NUNES (R), California: It's a legitimate concern for members of Congress here, from both sides of the aisle, that this level of debt is unsustainable in the long term. FORREST SAWYER: In Obama's budget, the debt will accumulate at an even faster rate than it did under George Bush. The deficits are so large that by 2017, the national debt is projected to be more than the entire economic output of the country. That hasn't happened since 1947. In 10 years, according to the budget plan, the debt will have more than doubled to over $23 trillion. [on camera] While President Obama talks about the national debt and how bad it is, you have a budget proposal that is saying, by its own numbers, its own reckoning, we will have doubled the national debt. That's massive. DAVID LEONHARDT: Right. We're in a massive economic downturn, right? And there are two reasons why you should run huge deficits. One is a war. We ran huge deficits during World War II, and I don't think anyone looks back and says that was a mistake. And two is a terrible economic downturn, which we're now in. FOREST SAWYER: That's fine. But it's- it's eight years- DAVID LEONHARDT: Right. FORREST SAWYER: -that we'll double- DAVID LEONHARDT: Right. FORREST SAWYER: -the national debt. And as for figuring out how to solve that, it's sort of, "We will, really." DAVID LEONHARDT: Yes. And I think that critique is fair, so I would like to see the Obama administration come out and be a little bit more honest - a lot more honest - about the fact that over the long term, taxes are going to have to rise not just on the top 1 percent, although they will very much have to rise on the top 1 percent. They're probably going to have to rise on everybody else, as well, in order to pay for Medicare, Social Security, the military, the other things our government does. MATT MILLER, Author, The Tyranny of Dead Ideas: Everybody wants more benefits. Everybody wants their Social Security and their Medicare, and they want it to be more generous. And at the same time, everybody wants low taxes. And if you ask people, you know, those two things don't add up. FORREST SAWYER: The American people are in a kind of denial. MATT MILLER: They're in a kind of denial, and I think their leaders find it risky to explain to them that it can't really go on like this forever. DAVID WESSEL: It's hard to sell a message of pain to Americans. It's hard to tell them that we have lived beyond our means and we're going to have to spend less money on benefits that you enjoy and we're going to have to collect more taxes from you than we do now because we over-promised in the past. That's a very hard message to deliver when unemployment's low and everybody's feeling good. It's an impossible message to deliver when people are frightened that they're going to lose their houses, lose their jobs, and their kids are going to be out of work. But there are not enough revenues to pay those promises, so something has to give. FORREST SAWYER: [voice-over] While the urgent issues surrounding the immediate crisis dominate the meetings that President Obama has almost every day with his economic team, they are always shadowed by the specter of the looming debt. CLIVE CROOK, The Financial Times: These warnings about the deficits and the debt, you know, they're like a piece of furniture in the room in the debate. You know, they're always there. And it never seems to happen, but one day it will. You know, you remember how people said, "House prices fall? House price inflation might slow, but it's never going to go negative." Well, now we know. And just because something hasn't happened for a long time doesn't mean it can't happen. And I think the- you know, the issue of the sustainability of America's long-term borrowing is just the same. You can get away with this for decades, of over-borrowing and saving nothing, but then when it goes wrong, you're in trouble, big trouble, very, very quickly. And it's hard to get out of. FORREST SAWYER: Not far from the White House, inside that room at an undisclosed location, the government keeps borrowing more money. Recently, China, the U.S. government's largest creditor, warned that so much borrowing has them worried, and the very next day, the president had to reassure the Chinese about the soundness of their investments. Meanwhile, in just the first three months of this year, the U.S. government has borrowed another $493 billion. TEN TRILLION AND COUNTING WRITTEN BY PRODUCED BY The Documentary Group: PRODUCER CORRESPONDENT EDITED BY ASSOCIATE PRODUCER ARCHIVAL RESEARCHER ASSISTANT EDITOR SENIOR PRODUCTION ASSOCIATE RESEARCHER ADDITIONAL EDITING GRAPHICS ORIGINAL MUSIC CAMERA SOUND ONLINE EDITOR SOUND MIX ADDITIONAL CAMERA ADDITIONAL SOUND PRODUCTION ASSISTANT PRODUCTION ACCOUNTANT STOCK FOOTAGE STILLS SPECIAL THANKS SUPERVISING PRODUCER Executive Producer for The Documentary Group FOR FRONTLINE DIRECTOR OF BROADCAST POST PRODUCTION ON AIR PROMOTION AVID EDITORS ASSISTANT EDITORS POST PRODUCTION SERIES MUSIC SENIOR PUBLICIST PUBLICIST OUTREACH MANAGER INTERACTIVE MARKETER PROMOTION DESIGNER PROMOTION ASSISTANT SECRETARY PRODUCTION SECRETARY COMPLIANCE MANAGER LEGAL CONTRACTS MANAGER UNIT MANAGER BUSINESS MANAGER WEBSITE DESIGNER WEBSITE ASSOCIATE DEVELOPER WEBSITE RESEARCH ASSISTANTS WEBSITE PRODUCER WEBSITE COORDINATING DIRECTOR OF NEW MEDIA COORDINATING PRODUCER STORY EDITOR SENIOR PRODUCER SENIOR EDITOR EDITORIAL DIRECTOR EXECUTIVE PRODUCER SERIES MANAGER SENIOR PRODUCER EXECUTIVE PRODUCER A FRONTLINE Co-Production with The Documentary Group FRONTLINE is a production of WGBH Boston, which is solely responsible for its content ANNOUNCER: There's more to explore at our Web site. Watch the full program again on line, see analysis of why the national debt matters, how bad it is and what the Obama administration should do about it, and read the extended interviews, plus facts about the national debt, who owns it and how it's fluctuated over time. Then join the discussion at PBS.org. Next time, FRONTLINE takes a road trip through America's health care system- - A hundred and sixty thousand dollars, and I was covered for nothing. ANNOUNCER: -and the hard choices it creates. - My medication is $1,000 a month. - Bankruptcy or the health of our child. - Well, how're you going to pay the bill? I said, "You know, that's a real good question." ANNOUNCER: Sick Around America. Watch FRONTLINE. FRONTLINE's Ten Trillion and Counting is available on DVD. To order, visit Shoppbs.org, or call 1-800-PLAY-PBS. [$24.99 & s/h] FRONTLINE is made possible by contributions to your PBS station from viewers like you. Thank you. With major funding from the John D. and Catherine T. 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