The 3 U.S. Policy Mistakes Most Responsible for S&P Downgrade

As a result of Standard & Poor's stunning and controversial decision Friday night to downgrade the credit rating of the U.S. Government, the "Washington blame game" will start soon, and while there's enough blame to go around on both sides of the aisle, the three biggest factors that set the nation on the wrong fiscal course were public policy mistakes made by President George W. Bush from 2001 through 2008.

1. 2001 Bush Income Tax Cut

The biggest mistake, or the factor that most contributed to S&P's downgrade of the U.S. Government was the 2001 Bush Income Tax Cut.

The $1.35 trillion tax cut -- a tax cut that many economists and policy professionals felt was not necessary from a stimulus standpoint, given that the U.S. economy was already recovering from the mini 2001 recession -- instantaneously turned a U.S. Government budget surplus into a budget deficit.

You read correctly: President Bill Clinton, D-Ark., in fiscal 2001 -- the Clinton administration's last fiscal year -- was the last president to run a budget surplus: the Clinton administration notched a $127.3 billion surplus in fiscal 2001 -- the fourth consecutive year of surpluses.

President George W. Bush's 2001 income tax cut instantaneously turned a $127.3 billion budget surplus into a -$157.8 billion budget deficit in fiscal 2002, and the U.S. Government has had trouble balancing its budget ever since.

The Bush administration, 2001-2008, fiscal 2002 to fiscal 2009, then ran the following deficits:

Fiscal 2003: -$374 billion deficit

Fiscal 2004: -$413 billion deficit

Fiscal 2005: -$319 billion deficit

Fiscal 2006: -$248 billion deficit

Fiscal 2007: -$162 billion deficit

Fiscal 2008: -$455 billion deficit

Fiscal 2009: -$1.416 trillion deficit.

Tax Cut Tilted Toward the Rich

One economic problem with the 2001 income tax cut was that it was skewed too much toward the rich and upper-income citizens -- George W.Bush's political base -- and it almost guaranteed that, over time, broad-based demand would soften, and probably fail, in a few years.

Further, Bush refused to build on President Clinton's successful earned income tax credit (EITC) policies -- which literally lifted millions of working poor / lower income adults and families out of poverty annually -- further preventing the bulk of society from benefiting as much as upper-income groups during his years in office.

But those are social / human development consequences: the major flaw in the 2001 income tax cut was its fiscal impact. It cost the U.S. Treasury trillions of dollars -- in total, the Bush tax cut has cost the U.S. Treasury more than $2 trillion in revenue, with interest on the debt included.

2. No Health Care Cost Control, Through 2008

The second biggest mistake that contributed to S&P's credit downgrade was the inability of the United States to contain both public sector and private sector health care costs, through the end of 2008.

The delay meant that Medicare and Medicaid expenditures were considerable higher in the previous decade, 2001-2008, than they would have been had health care reform been implemented sooner.

What's more, the best chance for containing U.S. health care costs per individual is through the 2010 U.S. Health Care Reform Act, which, long-term, will lower both Medicare and Medicaid costs, and increase private sector health plan competition -- via, among other techniques -- regional health care exchanges -- decreasing or at least slowing the cost increase rate of private health insurance premiums.

Further, President George W. Bush's decision to pass a senior citizen prescription program without a tax increase simply added another entitlement on to the U.S. budget without paying for it -- which further increased the U.S. budget deficit during his administration.

Also, most Republicans in Congress are now working to repeal the 2010 U.S. Health Care Act: simply, if that occurs, health care costs in the United States, absent the mass economies of scale that would occur under universal health care, and absent the heath insurance exchanges, will continue to increase at a high rate, adding to the national debt.

3. Wars Paid for With a Credit Card

The third biggest mistake that contributed to S&P's credit downgrade was the decision by President George W. Bush to not pass a tax increase to pay for the Iraq War, Afghanistan War, and for increased national security measures required following the terrorist attack on September 11, 2001.

Do not misunderstand: the point here is not the decisions to go to war -- the point is that historically, when the United States went to war, it asked its citizens to make a sacrifice in the form of a tax increase to pay for that war.

The Bush administration did not, and as a result, the wars/security measures to-date have cost $1.23 trillion and counting -- all borrowed -- paid for with a credit card, i.e. added to the national debt.

Three Mistakes, Big Deficit by End of 2008

As a result of those three mistakes, the budget deficit under President Bush ballooned during his administration, to, as noted, more than $450 billion by the end of fiscal 2008.

The acute-stage of the financial crisis hit in 2008, and credit market and related intervention and stimulus policies would then push the U.S. budget deficit over $1 trillion by the end of 2008 -- months before Barack Obama took the oath of office for president.

The final fiscal tally on those Bush years? At the end of President Clinton's presidency, the U.S. Government was running a yearly budget surplus, and the national debt was about $6 trillion and was dropping. At the end of President Bush's presidency, the U.S. Government ran a budget deficit of more than $1 trillion, in fiscal 2009, and the national debt had grown to $10.6 trillion, or about $9.7 trillion if you remove acute-stage financial crisis spending.

Bush '43 Years: Massive Deficits

To be sure, there were some economic successes during the 'Bush 43' era: trade ties were broadened, exports rose, and inflation remained low / moderate through his eight years. And, one segment of society (upper income citizens) got richer.

But the decisions to pass a 2001 income tax cut skewed toward upper-income Americans, to not address health care costs, and to increase defense spending/conduct wars by borrowing the money, substantially worsened the United States' fiscal condition, and the nation has been trying to recover ever since.

Moreover, the argument forwarded here is that it will take the United States a minimum of two decades -- 20 years -- to recover from those three major fiscal mistakes -- longer if income taxes are not increased on upper-income Americans.

Further, conservative Republicans, other conservatives, and supply-side economists can assert forever that entitlement reform and cuts in discretionary federal spending are the keys to balancing the federal budget, but "the reality of the facts on the ground," to quote former Israel Prime Minister Ariel Sharon, argue differently: a deeply flawed income tax cut and wars paid for with debt turned a budget surplus into a large budget deficit, and the nation will not be on a sound fiscal course until those mistakes are corrected.