It's January 25, 2001, the first week of the Bush presidency and more than half a year before the September 11 attacks. Federal Reserve Chairman Alan Greenspan testifies before the Senate Budget Committee, asserting:
"If current policies remain in place, the total unified surplus will reach $800 billion in fiscal year 2011. The emerging key fiscal policy need is to address the implications of maintaining surpluses."
As the poet William Wordsworth put it, "Bliss was it in that dawn to be alive!"
The 2011 fiscal year ended with a $1.3-trillion deficit. How did America go from a state of "burgeoning federal surpluses" (in Greenspan's words in 2001) to "extraordinary financial crisis" (the way he put it in 2010) in just one decade? Two words suffice: tax cuts.
Forget the recession and the Bush-Obama stimulus packages. Those are history.
The recession ended three years ago — at least in terms of economic growth. So why aren't the deficits disappearing?
The problem is that taxes are just too low. Most Americans will shudder to hear those words, but it's the truth. Taxmageddon? Bring it on.
If Congress does what Congress does best and takes no action by New Year's Eve, both the Bush and Obama tax cuts will expire. On January 1, 2013:
The Bush tax cuts on high-income filers will expire, returning the top marginal rate to its 1990s level of 39.6 percent.
The alternative minimum tax will be restored for a large number of high-income filers that are currently exempt.
Social Security employee payroll taxes will return to 6.2 percent from their current reduced level of 4.2 percent.
Other automatic mechanisms will result in spending reductions, including the elimination of extended unemployment insurance benefits for the long-term unemployed. Long-overdue Pentagon spending cuts will also go into effect.
The Congressional Budget Office (CBO) projects that these automatic tax increases and spending cuts would immediately cut the federal budget deficit in half, returning it to a manageable level.
The downside? According to the CBO, such a sudden tightening of the federal budget would reduce real economic growth from a projected 4.4 percent to just 0.5 percent in 2013.
I think we can have a lot of confidence in those projections. "Budget," after all, is the CBO's middle name.
But economic growth of 4.4 percent if only we keep our current low tax rates? I think CBO economists may be living the same low-tax fantasy as much of the rest of the economics profession.
Some facts: According to data from the Bureau of Economic Analysis, the last time real national income grew at a rate over 4 percent per year was in the high-tax 1990s.
The economy grew by over 4 percent a year four years in a row: 1997, 1998, 1999, and 2000.
That's right. The last four times the economy grew by 4 percent were the four years before the Bush tax cuts. Go figure.
In the decade since the Bush tax cuts went into effect the highest recorded growth rate was 3.5 percent, in 2004.
Now, it just might be that roaring economic growth is right around the corner. Happy days will be here again if only Congress and President Barack Obama can take the tough actions necessary to prevent tax cuts from expiring.
Keep the candy coming and everything will work out just fine.
On the other hand, this might be the best time in history for a do-nothing Congress to deadlock over the issue and let the tax cuts expire.
It's hard to know what direction the economy will take. But no one doubts that if the tax cuts expire, the deficit will disappear. And if the deficit disappears, our economic nightmare might finally come to an end.
Economic rapture may be just around the corner.