US Debt: 2001 Was a Turning Point Whose Impact Is Still Felt Today

Today, memorial events across the United States will commemorate the 25th anniversary of the September 11, 2001 attacks. On that fateful day, the world stood on the brink of profound change.

2001 was a year marked by geopolitical and economic transition. But the recession that year started well before 9/11. According to the National Bureau of Economic Research (NBER), it had begun a few months earlier, after the business cycle peaked in March 2001. The labour market had already recorded a net loss of 695,000 jobs from January to August 2001. The stock market had been trending sharply downward since the collapse of the dotcom bubble, with the S&P 500 down by nearly 30% between its own peak in 2000 and the start of September 2001. Of course, the terrorist attacks threw the economy into further disarray. The next six months saw another 1,284,000 net layoffs. That said, the recession officially ended soon after 9/11. According to the NBER, the business cycle hit bottom in November, and real GDP grew in the fourth quarter of 2001. The economy was bolstered by resilient consumer spending (partly fuelled by a sense of patriotism), as well as rate cuts by the Federal Reserve (Fed) and fiscal measures introduced earlier that year by the George W. Bush administration. But the last of these factors—federal fiscal policy—is the one whose consequences are still being felt most acutely 25 years later. 2001 was both a major geopolitical tipping point and a pivotal moment for public finances.

The federal government had just recorded four consecutive fiscal years of budget surpluses. The US$69.3 billion surplus in 1998 was the first since 1969, while the US$128.2 billion surplus in 2001 remains the last to date. The question of how to use these surpluses, including those projected for the years ahead, became a key point of debate among politicians, particularly during the 2000 presidential election. Several schools of thought emerged. Some wanted to gradually pay down the federal debt, which stood at US$5.629 trillion in 2000, including US$3.410 trillion in debt held by the public. Others wanted to ensure the long-term viability of Social Security by putting money into a dedicated fund (“lockbox”). And then there were those who were eager to return the projected surpluses to taxpayers through tax cuts. The new Bush administration’s decision to pursue this last option through the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which was signed into law in June 2001, was significant for several reasons.

First, the fiscal cost of these tax cuts was staggering. At the time, it was estimated at about US$1.3 trillion over 10 years. Second, it entrenched within the Republican Party the idea that “Reagan proved deficits don’t matter,” as then-Vice President Dick Cheney reportedly claimed.¹ Lowering taxes was more important than preserving the short- and long-term sustainability of public finances. Third, the EGTRRA didn’t simply provide temporary support to the economy through short-lived tax cuts. Instead, it reduced government revenue on a near-permanent basis. Finally, although a comparable mechanism had been introduced in 1975, the measure reinforced an idea that would become increasingly influential: Tax cuts were no longer enough. Money also had to be paid directly to households. This was done in the summer of 2001, with payments of up to US$600 per household.

At first, those cheques had little impact on economic growth and were used mainly to boost personal savings (including debt repayment). But then September 11 happened, and consumers were able to use those additional savings to boost their spending in the aftermath of the attacks. Car sales also increased, supported by favourable credit conditions and substantial discounts.

The lesson was clear: Direct payments to households could produce results faster than tax cuts, whose effects generally take longer to materialize. Subsequent administrations followed suit during other periods of economic weakness. For example, there was a refundable family tax credit in 2003, a refundable tax rebate under Obama in 2008 and three rounds of pandemic stimulus cheques (in March and December 2020 under Trump and in 2021 under Biden).

The recession, lower corporate income, the sharp decline in capital gains following the dotcom crash, tax cuts including cheques sent to households, the immediate consequences of September 11, increased homeland security spending and military operations in Afghanistan all contributed to a deterioration of public finances. A US$128.2 billion deficit was recorded as early as 2002.

The situation continued to deteriorate in subsequent years as deficits accumulated. The 2003 tax cuts, the war in Iraq, the expansion of social programs, the financial crisis and the Great Recession of 2008–2009 all contributed to the mounting deficits. Actual budget results diverged completely from the Congressional Budget Office’s (CBO) 2001 projections (graph 1). Debt held by the public was projected to reach just US$818 billion, or 5.3% of GDP, in 2011. Instead, it came to US$10.128 trillion, or 65.5% of GDP (graph 2).

Tax adjustments and slightly more spending restraint, imposed in part by the bipartisan Budget Control Act of 2011, helped reduce deficits starting in 2013. But the 2018 tax cuts once again worsened the situation. The COVID‑19 pandemic and the response by the Trump and Biden administrations dealt another major blow, causing deficits and debt to soar. Since then, budget shortfalls have remained high External link., despite the DOGE spending cuts and the tariffs imposed by the Trump administration. The 2025 tax cuts clearly made matters worse, with little positive impact on economic growth so far. In February 2026, the CBO projected a US$1.853 trillion deficit for the fiscal year ending on September 30. Depending on the August and September results, it could move closer to US$2 trillion. Total federal debt recently made headlines by rising above US$40 trillion. More specifically, debt held by the public stood at US$32.415 trillion on August 31, close to 100% of GDP (graph 3).

The problem is that there’s little real political will to significantly and sustainably reduce deficits. Every election campaign brings a new round of promises to cut taxes. For example, President Trump recently offered to send every adult US citizen a US$5,000 “dividend” after the November 3 midterms if Republicans retain their congressional majority. The cost of such a measure could run as high as US$1.3 trillion.

Even the seemingly draconian spending cuts introduced in 2025 did little to slow the growth of federal spending. Instead, the real change was the composition of federal expenditures. Defence and social programs are taking up an increasingly large share of government revenues, which never seem to be enough.

And that doesn’t include the growing cost of servicing the debt. Over the first ten months of the current fiscal year, interest charges will have cost the US Treasury US$1.170 trillion, compared with US$970 billion for the entire 2025 fiscal year. The recent rise in bond yields both reflects the deterioration of public finances and strains them even further. All else being equal, a 0.10 percentage point increase in interest rates would add US$379 billion to the deficit after ten years, according to the CBO External link..

This places a heavy burden on the Treasury and is also becoming a constraint for the Fed. In particular, without clear forward guidance on monetary policy from Fed Chair Warsh, bond market participants must respond to factors affecting supply and demand in the market. The sad state of federal public finances is one of the factors pushing bond yields higher. And rising yields could have economic consequences. Among other things, higher mortgage rates could further hold back an already weak housing market. The Fed will need to take this into account at next week’s monetary policy committee meeting, and Chair Warsh will no doubt be asked about it at Wednesday’s press conference.

¹ Ron Suskind, The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O'Neill (New York: Simon & Schuster, 2004), page 291.