The Great Debt Debate

White House Burning: The Founding Fathers, Our National Debt, and Why it Matters to You;
Simon Johnson & James Kwak.

Book review by R. Alan Clanton | published August 13, 2013; |
Thursday Review Editor

Of all the contemporary economic debates between conservatives and liberals, the decades-old struggles over deficit spending and national debt must rank as one of the most contentious. Those debates can also be fluid and politically self-serving, with liberals embracing debt for a decade or so, then, conservatives—if not embracing, at least ignoring national indebtedness. Debt can be a tool, a resource, a curse or a burden, and few elected officials are immune to the seductions of spending taxpayer money for immediate political gratification. Often, the moral high ground can shift depending on which party controls Congress and who is sitting in the Oval Office.

Solutions are sometimes instantly divisive. Many liberals and progressives react to talk of spending cuts as inherently destructive to social programs and entitlements, and promote tax increases (especially among high earners) as a solution. Republicans frame the question as one of fiscal responsibility, and the GOP’s narrative includes government which must learn to live within its means and tax cuts. Neither side wants to talk honestly about raising taxes, and the elements most in need of scrutiny and reform—Social Security, Medicare, defense spending—are the most sacred of cows. Special interest groups and lobbyists on all sides of these issues keep the pressure on those in Washington and make conciliation and frank conversation difficult.

Conservatives and many Republicans have for decades argued that the country can have a balanced budget and restrained spending, and have a growing, healthy economy, but it was during the Presidency of a Democrat, Bill Clinton, that the U.S. finally settled into that illusive, magic contemporary combination. That budget surplus in the 1990s can be attributed to several key factors: the end of the Cold War, which greatly reduced military spending; a generally healthy economy coupled with a long period of economic growth, which could be dated back to the Reagan years and the end of the 1981-82 recession; and an equally long era of relatively low unemployment, which meant that more Americans were earning wages and paying taxes. Both Democrats and Republicans took credit for the success. By the early-to-middle aught years the U.S. economy seemed bullet-proof, ticking along even through 9/11, a variety of gas and oil price shocks, and various Wall Street and international stock disruptions.

But, as we would learn as housing markets began to deflate in 2007, and from the market collapse and bank failures of 2008, the U.S. economy was not as resilient as many thought. The subsequent Great Recession brought about brutal market contractions and heavy unemployment, as well as plenty of blame to go around the table. This time around politicians dodged any accountability, and Democrats and Republicans blamed each other for the enormous mess. In the last months of the Bush presidency and the first year of Obama’s administration, the government spent $1.5 trillion on halting the economic slide and rescuing mortgage institutions, banks and insurance firms from failure. But the damage was done. During the 2012 presidential election season, candidate Mitt Romney sought to position the economy and jobs as the central priority, even as President Obama sought to grab even the smallest economic good news as evidence that his administration must be doing something right.

Meanwhile two major wars, and a trillion and a half spent on financial bailouts and economic stimuli, have driven the nation’s debt to dizzying heights.

The blame game continues even now, with predictable plot twists: budget showdowns; dueling press conferences by stubborn Republicans and obstinate Democrats on Capitol Hill; explanations in the media about “sequestration” and “earmarks”; party-line arguments over who benefits from tax cuts; threats of government shutdowns; layoffs of thousands who work as government contractors; and all the usual hyperbolic talk of paychecks being withheld from park rangers, bridge safety inspectors and VA Hospital nurses; and the specter of seniors waiting on social security checks that never arrive. Where these staged sideshows do not evoke outrage or fear, they induce glazed eyes, or worse, frustration and apathy.

The financial pain of this recession—along with the costs associated with two major wars in the aught years—has forced to the forefront the concept of the national debt and deficit spending, a deeply contentious issue with incalculably huge consequences for the future of the economy of the United States and its trading partners.

To make matters worse, the issues are immense and complex, so seemingly intractable that few reporters, and fewer average Americans, have patience for the business of sorting out what it means to our daily lives and our personal finances. Most reporters, even those who write professionally about economics, seek to simplify—often oversimplify—leaving most folk stuck with nightly platitudes, generalizations and half-truths. Whenever any politician talks about spending cuts, their political opponents wave the bloody flag: cuts will hurt Social Security, Medicare, health care, military spending and other essential programs.

Then, with politicians at their impasse, there are all the familiar patterns as the headlines and television news reports trumpet the “looming budget battle” or the “coming fiscal showdown.” There are standoffs, threats, partisans walking out of meetings, and last minute deals to keep the government operating. Then, there is another round of finger-pointing and blame.

But, in reality, what do these often tiresome political confrontations really mean to us? And are there consequences to a nation that carries the heavy burden of debt?

Authors Simon Johnson and James Kwak have written a timely, carefully-paced book, White House Burning: The Founding Fathers, Our National Debt, and Why it Matters to You, crafted neatly for consumption by any reader who wants a full understanding of what these arguments mean to our future.

The authors deftly graft the historical examples of economic successes and failures, especially the complex issues of taxes and spending, onto the current conversations about national debt.

Johnson and Kwak begin with a short, enjoyable history lesson, tracing the great powers' ongoing struggles with war alongside the more potent machinery of economic growth and taxation. The American schizophrenia over taxes and spending brought the young nation to an early, nearly catastrophic reality check when, in the War of 1812, British troops entered Washington and calmly, systematically burned the U.S. Treasury building, the U.S. Capitol and The White House. More British troops moved upriver, attacking Fort Warburton and entering Alexandria, where they captured dozens of commercial ships. The English troops and their commanders met little resistance.

For the Americans, the problem wasn’t bravery or fortitude, but was instead a matter of resources and money. Congress, though readily inclined to go to war with Britain, had infamously refused President James Madison’s requests for tax increases as a way to pay for war preparations. Many in Congress saw taxes as the most sacred of issues, trumping even defense of the nation, and after a long, arduous political fight Treasury Secretary Albert Gallatin turned to wealthy Philadelphia bankers to finance the war. But it was too late, and the better-trained, better-armed British navy and army inflicted heavy damage to the underprepared and poorly supplied Americans. The lesson extended even further: Britain was able to win those early victories in the Americas even while fighting a sustained, full-scale war in Europe. It was the economic dynamism of England, along with its capacity to raise money through taxes, which had given the British the upper hand.

The burning of Washington had been a painful moment for the still-young United States, and Johnson and Kwak show how that early experience with fiscal crisis set in motion antipathies and entrenchments which would affect the national conversation for centuries.

Using clear examples, the authors walk the reader through the great economic cycles, along with the sometimes inevitable path toward war; the enormous costs of the War of 1812, the Civil War, and World War II, each of which had left the U.S. with mountains of debt. They illustrate how in each of these cases the United States eventually found its way back to stability and prosperity. Debt as an issue facing a nation at the start of war, and after a war’s conclusion, is especially important, as Johnson and Kwak point out. The U.S. paid for World War I largely through tax increases despite the vast increase in spending: federal expenditures had been roughly $700 million in 1916, but had increased to $18 billion by 1919. Further, Congress has finally settled the thorny issue of national taxation with the Sixteenth Amendment, establishing that the federal government’s authority to collect income tax superseded individual states’ interests and fiscal machinations.

But at the end of World War II, the United States faced arguably its most immense debt dilemma, for the U.S. at that point had run up the largest deficit in history, amounting to more than 110% of the American GDP. During the war, traditional military spending had increased to over $80 billion, and the mostly secret cost of the Manhattan project reached $1.6 billion. But the resilience and dynamism of the U.S. economy meant that most of that vast debt was paid off with a few years, in part because of the new economic preeminence of the United States as it converted from war production to a combination of Cold War preparedness and the rise of the middle class.

Johnson and Kwak also trace the processes set in motion as a result of the market collapses of 1929 and the Great Depression, which led first the United States, then other nations, down a variety of misguided policy paths, including a vicious downward cycle of tightened credit, lowering property values and debates over the gold standard. The authors illuminate the central concepts of money itself. What defines money? What makes paper money worth more, perhaps, than coins-other than the convenience of not carrying around heavy metals in one’s pockets or bags? Why do we have Benjamin Franklin to thank for the system of printed money we rely upon to this day? What is the historical importance of the Breton Woods Agreements of 1944-45? And what market forces pushed Richard Nixon to take the U.S. off the gold standard in 1971. Though perhaps obscure to many American readers, each of these chapters from past centuries has altered the trajectory of our conversation about national debt to this day.

The authors discuss the core notions of deficit spending—how it works, why it works, its advantages and its weaknesses. How much do deficits matter in the short run, or the long run?

The national debt that the United States carries is a growing danger for future generations, and a potentially pivotal flaw in U.S. foreign policy and trade, and many conservatives and liberals are in agreement on that central point. But the debate gets prickly when it comes time to find a remedy. The authors offer up a significant, long chapter devoted to solutions—including possible remedies to our most difficult challenges: health care reform, Social Security and Medicare, the three things most likely to raise the decibel level in any political conversation. There are plenty of components of their proposals which will rattle conservatives about as equally as liberals, and a few libertarians might toss the book directly into the trash after just a few chapters.

Johnson and Kwak have peppered the book with numerous charts and graphs—a notably helpful tool in grasping the historical context of debt on a national scale. Their 240 pages of text are also scrupulously researched and fully sourced. Good luck finding even one page free of copious footnotes, and when you reach the end of the text there are still 100 pages of notes and citations. This book is readable and moves surprisingly quickly. On the whole, not light reading, but not overly dense either, at least not for anyone who wants a complete understanding of what our complex arguments about national debt are really about, and why it should matter to you and your children.