America's Fiscal Constitution (4 page)

The federal budget disguised the extent of total debt by subtracting the surplus in Social Security trust funds, the precise form of manipulation once feared by traditional fiscal conservatives like Vandenberg. Bush’s predecessor, Bill Clinton, had separated trust fund revenues in his last budgets in order to avoid hiding any deficit.

In March 2003 the United States invaded Iraq. During prior major wars, Congress had raised taxes in order to reduce the need for borrowing and to demonstrate civilian support. Majority Leader Tom DeLay of Texas, then the most powerful member in the House, was adamant that “nothing is more important in the face of a war than cutting taxes.”
¹⁸
Popular Republican senator John McCain opposed cutting taxes during war, but only two other Republicans in Congress joined him in voting against the large tax cut enacted in the spring of 2003. Congressional budget experts calculated that within ten years the 2003 tax cut would add $2.7 trillion, or about $20,000 per working American, to the federal debt.
¹⁹
After the planned expiration of the tax cuts in 2010 federal borrowing was projected to skyrocket, as the first of seventy-five million Baby Boomers began to qualify for Medicare. Projected debt would be even greater with an extension of those tax cuts.

President Truman had repeatedly championed federal medical insurance even though he never included it in his budgets. He refused to plan for domestic spending greater than the level of taxes that Congress would impose. In 2003, freed of constraints imposed by traditional budget practices—“pay as you go” budget planning, the use of dedicated taxes paid into trust funds to finance new programs, and congressional authorizations of debt for defined purposes—Congress borrowed to finance an expansion of Medicare and suspended the limit on the annual Medicare costs that had been crafted by President Clinton and Republican congressional leaders just six years earlier.

The idea of expanding Medicare to cover prescription drugs was nothing new; its cost had always been the problem. The original architect of Medicare, Wilbur Mills, had excluded coverage of prescription drugs used outside of hospitals because of his concern that the cost would exceed available federal revenues. In 1988 President Reagan and Congress had
tried to tax high-income Medicare recipients in part to allow coverage of expensive prescription drugs, but Congress quickly repealed the program following a backlash against the tax.

In 2003 President Bush asked Senator Ted Kennedy of Massachusetts to help him obtain coverage for prescription drugs. Kennedy had participated in every significant legislative initiative concerning medical services since the creation of Medicare and Medicaid thirty-eight years earlier. With Kennedy’s help, the bill expanding Medicare passed the Senate by a lopsided, bipartisan margin. While many Democrats had objected to the large debt financing of a tax cut passed in May of the same year, few voted against a debt-financed expansion of Medicare.

House Republicans who previously bridled at passing a new spending program tried to secure new debt-financed tax breaks as the price of their support. When the Senate rejected those tax reductions, House Republicans instead obtained new debt-financed federal subsidies for privately administered Medicare insurance. The estimated cost of the new program for prescription drugs rose sharply after its enactment.

The Medicare Prescription Drug Improvement and Modernization Act was the first major new domestic program in history that the White House and Congress planned from the outset to finance almost entirely with debt. Congressman John Boehner of Ohio, who chaired the Republican Policy Committee, explained to Republican House members that “the American people did not want a major reduction in government” and that they should accept “such realities as the burdens of majority governance.”
²⁰

Analysts warned of the risks of a debt-financed expansion of Medicare. Baby Boomers—children born from 1946 through 1964—were in their prime earning years. Medicare costs would begin to soar when the first of their generation became eligible for Medicare in 2010. From 2000 to 2010 the growth in the number of Americans age forty-five to sixty-four—the Baby Boomers—equaled three-quarters of the growth in the entire population.

The 2003 spending spree did not end with the expansion of Medicare. In September the president requested $87 billion for military operations in Iraq and Afghanistan and efforts to reconstruct those nations.
²¹
Republicans defeated an attempt in the Senate to delay a planned tax cut in order to defray the amount of debt used to finance the war.

Never before in American history had federal leaders financed a major war entirely with debt. Federal officials did not even ask the general public
to contribute to war efforts by lending money. When the nation made a commitment to a global security umbrella in 1950, tens of millions of American citizens purchased savings bonds to fund a fifth of the total federal debt. American insurance companies and banks purchased most of the rest. From 2001 to 2004, in contrast, foreign creditors financed almost the entire rise in Treasury debt, apart from the amounts sold to federal trust funds or the Federal Reserve.

M
YTHS
C
ONCERNING
F
EDERAL
D
EBT

The foregoing sketches of budget history in two pivotal years
describe
but do not
explain
what happened to the traditional limits on federal debt. There was no official announcement that federal leaders abandoned the traditional fiscal constitution. Partisan or cynical explanations of what happened gave rise to influential myths. Examples of common myths include “the federal government almost never balances its budget” and “they always used to balance the budget.” In fact, for 180 years the federal government never set out to borrow to support routine spending, though at times it did borrow quite a bit for the four extraordinary purposes identified earlier.

Consider the following common budget myths.

Myth:
“It’s an old story: liberals always spend more, and conservatives tax less.”
“Conservatives” once supported a stronger central government. In the late nineteenth century, “liberal” referred to Republicans and Democrats who supported policies akin to those of Gladstone’s British Liberal Party—competitive markets and balanced public budgets. Throughout most of American history progressive politicians refrained from the use of debt in order to avoid mortgaging the future, and conservatives strongly opposed debt-financed tax cuts.

Myth:
“Ultimately, the federal government just inflates the dollar to reduce the burden of the debt.”
Federal officials have never intentionally inflated the currency for the principal purpose of reducing the burden of debt. Following every spike in debt occurring from the War of 1812 to World War II, the federal government restricted credit in order to curb inflation.

Myth:
“Keynesian economics led federal leaders to believe that balanced budgets stifle economic growth.”
Members of Congress rarely defer to economists when crafting legislation on taxes or appropriations, though politicians often cite the opinions of economists who agree with their actions.
John Maynard Keynes argued that debt incurred during downturns should be repaid with future surpluses.

Myth:
“It all started with the New Deal.”
Franklin Roosevelt began his presidency by cutting “normal” federal spending, including federal civilian and military salaries and veterans’ benefits. He sought to restrain debt by vetoing a record 665 bills.

Myth:
“It all started with the Great Society programs in the 1960s.”
Spending on new social programs amounted to a small fraction of the federal funds budget during the Johnson administration. Since 1977 federal funds domestic spending, apart from medical services, has not grown significantly as a share of national income.

Myth:
“It all started with Reagan, who thought he could cut taxes without a loss of revenue.”
Neither President Reagan nor his senior White House economic advisors believed that the 1981 reduction in tax rates, in itself, would raise federal revenue as a share of national income. They explicitly assumed that federal revenues would grow rapidly as high rates of inflation persisted and pushed Americans into higher tax brackets.

Myth:
“The real problem is Social Security.”
The Social Security trust funds are in great shape compared to the federal funds budget, which is the only budget capable of incurring debt. Reforms enacted in 1983 created large reserves for the pensions of Baby Boomers. Modest changes in future benefits or payroll taxation would balance Social Security’s long-term revenues and payments.

Myth:
“The real problem is partisanship and gridlock.”
Democratic and Republican leaders blamed each other for the death of much of the nation’s population in the decades immediately after the Civil War. Yet they worked together to pay down debt. After 2000 federal elected officials often compromised on budget issues, typically by raising spending, cutting revenues, and increasing debt. From 2001 through 2006 debt-financed appropriations bills sailed through Congress with lopsided bipartisan majorities.

Myth:
“The debt crisis is the unfortunate result of the War on Terror and the Great Recession.”
Traditional uses of borrowed funds—fighting two wars and filling budget holes during a severe downturn—account for no more than half the debt incurred during 2001–2013.

Myth:
“We cannot balance the budget without hurting the economy.”
Long run economic growth results from a growing and productive workforce, not greater debt. The United States has experienced sustainable
economic growth principally at times when the federal government repaid debt or borrowed very little in relation to the size of the economy. From 2000 through 2007, even before the Great Recession, private sector job growth lagged far behind twentieth-century averages despite a massive federal borrowing binge.

—————

I
N HINDSIGHT IT IS
easy to describe what happened: After 2000, members of Congress and two presidents made commitments that resulted in a large gap between spending and tax revenues. In short, they behaved like many government officials in many nations throughout history who descended down the slippery slope of debt—to use Washington’s phrase—“like a snowball . . . rolling.”

Debt-financed spending has a powerful allure. It disguises the perceived cost of government, what economists call a “fiscal illusion.” In fact, this very illusion is critical to the notion that debt-financed spending or tax cuts can stimulate the economy; people would be reluctant to spend or invest more if their share of higher federal debt showed up on their credit card balance.

Traditional budget practices—clear accounting, “pay as you go” budget planning, trust fund spending confined to dedicated revenues, and specific congressional authorizations of the amount and use of each new debt—had been eroding for years before the link between taxes and spending broke in 2001.

Rosy projections, creative accounting for trust funds, and traditional borrowing during wars and recessions made it difficult for voters, and sometimes even elected officials, to appreciate the extent of the nation’s dependence on debt. Benjamin Franklin had once noted the plight of debtors in denial: “The second vice is lying, the first is running in debt. . . . lying rides upon debt’s back.”
²²

American history after 2000 is not the most promising place to find a solution to the current debt crisis. It is more useful to seek guidance from lessons learned from prior generations of American leaders who matched federal commitments and resources—and still managed to get reelected.

Too often budget battles often appear as minor subplots in historical narratives constructed around the drama of elections and wars. Some say that politicians campaign in poetry and govern in prose. Frequently,
however, numbers rather than words yield greater insight concerning hard decisions. Political rhetoric can gloss over the difference between the ideal and the possible. Libraries contain hundreds of books describing Civil War military campaigns, yet few volumes shed light on budget battles extending over two centuries. Just as peacekeepers leave lighter footprints in history than do soldiers marching in war, so too has the legacy of budget heroes faded from popular memory. Nonetheless, their success in limiting debt preserved the nation’s future and independence.

This book narrates a journey along a tested trail of fiscal safety. Earlier generations who persevered along that path overcame partisan, regional, and ethnic obstacles far greater than those today. They built a great nation without mortgaging its future. They opened doors of opportunity, created the first generation of older Americans with financial security, and set a standard of living that remains the envy of much of the world. They fended off an invasion from the world’s strongest military power, secured possession of much of North America, endured a civil war, financed two world wars, and relieved human suffering during three severe economic depressions.

The story of Americans who crafted and respected America’s fiscal constitution can inspire as well as instruct. It begins with a weary Virginian who traveled on horseback toward his first Christmas at home in eight years. He was troubled by debts owed to the soldiers he led, some of whom had chased Congress out of town because it could not honor its financial commitments.

PART I