Stealing the dream

Stealing the dream

American political principles were considered a marvel for centuries. Although much less famous, so were the principles of government finance that were extrapolated from them. Bill White’s "America’s Fiscal Constitution" is an effort to identify these fiscal principles and trace their application over the years. It chronicles a number of remarkable shifts in American behavior, including the modern adoption of income-based taxation over consumption-based, and the corresponding rise of taxation based on an estimated "ability to pay" rather than a calculated "fair share." The most fascinating shift this book details is one that doesn’t superficially appear to be a shift at all: America’s treatment of posterity.

The book is rich with excerpts from the writings and speeches of American statesmen throughout history. It is astounding how consistently our leaders have referenced "the next generation"- our "children," "successors" and "heirs" - when talking about government debt. If words are any indication, Americans have always given serious thought to the tax burden their children will face in adulthood. Unfortunately, it seems words are no indication at all.

Early American generations made great sacrifices to allow their children to be free from the burden of government debt. The American nation faced crushing levels of debt after the Revolutionary War, the War of 1812, the Civil War. Yet the generations that fought took it upon themselves to pay their own debts, for the sake of those who would inherit the country.

Today, American politicians continue to speak frequently about the crushing effects of government debt on succeeding generations. Their message seems identical to the American statesmen of old. However, not only do modern politicians fail to take meaningful measures to mitigate the problem, Congresses continue to pass bills that expand the debt, and Presidents continue sign those bills into law.  Where Americans have historically taken action to reduce the problem, modern Americans have taken action to magnify it.

"America’s Fiscal Constitution" doesn’t intend to convey a cynical message about America’s treatment of posterity. It can't help but do so.  As a book largely about government debt, it frequently touches on Americans’ thoughts for the inheritors of government debt. The transformation that has occurred over the years is contemptible because Americans’ care for posterity was once so earnest, and has become so hollow, without any change in the rhetoric that is mouthed in public.

The first Americans debated the merits of repaying the tremendous debt incurred for the Revolutionary War. Some argued that the generation that fought the war for independence shouldn’t also be burdened with paying the debt on behalf of those who would enjoy the independence. Others argued that the fledgling government could easily get away with reneging on the debt completely. The victors in this debate argued that the debt should be paid as "a matter of honor" in order to preserve the creditworthiness of the fledgling country for use by future generations, which would face their own challenges. "America’s Fiscal Constitution" reveals the thinking of these Americans:

[1789] [Thomas Jefferson] expressed concerns about federal debt financing in an essay he wrote to [James] Madison, a fellow Virginia planter, in September 1789. … "would it not be wise and just for [a] nation to declare, in the constitution they are forming, that neither the legislature, nor the nation itself, can validly contract more debt than they may pay within their own age, or within the term of 19 years?"  (pg 27-28)
[1790 (approx)] [James Madison] agreed with the notion that "the living generation" should not impose "unjust or unnecessary burdens on their successors." … Madison concluded that each generation should pay "its own debts" and that government should be financed with "more palpable" taxation rather than the more "imperceptible mode" of debt. (pg 28)
[1789] [Alexander Hamilton] posited that it ought to be a "fundamental maxim, in the system of public credit of the United States, that the creation of debt should always be accompanied by the means of extinguishment and principal payments on the debt." In short, Hamilton believed that taxes should always be high enough and spending low enough to allow taxes, rather than additional borrowing, to service both interest and principal payments on the debt. (pg 29)
[1796] [George Washington]’s farewell address asked his fellow citizens to "discharge the debts," rather than "ungenerously throwing upon posterity the burdens which we ourselves ought to bear." (pg 40-41)
[1797] [John Adams] warned that the "accumulation of public debts in other countries ought to admonish us to be careful to prevent their growth in our own." Adams advocated federal spending only of an amount that could be supported "by immediate taxes, and as little as possible by loans." (pg 41)

In 1835, President Jackson fully repaid the national debt, which included debt largely attributable to the War of 1812.

[1885 (approx)] In explaining his determination to pay down the debt [from the Civil War], President Lincoln’s last treasury secretary, former Indiana banker Hugh McCulloch, evoked the American Fiscal Tradition’s most powerful, underlying value: "As all true men desire to leave their heirs unencumbered estates, so should it be the ambition of the people of the United States to relieve their descendants of this national mortgage." Anticipating the argument that the debt was too high to pay off within a generation and that "future generations [should] be asked to share the burden," McCulloch observed that "wars are not at an end, and posterity will have enough to do to take care of the debts of their own creation." (pg 110)

After the Civil War, Congress wrestled extensively with the issue of the debt. Measures were finally passed that contributed to the ongoing decline of the national debt until World War I.

[1917] President Wilson, on April 5, 1917, asked that "so far as practicable the burden of [World War I] should be borne by taxation of the present generation rather than by loans."… [Secretary of the Treasury] McAdoo surveyed financial leaders concerning the nation’s debt capacity and set the goal of using tax revenues to pay for half of the first year’s estimated war cost of $8.5 billion. McAdoo observed that "one of the most fatal mistakes that governments have made in all countries has been the failure to impose fearlessly and promptly upon the existing generation a fair burden of the cost of war." The treasury secretary’s analysis of the improvised early financing of the Civil War gave him "a pretty clear idea of what not to do." (pg 162)

Federal war debts were being rapidly repaid during the 1920s until the onset of the Great Depression.

[1935] [President Roosevelt] insisted that actuaries design a [Social Security] system that was fully funded by a dedicated new tax. When [Secretary of Labor] Perkins explained that it would be many decades before the pension fund might need general revenues to offset the cost of early benefits, Roosevelt curtly told her that it would be "dishonest to build up an accumulated deficit for the Congress of the United States to meet in 1980." … No one even considered borrowing to pay for pensions, since the very purpose of a pension system was to save, rather than borrow, in order to defray the future costs associated with an aging population. (pg 197)
[1956] Eisenhower’s 1956 State of the Union address reminded Americans of "our enormous national debt and of the obligation we have toward future Americans to reduce that debt whenever we can appropriately do so. Under conditions of high peacetime prosperity, such as now exist, we can never justify going further into debt to give ourselves a tax cut at the expense of our children." (pg 235-6)
[1960] Eisenhower took pride in the large surplus obtained in the fiscal year of 1960. In his final State of the Union address, Eisenhower asked the nation to forego tax cuts until it had paid down some debt with several years of surpluses, an action he termed a "reduction on our children’s inherited mortgage." (pg 238)

After Eisenhower, the rhetoric about posterity remained the same. American leaders continued to decry the harms that deficits and debt would have on future generations. However, unlike prior American leaders, their actions increasingly stood at odds with their words.

Treasury debt was originally a financing method of last resort reserved for times of war, when tax rates couldn’t be raised high enough. In the latter half of the 20th century, debt become a standard means of funding the government’s regular operations, alongside taxation. For decades now, American leaders of both parties have been approving spending that consistently exceeds revenue, and using debt to fill the gap.

Yet all the while, they have maintained the practice of publicly discussing how profoundly posterity will be harmed by these very same practices.  The paradox is clearest in White’s coverage of U.S. fiscal history since 2000.

[2000] In his first State of the Union address Bush echoed a favorite theme of both Eisenhower and Truman. Bush pledged to reduce federal debt by $2 trillion and keep $1 trillion in reserve. He reminded the public that "we owe it to our children and grandchildren to act now."

Despite his statements, Bush became the first American president to call for a tax cut in a time of war, and the first to authorize an entitlement program primarily funded by debt (Medicare Part D). His successor was no better.

[2006] Echoing a powerful theme, one of the Democrats’ rising stars, Senator Barack Obama, tried to make the case for budget discipline: "We are mortgaging our future. We’re taking a credit card for our children, in our children’s name and our grandchildren’s, and we’re running up the card and being completely irresponsible."

President Obama’s first budget, which was titled "A New Era of Responsibility," reiterated that "deficits, over time, will harm economic growth and impose burdens on our children and grand-children."  However, the same document projected deficits that would only shrink for 3 years, and then reverse course and continue rising into the foreseeable future.  Further, Obama signed the Affordable Care Act, which significantly increases the federal government’s spending on healthcare. Although it was claimed that new taxes embedded in the law would actually cause a net reduction in the deficit, it now appears that the law will cost $300 billion over the next 10 years alone.

White believes that balancing the federal government’s budget might cause "harm to the economy," but only in the way spendthrifts might feel "harmed" if they were forced to live within their means:

"Despite the verdict of history, many Democratic and Republican leaders now assert that balancing the budget in the near future would cripple the economy. The fig leaf of claimed harm to the economy serves to hide the naked reality of the federal dependence on debt. In some sense, of course, any nation can use debt to shift consumption from the future to the present and create an illusion of sustainable growth. … When debt-financed consumption stops, there may be an adjustment similar to that of a consumer who stops writing checks on an account with insufficient funds. But living within one’s means is hardly tantamount to damaging the economy."

After four hundred pages of historical anecdotes and analysis, White is succinct about the damning consequence of modern America’s reckless debt habit:

Abandoning the traditional limits on debt has compromised the most cherished of all Democratic ideals: a nation in which each generation has opportunities greater than the one that preceded it.

The "American dream" is about having a better life – better than your parents, or the people in the country you immigrated from. This so-called "dream" has actually been real for centuries. Every American generation in history has achieved a higher standard of living than the one before it. Modern Americans are putting an end to that tradition. As White observes, "someone must eventually pay for every public dollar spent." (pg 408)

The next American generation will have to foot the bill for decades of reckless debt-financed spending. This bill will be so large it may well cause a debt crisis with catastrophic repercussions. At the very least it will require higher taxes, lower investment, and a reduced economic growth rate. Yet these staggering costs are still dwarfed by the magnitude of the crime itself: modern Americans have robbed their own children of the American dream.  The historical record proves they did so knowingly.