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What would Washington, Jefferson, Madison, Lincoln, the Roosevelts, Truman, and Eisenhower have done about today's federal debt crisis?
America's Fiscal Constitution tells the remarkable story of fiscal heroes who imposed clear limits on the use of federal debt, limits that for two centuries were part of an unwritten constitution. Those national leaders borrowed only for extraordinary purposes and relied on well-defined budget practices to balance federal spending and revenues.
That traditional fiscal constitution collapsed in 2001. Afterwardfor the first time in historyfederal elected officials cut taxes during war, funded permanent new programs entirely with debt, grew dependent on foreign creditors, and claimed that the economy could not thrive without routine federal borrowing.
For most of the nation's history, conservatives fought to restrain the growth of government by insisting that new programs be paid for with taxation, while progressives sought to preserve opportunities for people on the way up by balancing budgets. Virtually all mainstream politicians recognized that excessive debt could jeopardize private investment and national independence.
With original scholarship and the benefit of experience in finance and public service, Bill White dispels common budget myths and distills practical lessons from the nation's five previous spikes in debt. America's Fiscal Constitution offers an objective and hopeful guide for people trying to make sense of the nation's current, most severe, debt crisis and its impact on their lives and our future.
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About the Author
Bill White is senior advisor at Lazard, a firm advising corporate leaders and governments worldwide. He served as Houston's mayor and was twice re-elected with an average vote of 88 percent. He also served as the deputy secretary of energy of the United States. He received the prestigious John F. Kennedy Profiles in Courage Award for his leadership in response to Hurricane Katrina and the Governing Official of the Year Award from Governing magazine. He has worked as the CEO of a successful business and as a member of numerous corporate boards. In 2010 he received more votes for governor of Texas than any Democratic candidate in the state's history.
Read an Excerpt
This book tells the story of generations of Americans who fought for their nation’s future by limiting federal debt. As debt steadily soared following the last balanced budget in 2000, their achievement seems more remarkable.
I shared the frustration so many who have watched the federal government lurch from one budget crisis to another in each of the last several years. My business experience taught me that poorly defined problems are difficult to solve. I set out to use the history of federal debt as a backdrop to clarify what recently went wrong. In doing so I discovered the neglected and inspiring story of what had once gone right.
Before 2001 the federal government had not always balanced its budgets. However, it had borrowed according to informal but well-understood rules, an unwritten fiscal constitution. For most of the nation’s history, federal leaders incurred debt to finance spending for only four accepted purposes. Time-tested budget practices curbed the temptation to use debt for the purpose of hiding the routine cost of government.
The triumph of an unwritten or traditional American fiscal constitution would not have surprised James Madison, the architect of the written Constitution. He had hoped that the new US government would limit debt by application of principles that would be clearly “visible to the naked eye of the ordinary politician.” Many generations of ordinary politicians used those principles to make budget decisions that now seem extraordinary. The very nature of federal borrowing, not just its magnitude, changed fundamentally after 2000. Never before had the federal government waged prolonged wars without raising taxes. Never before had the federal government relied so heavily on foreign creditors. Never before had the president and Congress intended to finance a permanent vast new domestic programthe Medicare Prescription Drug, Improvement and Modernization Act of 2003entirely with debt. Never before had a Democratic president and Congress tolerated, much less insisted on, the substitution of federal debt for payroll contributions supporting the Social Security trust fund. Never before had “conservatives” spearheaded opposition to a constitutional amendment requiring a balanced budget. Never before had mainstream leaders in both major political parties claimed that balancing the budget in normal economic conditions would damage the nation’s long term economic growth.
Trends in public opinion or ideology cannot adequately explain these shifts in budget policy. Americans did not wake up some morning and resolve to saddle their children with debt. The photo-finish 2000 election furnished no mandate to borrow. Even excluding debt incurred to pay for wars and recession-related relief, the federal government borrowed large amounts with a Republican president and Republican Congress, a Democratic president and Democratic Congress, a Republican president and Democratic House, a Democratic president and Republican House.
Many people believe that it is now politically impossible to balance the budget. My practical experience makes me more optimistic. For much of the last decade I served as the mayor of the nation’s fourth largest city, with a population greater than many states. Like most other cities, counties and states, it abided by laws that prevented the use of debt to fund routine operating expenses. Almost daily I explained to citizens the tradeoff between taxes and spending. They did not always agree with the choices we made, but I learned that people from across the political spectrum respected the need to balance public obligations and tax revenues.
I do not believe that Americans suddenly chose to elect short-sighted people to public office. Most members of Congress in 2001 who supported borrowing for routine expenses had worked hard in the 1990s to balance the budget. For some of that time, as a chief operating officer of a cabinet department who worked to cut spending, I found that leaders in each party supported good faith efforts to promote financial discipline. For two decades I have known our presidents and many congressional leaders in each party. They and others willing to endure the ordeal of elections care at least as much about their country’s future as do other citizens who sit on the sidelines.
History offers a valuable perspective on the nation’s sixth, and current, debt crisis. Budget battles have raged in every session of Congress since Washington took office. Today rising federal debt does threaten the value of investments, the availability of medical care for older Americans, and the viability of future American international leadership. But contemporary budget dilemmas seem manageable when compared to those that confronted Americans immediately after the Revolution, the Civil War, and tough sixteen years of Great Depression and World War II.
Americans have often treated their nation’s exceptional history as a form of secular scripture, a source of inspiration and instruction. Citizens who despair of a government lurching from one annual budget crisis to another can find new hope in some old traditions. The federal government steadily paid down debt during Thomas Jefferson’s administration. Jefferson believed that the nation could ultimately invest more in public improvements if federal leaders reduced the share of tax revenues required to service prior debts. He believed future voters would best be able to judge budget policies by comparing the track record of “different epochs.” I wrote this book with Jefferson’s vision in mind.
Table of Contents
Author's Note ix
1 The American Fiscal Tradition 1
Part I A New Nation and Democratic Party Limit Federal Debt: 1789-1853
2 Debt Gives Rise to a New Nation and Political Party 19
3 Jefferson's Party Defines the Limits On Debt 45
4 A Revived Democratic Party Pays Off the Debt 69
Part II The Tradition Sustains a Growing Nation and the Republican Party: 1854-1900
5 Republicans Embrace the Tradition 93
6 Borrowing and Taxing to Restore the Union 103
7 Shrinking Debt and Drifting Parties 121
Part III Progressive Reformers Embrace the Tradition: 1901-1940
8 Reformers Redefine the Parties and Government 141
9 Financing a World War and Paying Down Debt 159
10 Debt During the Great Depression 183
Part IV Containing the Burden of World War II Debt While Increasing Commitments: 1941-1976
11 War and Taxes 207
12 Containing Debt While Funding Defense, Pensions, and Highways 225
13 Medical Needs, War, and Recession 247
Part V The Erosion, Revival, and Collapse of the Tradition: 1977-2013
14 Structural Deficit: Pressures for Tax Cuts and a Revived Cold War 271
15 The Tradition Survives, Though Its Pillars Erode 291
16 Traditionalists Battle Back 305
17 The Tradition Collapses 327
18 The Great Recession and Budget Stalemate 343
Part VI Restoring the Tradition
19 Reviving Traditional Budget Practices 363
20 Balancing the National Security Budget 375
21 Paying for Medical Care 383
22 Growth, Taxes, and the Federal Reserve 393
23 Reforming the Political Parties 403
A US Treasury Debt, 1790-2013 492
B Unmonetized Debt Compared to National Income and Tax Revenues, 1790-2012 499
C Federal Funds Revenues, Outlays, and Surplus/Deficit, 1789-2013 507
D Foreign Holdings of US Debt, 1976-2011 514
E US State and Local Debt, 1970-2009 516
F Trade Balances, 1790-2010 518
G Corporate Income Tax: Effective Rates and Share of National Income, 1960-2009 525
H Personal Income Tax: Effective Rates and Share of National Income, 1950-2010 527
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