Great Nations Pay Their Bills

Great nations pay their bills.

That, I believe, is what this debate boils down to. That is what our founding fathers would tell us if they saw us toying so dangerously with the federal budget and the debt ceiling.

The national debt has always been controversial. The current government shutdown is only the latest episode in a long history of divisive debates over paying the nation’s bills.

Consider, for example, what John Adams’s wife Abigail wrote to her daughter Mary in 1792: “I firmly believe, if I live ten years longer, I shall see a division of the Southern and Northern states, unless more candor and less intrigue, of which I have no hopes, should prevail.”

She wasn’t talking about slavery. She was talking about government debt. And she wasn’t alone.

“With the South filled with debtors and the North creditors,” says the historian Ron Chernow, Thomas “Jefferson feared the country would break apart along sectional lines.”

You have to admit, that really puts things in perspective. Today’s debate may be polarized, but no one seriously expects half the nation to secede because of it. And yet, in the early days of the American experiment, that’s how controversial the national debt was.

After the American Revolution, the new government had a lot of bills to pay. Fighting the mighty British Empire wasn’t cheap. The federal government had racked up $54 million in unpaid bills, and the states owed another $25 million.

There were many in Congress who believed that the government should default on its debt rather than pay the bills. They knew that they’d have to raise taxes to pay the bills, and they believed that taxing and spending were the first steps toward monarchy.

Sounds familiar, no?

George Washington disagreed. During the war, Washington had marveled at the British army’s seemingly inexhaustible supply of money. A great military, he believed, depended on the government’s ability to spend as much as necessary, and that required tax revenue and solid credit — two things that were sorely lacking on the American side.

By the end of the war, investors were fed up with the Americans. The new state governments had refused to collect enough taxes to pay the interest on the debt they had accumulated. The financier Robert Morris warned Washington that investors “who trusted us in the hour of distress are defrauded.” It’s “madness,” he lectured, to “expect that foreigners will trust a government which has no credit with its own citizens.” He begged the federal government to begin collecting taxes to repay their loans.

“With respect to the payment of British debts,” Washington concluded, “I would fain hope…that the good sense of this country will never suffer a violation of a public treaty, nor pass acts of injustice to individuals. Honesty in states, as well as in individuals, will ever be found the soundest policy.”

In other words, when a gentleman gives his word, he honors it. Great nations pay their bills. He did not, however, have an easy time convincing Congress of that.

In his first State of the Union, Washington declared that “an adequate provision for the support of the public Credit is a matter of high importance to the national honor and prosperity.” A few days later, his Treasury Secretary Alexander Hamilton proposed to Congress that the federal government not only raise enough taxes to pay off its debt but also to pay off all the states’ debts as well. Even more controversial, he suggested that they pay the entire face value of the debts, not the low prices that they were currently selling for in the market.

James Madison rose in the House of Representatives to denounce Hamilton’s proposal. It would reward speculators who had purchased the government bonds from hapless war veterans, he argued, and create a dangerously large Treasury bureaucracy.

In the end, Hamilton won, but not before creating many enemies. The investors who stood to gain from his policy lived mostly in the industrial North, while the indebted landowners of the South were suspicious of bankers and their “paper assets.” The debate over Hamilton’s proposal was the beginning of a rift that eventually led to our modern political parties.

Not long after Congress approved Hamilton’s plan, government bonds tripled in value. “The progress of public credit is witnessed by a considerable rise of American stock abroad as well as at home,” boasted Washington.

Still, radical dissenters tried to thwart this goal. In western Pennsylvania, a group of outraged farmers rebelled violently against the new tax the government had placed on whiskey, a product created from their grain. But Washington wouldn’t stand for it. If “a minority…is to dictate to a majority,” he warned, “there is an end put at one stroke to republican government.”

Apropos wisdom for today, wouldn’t you say?

Eventually, the Whiskey Rebellion was quelled, and all the debts were paid off — state and federal — at face value. The American government went on to become the most trusted investment in the world. To this day, it is widely considered the crowning achievement of Hamilton’s career — and one of the most important acts of this new nation.

Our credit is our reputation. It is our word. It is, quite literally, our bond with the investors of the world. To abuse it is not only to invite economic disaster; it is, more importantly, to sever the promise our forefathers made to us and the promise we make to the world. When other nations are in distress, they turn to us. We are the beacon in a sea of uncertainty. We are the deep pockets when all others have gone empty.

We are a great nation. Let’s start acting like it.

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This op-ed was published in today’s Huffington Post. An abbreviated version was published in the South Florida Sun-Sentinel.

We Don’t Have a Government Spending Problem. We Have a Health Care Problem.

Nobody’s happy about the sequester, the government spending cuts that took effect a few days ago, but most people think it was a necessary evil.

Evil? Maybe. Necessary? Absolutely not.

In June 2011, before Congress passed the Budget Control Act, the Congressional Budget Office released its annual “Long-Term Budget Outlook.” This is the best nonpartisan projection we have of what the federal budget would look like without the sequester.

The CBO considered two possibilities.

First, what would the budget look like if Congress did absolutely nothing? The Bush tax cuts would expire as scheduled, Obamacare would take effect, and Medicare payments to doctors would remain at current rates. They called this the “Extended-Baseline Scenario.”

Second, what if Congress stopped all those things from happening? They extended the Bush tax cuts permanently, repealed Obamacare, and raised Medicare’s payment rates for doctors every year. They called this the “Alternative Fiscal Scenario.”

The difference is stunning. In the Extended-Baseline Scenario, the government’s debt never increases. Relative to the size of the economy, it’s the same in 2033 as it was in 2013. Meanwhile, in the Alternative Fiscal Scenario, it skyrockets. By 2033, it’s double what it was in 2013.

The Alternative Fiscal Scenario is what scared legislators into passing the Budget Control Act. They decided to slash government spending across-the-board by over $2 trillion over the next decade in order to avoid a massive increase in debt.

But why were they looking at the Alternative Fiscal Scenario? After all, the Extended-Baseline Scenario showed that the debt problem disappeared if Congress simply did nothing. Why didn’t they just…do nothing?

Well, if they did nothing, taxes would go up, and doctors’ payments wouldn’t. The politics speaks for itself.

Instead of doing nothing, Congress made 84 percent of the Bush tax cuts permanent at the beginning of this year, and of course, doctors’ payments continue to rise.

And that’s why they needed the sequester to rein in rising debt.

But that doesn’t explain why the sequester was an across-the-board cut in government spending when, according to the CBO, we don’t have an across-the-board spending problem.

Let’s look at the 2011 Budget Outlook one more time.

In the Alternative Fiscal Scenario, it’s true that spending increases dramatically — from 24.1 percent of our nation’s income in 2011 to 33.9 percent in 2035. But it’s not across-the-board. In fact, if you exclude health care programs and interest payments, federal spending actually decreases from 17.1 percent in 2011 to 14.6 percent in 2035!

In other words, we don’t have a spending problem. We have a health care problem!

If we had the health care costs of the average industrialized country – which has a higher life expectancy than us, by the way – we’d save over $2.5 trillion over the next decade, far more than the sequester.

And yet, looking at these numbers, our legislators decided to slash government programs across-the-board, the vast majority of which nothing to do with the problem. They chose to kick 70,000 kids out of Head Start; eliminate funding for 1.2 million disadvantaged students; serve 4 million fewer Meals on Wheels; eliminate nutrition assistance for 600,000 women and children; kick 120,000 families out of low-income housing; kick 100,000 homeless people out of shelters; conduct 2,100 fewer food inspections; conduct 1,200 fewer workplace safety inspections; treat 373,000 fewer mentally ill Americans; employ 1,000 fewer federal law enforcement agents; prosecute 1,000 fewer criminal cases; issue 1,000 fewer science research grants; guarantee $540 million less in loans to small businesses; conduct 424,000 fewer HIV tests; and treat 7,400 fewer AIDS patients. And that’s only this year, when less than 10 percent of the sequester will kick in.

All because they didn’t want to deal with the real problem.

Last month, the CBO published a new Budget Outlook. Including the effects of the sequester, it shows debt declining for the next few years, and then in 2019 it starts to rise again. That’s the dirty little secret that Congress won’t tell you: Even $2 trillion in spending cuts can’t stop the rise in debt…because spending simply isn’t the problem.

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This op-ed was published in today’s South Florida Sun-Sentinel.

5 Ways to Sound Stupid When Discussing the Debt Ceiling

In the past week, I’ve had conversations with people who voiced the following myths. Read and learn, lest you embarrass yourself in the same way.

Myth #1: Federal debt has been increasing under all presidents since World War II.

Reality: Federal debt steadily declined from the mid-1940s to the early 1980s, then it increased dramatically (with a brief hiatus in the mid-to-late 1990s). Ronald Reagan reversed four and a half decades of safe, responsible fiscal policy, and every successor except Bill Clinton followed his lead. See for yourself:   Continue reading “5 Ways to Sound Stupid When Discussing the Debt Ceiling”