July 12, 2006


Caption: Lending to or borrowing from goats is generally a bad idea.

This is the fourth post in a series on issues of debt, including international, national, and personal. Today's post will look at US debt and deficit issues.

In the early days of the American republic, Alexander Hamilton said that "A national debt, if it is not excessive, will be to us a national blessing." Hamilton believed that a strong federal government was needed to promote economic growth and that the public debt would bind the interests of many people, particularly the wealthy, to the public interest.

While this idea was rank heresy to Jefferson and his allies, who viewed Hamilton and other federalists as monarchists in disguise, he was probably right if, as he said, "it is not excessive" and if the debt took the form of investments that strengthened the nation rather than enriched a faction.

It is likely, however, that even Hamilton--no enemy to the wealthy or to a reasonable amount of debt-- would be baffled by current US fiscal policy.

According to the Center on Budget and Policy Priorities,

Only a few years ago, we had large budget surpluses, not large deficits. In January 2001, the Congressional Budget Office projected that the federal government would amass $5.6 trillion in surpluses over the next ten years (2002-2011). CBO's most recent projections, issued in March 2006, indicate that the federal government will amass deficits of $3.4 trillion during the same 2002-2011 period, assuming that the Presdient's tax cuts (which are scheduled to expire by the end of 2010) are extended...In other words, there has been a negative swing of roughly $9 trillion for this ten-year period (or an average of roughly $900 billion per year)...

While right wing ideologues blame out of control social spending, the real reasons for the deficit have little to do with either mandatory (entitlement) or discretionary spending.

Of legislation adding to deficits since 2001, only 16 percent was due to domestic spending other than homeland security. Tax cuts, aimed particularly at the wealthy, account for fully 50 percent, while defense, security and international programs caused 33 percent of the increase.

The idea of cutting taxes during (an unnecessary) war is truly bizarre and makes about as much sense as taking the gas out of a car while on a long and dangerous trip.

Yet, as we saw with last year's congressional budget resolution, domestic programs are the first to be cut. The misnamed Deficit Reduction Act cut $40 billion from Medicaid, student loans, and other programs while actually increasing the deficit with $70 billion more in tax cuts.

Households with incomes over $1 million will get around $111,549 in tax reductions from cuts passed since 2001, while low income and working families bear the brunt of budget cuts.

While the Bush administration is now boasting that the current deficit is "only" $300 billion this year (after previously inflating deficit expectations), the long term and largely unproductive debt that younger Americans will face is staggering.

As Diane Lim Rogers of the Brookings Institution put it (see July 7 post titled "Taxing Subjects"), the administration and its allies in congress are actually imposing a "birth tax" on future generations of Americans.

Debts incurred during this administration due to the unnecessary war in Iraq and the tax cut mania will hinder the ability of Americans in the future to respond as needed to the challenges of the times.

So what's the solution? As the saying goes, if you find yourself in a hole (assuming you don't want to be there) the first thing to do is stop digging. The Center recommends a balanced approach to the budget which "would include revenue increases as well as spending cuts, especially since the recent tax cuts are a main reason we have deficits." Cuts in spending should not fall heavily on those least able to bear them.

El Cabrero thinks that if Jefferson and Hamilton were with us today, even they would agree on that.


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