AP: Legacy of debt from Founding Fathers not celebrated on Independence Day

The country first got into debt to help pay for the Revolutionary War. Growing ever since, the debt stands today at a staggering $11.5 trillion — equivalent to over $37,000 for each and every American. And it’s expanding by over $1 trillion a year.

The mountain of debt easily could become the next full-fledged economic crisis without firm action from Washington, economists of all stripes warn.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Federal Reserve Chairman Ben Bernanke recently told Congress.

Higher taxes, or reduced federal benefits and services — or a combination of both — may be the inevitable consequences.

Read it all.

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Posted in * Economics, Politics, Budget, Economy, The Credit Freeze Crisis of Fall 2008/The Recession of 2007--, The National Deficit, The U.S. Government

23 comments on “AP: Legacy of debt from Founding Fathers not celebrated on Independence Day

  1. Capt. Father Warren says:

    Higher taxes will not solve the debt problem, period. All that will do is enable more spending, history proves that. What we need is a constiutionally driven revolution that dramatically scales back the Federal Government to its constitutionally granted powers and duties and leaves everything else to the states.
    Tax reciepts a few years ago were at all time highs, yet out of control spending then and now is leaving us awash in debt. Pretty soon our banker (China) is going to close the credit window, then you will have a real crisis.

  2. Vatican Watcher says:

    [quote]Legacy of debt from Founding Fathers not celebrated on Independence Day[/quote]
    What is the title of the article and the first paragraph supposed to mean? That the US has been a nation of debt during all of its history? That’s inaccurate, but is the usual we expect from the AP…

  3. Jeffersonian says:

    Captain Warren is exactly right. Remember how we taxpayers were funding TARP with the expectation that all these toxic assets were going to appreciate and we’d make out like a bandit? Well, now [url=http://www.reason.com/blog/show/134563.html]Barney Frank[/url] is leering at that cash like it was a new poolboy.

  4. Ken Peck says:

    Sorry, but Vatican Watcher is wrong. (So is the article, which states that “the nation has only been free of debt once, in 1834-1835.”) A quick check of the U.S. Treasury website (http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm) shows that from 1791 to the present, the U.S. has never been free of debt. (1834 & 1835 show a national debt of $33,733.05 and $37,513.05.)

    Most economist tell us that in recessionary times, the government should (a) lower interest rates, (b) cut taxes and (c) increase spending. That is what is being done right now. Yes, it increases the national debt, but that is a problem only in that the government ran up the debt between 2001 and 2008 on top of a huge preexsiting debt.

    The same economists will tell you that in “boom” times, the government should (a) increase interest rates, (b) increase taxes and (c) cut spending. That will (1) slow the boom and (2) produce budget surpluses that pay down the debt. Instead, during the “boom” years of 2004-2008 we did exactly the opposite, doubling the national debt.

    We will pay for the spending of this decade in the future either by higher taxes or inflation — and probably both. It is, of course, a politically easy course to propose tax cuts in boom times; no one likes taxes. But unless those tax cuts boom times are matched and exceeded with spending cuts, it is merely a tax (via inflation and eventual tax increases) on future generations of voters.

    And, I’m sorry, but “limited federal government” with responsibilities for roads, schools, law enforcement, health and welfare shifted to the several states isn’t really a viable alternative. The states (and their political subdivisions) are also strapped for cash to carry out their constitutional roles — and have even fewer resources to deal with the costs than the federal government.

  5. Katherine says:

    Cutting taxes, #4? Where are they doing that?

  6. Branford says:

    I’m sorry, Ken, but my taxes are going up – where are they cutting taxes?

  7. Ken Peck says:

    #5 & #6:
    http://usgovinfo.about.com/od/moneymatters/a/ecstimtaxes.htm

    I saw a reduction in withholding in my June checks.

  8. Jeffersonian says:

    [blockquote]Most economist tell us that in recessionary times, the government should (a) lower interest rates, (b) cut taxes and (c) increase spending.[/blockquote]

    Keynesians will tell you that, but there’s no real evidence that boosting government spending does anything but empower the unproductive, coercive part of society. Just ask the Japanese.

  9. Capt. Father Warren says:

    Currently cash strapped states is no argument against limited Federal government. Their distress comes from at least three sources:
    1. Unfunded federal mandates (medicaid, medicare, education)
    2. Unsustainable policies (California)
    3. Archaic tax policies and little room to manuver because the Fed makes off with so much tax potential
    Also, you hear so much about state budget distress for the precise reason that they HAVE to live within their means. The Fed just prints paper as long as the paper and the ink don’t run out.

  10. CanaAnglican says:

    Not to nit-pick, but the US was “essentially” debt-free in 1835, and was probably actually debt free for some parts of that year. After incurring $75 million in debt (a trillion in today’s money?) to wage the Revolutionary War, our nation paid off its debts over a 45-year period. A debt of $33 thousand at the end of 1835, was essentially nothing.

    Then the Uncivil War, WWI, WWII, Korea, Viet Nam, Cold War, and the Middle East helped to slide us deeper in debt. Borrowing 5 trillion in the last 8 years cannot, however, be blamed on the war in the Middle East. Our government has simply been out of control. It promises to continue that way for the next 3.5 years, and there seems nothing we can do about it. Each district seems to love its Congressperson (they have the power of the purse) but the Congresspersons have neither the spines nor minds to fix the problem. Our nation’s “think tanks” seem incapable of analysis.

    At least we are blessed as a nation to have tremendous assets, so perhaps our debt-to-asset ratio is still viable.

  11. Bruce says:

    The debt-to-asset ratio is a very important factor to keep in mind. Borrowing money to take a trip to Europe is a bad idea. Borrowing money to repair a leaky roof may not be a bad idea. The country ran up a big debt to fight the Second World War, but I don’t think it would have made much sense for congress to have told President Roosevelt to let the Nazis have Europe and balance the budget instead.

    I’m not really a Keynesian, but for me the big problem with the stimulus right now is not so much the running up of the debt but the streaming of those stimulus dollars away from the original idea of asset/infrastructure development and toward social welfare programs. In a sense, you could get perhaps a similar bounce in the economy by taking a trillion dollars or so and dropping bundles of cash over America’s cities and towns. But six months later you’d be hungry again. If they’d taken the trillion and ploughed it into rail and roads and bridges and the electricity grid and communications, the jobs would have perked. But more importantly, business would have been able to build on that infrastructure for another generation. Debt numbers by themselves are relatively meaningless, but debt-to-income and debt-to-asset numbers are not, and to increase debt like this in ways that will have relatively little impact on long-term income generation or asset development is just putting a summer vacation on the visa card . . . .

    Bruce Robison

  12. Ken Peck says:

    An interesting site for information on the The American Reinvestment and Recovery Act:

    http://www.recovery.gov/

    For those who want to pronounce final judgment on the act, it should be noted that of the $787 billion in the act, only $158 billion (20%) was available and only $56 billion (7%) had actually been been paid out — so the full effects of TARRA are yet to come.

    The “debt-to-asset ratio” after WWII (and the Great Depression & the New Deal) was 120% of the Gross Domestic Product; the current national debt is approximately 80% of the GDP. Interestingly, the ratio’s trend fell during the administrations of Truman, Eisenhower, Kennedy, Nixon, Ford, Carter and Clinton; it rose sharply during the administrations of Reagan, G. H. W. Bush and G. W. Bush.

    The Iraq War may not be the primary cause of the rise in the national debt; however, it does account for approximately $1 trillion dollars of it.

    http://uspolitics.about.com/od/thefederalbudget/ig/Political-Economic-Measures/Debt-as-a-Percent-of-GDP–1940.htm

    (http://tinyurl.com/4rtr9p)

    If you are paying more in federal taxes in 2009, it is because you are one of the lucky few to be making more money; most of us aren’t — and millions of Americans are making anything.

  13. Ken Peck says:

    Whoops I skipped Johnson — the debt/GDP ratio fell during Johnson’s administration as well — in spite of the Vietnam War and the War on Poverty.

  14. Capt. Father Warren says:

    The “good” or “bad” of Federal debt also depends upon which our treasure is spent: going into debt for long-term hard assets (eg, the interstate hiway system) is different than going into debt to pay off the political support of auto unions. One is an investment that has a “return” while the other is, well like going into debt for a vacation to Disney.
    I suspect Ken Peck is probably a follower of David Brooks (NYT). Much of our debate about what the Federal Government does would be rendered totally moot if we were still following the Constitution which enshrined the model of limited Central Government with all unspecified rights being left to the individual states.

  15. Br. Michael says:

    Ken, “Yes, it increases the national debt, but that is a problem only in that the government ran up the debt between 2001 and 2008 on top of a huge preexsiting debt.”

    Which existed before Obama and which means that Obama knowingly added to it. And, Ken, while trying to blame Bush for everything, admits that this is a problem which Obama added to.

    And he conveniently forgets that budget bills start in the House and are passed by Congress. For most of Bush’s terms Congress was controlled by the Democrats.

  16. Ken Peck says:

    15. Br. Michael wrote:

    And he conveniently forgets that budget bills start in the House and are passed by Congress. For most of Bush’s terms Congress was controlled by the Democrats.

    Get your facts straight, Brother. Yes, appropriations start in the House. The House was controlled by the Republicans from 2001 to 2007. The Republicans never had fewer than 219 House seats throughout that period; the Democrats never had more than 211. The American people’s judgment on the Republican party came in the 2006 elections, so that from 2007-9 the Republicans never had less than 198 seats and the Democrats never had more than 236 seats.

    In the Senate in 2001-3 and 2007-9 the Democrats did have a small majority, but not anywhere near enough to cut off a Republican filibuster. From 2003-7 the Republicans had majorities in the Senate — never less than 51 seats and the Democrats never had more than 48 seats.

    House Senate
    R (min) D (max) R (min) D (max)
    2001-3 107th Congress 219 211 49 51
    2003-5 108th Congress 225 208 51 48
    2005-7 109th Congress 229 202 55 45
    2007-9 110th Congress 198 236 48 51

    And just to give you the benefit of the doubt, I did not count Independents voting with the Republicans as Republicans, and I did count Independents voting as Democrats as Democrats.

    The only time that the Republicans did not have control of the appropriations process in the Congress was after the 2006 elections — the last two years of the Bush administration. This is also reflected in Bush’s use of the veto. He hardly ever found it necessary to veto anything coming out of the Congress during his first six years; his use of the veto power came in the last two years when Democrats did control Congress — but by not majorities large enough to override a Presidental veto. By this time the economic storm clouds were apparent to many, although the administration didn’t notice them until late in 2008.

  17. Ken Peck says:

    10. CanaAnglican wrote:
    [blockquote]Each district seems to love its Congressperson (they have the power of the purse) but the Congresspersons have neither the spines nor minds to fix the problem.[/blockquote]
    Yes, we, the people, do like to vote for Congressmen who will “bring home the bacon.” Of course, sometimes my “essential project” is your “pork.”

    One should also not forget that these days it is terribly expensive to run for Congress and that all sorts of special interests are willing to spend obscene amounts to get someone whom they believe will get them huge government contracts, additional profits (like the Medicare prescription drug program), subsidies in the form of special tax breaks, etc.

    14. Capt. Deacon Warren wrote:

    [blockquote]The “good” or “bad” of Federal debt also depends upon which our treasure is spent: going into debt for long-term hard assets (eg, the interstate hiway system) is different than going into debt to pay off the political support of auto unions. One is an investment that has a “return” while the other is, well like going into debt for a vacation to Disney.[/blockquote]
    I find this comment rather interesting. In one sweep he wipes away “soft” assets like [b]people[/b]. Are not people “assets” to be protected and developed. Do we not [b]invest[/b] in people? And, of course, in addition “to pay[ing] off the political support of auto unions”, that was part of the bailout of Chrysler and General Motors, which is important for several reasons.

    He continues to opine
    [blockquote]Much of our debate about what the Federal Government does would be rendered totally moot if we were still following the Constitution which enshrined the model of limited Central Government with all unspecified rights being left to the individual states.[/blockquote]
    I would observe that the auto bailout falls under at least three constitutional provisions: commerce, national defense and the general welfare. The collapse of the automobile industry would have grave effects on interstate commerce. It is also important that we preserve heavy industry in order to maintain a strong national defense potential. One of the contributing factors to our success in WWI and WWII (and the North’s victory in the Civil War) was a strong industrial base. And, as we have seen, when large segments of the labor force lose their earnings in whole or in part, it has a serious impact on the general welfare of we the people.

    It would be interesting to hear exactly and specifically what “unconstitutional” excesses of the federal government those who resort to this argument have in mind. In most cases I think we will find that legislation coming out of the Congress have a constitutional basis, usually set forth in the preamble to the act.

    Furthermore, shifting responsibility for these alleged “unconstitutional excesses” to the several states, really doesn’t solve anything. It merely shifts the costs to the states. I think it’s not a whole lot different from imposing “unfunded federal mandates” on the states. And eventually it would have fatal consequences on interstate commerce, the national economy and national security. Remember that the Articles of Confederation quickly failed; that’s why the Constitutional Convention gave us a federal republic.

    Of course, we could, I suppose, fight the Civil War all over again.

  18. Branford says:

    Ken – #7 – so glad I’m paying more so you can pay less. Of course, maybe my additional taxes are going to the 50% increase in overseas travel that our elected representatives in Congress are undertaking. Or perhaps just to the coffers of groups like ACORN – whatever – I should just be glad that I’m lucky enough to pay increased taxes, according to some.

    Unfortunately, what’s happening is that this year, more people did not file taxes by millions that in previous years. The IRS isn’t sure what’s going on – but I have a good idea – after seeing the disregard that many in the administration have towards paying their taxes (Geithner, anyone?) and the fact that when they’re caught and they do pay, they suffer no penalties (either financially or professionally), I think many people are pulling a Geithner. Our system is based on voluntarily paying what we owe – when people start feeling what they owe is unfair or that they are burdened in a way the political elite are not, they stop paying. It wouldn’t take much for the system to then implode. Of course, for Christians, we are called to “render unto Caesar that which is Caesar’s” – but that doesn’t mean we can’t speak out against a system that penalizes the small business owner, but lets others more politically connected off the hook.

  19. Sick & Tired of Nuance says:

    The U.S. Government is designed to be in debt. It’s a feature, not a bug. If businesses and the people are owed money by the government, then they have a vested interest in seeing to it that the government does not fail. The problem isn’t government debt. The problem is [i]too much[/i] government debt. “Too much” being defined as reaching the limit of ability to pay. Then again, the debt could be erased by the stroke of a pen. The U.S. Congress could disestablish the private bank system known as the Federal Reserve Bank, doing away with fiat currency, and reassert control over the money supply through the U.S. Mint. We could go back to using real Dollars instead of Federal Reserve Notes. Of course, that would require an independent audit of Fort Knox and a real accounting of where all the Gold is. There has not been an audit of Fort Knox since the 1950’s. Why? Fifty plus years without an audit seems like an awfully long time.

    Anyway, the United States of America will be in debt until it ceases to exist. What does the Bible say about folks in debt? Proverbs 22:7 The rich rules over the poor, And the borrower becomes the lender’s slave. [NASB]

    So, since the United States is in debt…and “We the People” are the United States…that makes us…? Anyone? Anyone? Bueller?

  20. Br. Michael says:

    Ken, thank you for your corrections. But my point stands. If Bush spent like a drunken sailor, Obama is on steriods. If Bush’s spending was bad, how can Obama’s be good? Or is the distinction to be found in partisanship?

  21. Br. Michael says:

    [blockquote] Big admission from Vice President Joe Biden today.

    “The truth is, we and everyone else misread the economy,” Biden told me during our exclusive “This Week” interview in Iraq.

    Biden acknowledged administration officials were too optimistic earlier this year when they predicted the unemployment rate would peak at 8 percent as part of their effort to sell the stimulus package. The national unemployment rate has ballooned to 9.5 percent in June — the worst in 26 years.

    “The truth is, there was a misreading of just how bad an economy we inherited,” said Biden, who is leading the administration’s effort to implement it’s $787 billion economic stimulus plan.

    “Now, that doesn’t — I’m not — it’s now our responsibility. So the second question becomes, did the economic package we put in place, including the Recovery Act, is it the right package given the circumstances we’re in? And we believe it is the right package given the circumstances we’re in,” he told me.[/blockquote]
    http://blogs.abcnews.com/george/2009/07/biden-we-misread-the-economy-.html

    Fair enough.

  22. Ken Peck says:

    20. Br. Michael wrote:
    [blockquote]Ken, thank you for your corrections. But my point stands. If Bush spent like a drunken sailor, Obama is on steriods. If Bush’s spending was bad, how can Obama’s be good? Or is the distinction to be found in partisanship?[/blockquote]
    I thought your point was that it was the Congressional Democrats “that spent like a drunken sailor” the past 8 years.

    The distinction is that Obama took office, inheriting a tanking economy and two unfinished wars. Balancing the budget in the short term is [b]not[/b] a rational option under the circumstances. Rational options at the present time are to cut taxes (done), provide immediate relief to individuals losing their jobs (more or less done) and investing in infrastructure (including education and health) which is started, but there’s much more to be done.

    An educated, healthy work force will be more productive than uneducated, sick workers. Investments in energy, roads, rail and the like will reap long term economic benefits and create jobs for those workers. That in turn will increase tax revenues. And that, along with higher taxes and cuts in government spending, will enable a balanced, if not surplus, budgets to control the national debt.

    The four years when Republicans had absolute control over both houses of Congress and the Executive Branch, they cut taxes and increased spending in a time of economic boom, when they should have been doing the exact opposite. In so doing, they created the situation which the Democrats have inherited in 2009, when tax cuts and increased spending are an economic necessity.

    The Republican Party and conservative Democrats have simply not offered any specific proposals as to how to deal with the economic crisis of 2009. Maybe sometime down the future we can talk about “limited [federal] government”, whatever that might actually mean. But it isn’t an option at the present time, unless you want to turn a major recession into a disasterous depression and perhaps turn the United States into a second, if not third rate country.

  23. Ken Peck says:

    18. Branford wrote:

    [blockquote]Ken – #7 – so glad I’m paying more so you can pay less. Of course, maybe my additional taxes[/blockquote]
    If you are paying additional taxes you either are well above the median in income and/or have an increase in your income. If you are well above the median, you should be able to afford the increases. And it is probable that you have more, not less, disposable income after taxes than before.

    Something like the top 5% of income earners in the U.S. paid around 16% in federal income tax. That is just about what those of us in the median income levels pay. The progressive tax system isn’t progressive, it’s pretty much a flat tax because of the various tax loopholes that the very rich are able to take advantage of.

    [blockquote]Unfortunately, what’s happening is that this year, more people did not file taxes by millions that in previous years. The IRS isn’t sure what’s going on – but I have a good idea -[/blockquote]
    Perhaps you haven’t heard — millions of people have lost their jobs. If you don’t have any income, you don’t file. Others have low paying and/or part time jobs that do not generate sufficient income to require filing.

    [blockquote]after seeing the disregard that many in the administration have towards paying their taxes (Geithner, anyone?) and the fact that when they’re caught and they do pay, they suffer no penalties (either financially or professionally), I think many people are pulling a Geithner.[/blockquote]
    My understanding is that Geithner paid the taxes, with interest, and penalties. That’s what happens to most of us if we mistakenly under report income. Perhaps if one is wealthy enough (and maybe Geithner could qualify) you can pay expensive tax lawyers to settle for pennies on the dollar.

    If “millions” are not filing to avoid taxes owned, they are in for a rude awakening in a few months when the letters from the IRS start arriving, the interest clock is running and the penalties accumulating. I don’t know, maybe it’s full employment for tax lawyers year.