The Fiscal Times
Author John Steele Gordon has chronicled the history of American business and finance in books such as Hamilton's Blessing: the Extraordinary Life and Times of Our National Debt; The Great Game: The Emergence of Wall Street as a World Power, 1653-2000; and Empire of Wealth: The Epic History of American Economic Power. He spoke with The Fiscal Times’ Yuval Rosenberg about our national debt and its long history as a subject for political debate. An edited transcript:
TFT: First, can you explain what exactly the national debt is and how it’s different from the public debt?
JSG: The national debt consists of all of what are called the Treasury securities—either bonds or notes or bills, depending upon how soon they come to an end. The public debt is the bonds, notes, and bills that are held by the public or by banks or by foreign governments or whomever other than the United States government itself. And then you have the intra-governmental debt, which are the federal bonds that are held by other agencies of the federal government, principally the Social Security Trust Fund.
TFT: Let’s take that last part, intra-governmental debt and the Social Security Trust Fund—you have argued that should rightly be included in the national debt. Why?
JSG: It’s because those bonds will eventually have to be redeemed. They bear the full faith and credit of the United States, just like the federal bonds that China owns. Those bonds cannot be sold in the marketplace; they can only be redeemed by the Treasury. And therefore when the Social Security Trust Fund starts running deficits because of the baby boomers increasingly retiring, the Fund is going to start taking those federal bonds down to the Treasury and saying, “Give me the money.” At which point Congress, basically, is going to have to decide whether to raise taxes to redeem those bonds, cut spending elsewhere to redeem those bonds, or borrow the money in the public bond market, which is overwhelmingly the likely thing for them to do. So those bonds that are now intra-governmental debt will, in the fullness of time, become part of the regular debt.
TFT: You have written that the debt has primarily been increased over our history in order to fight wars or counteract recessions.
JSG: Right. No major country has ever fought a… major war without borrowing money in order to do it. In the Civil War the national debt went from $65 million to about $2.7 billion in four years. And that’s one of the main ways the North was able to win the war, because we could borrow money, whereas the South increasingly could not. And therefore they had to print it, which caused a raging inflation in the Confederacy.
TFT: How is our current scenario different? We’ve been fighting wars that have cost $3.7 trillion or however much it is and, of course, fighting a recession. So why has the size of the debt become such a problem now? Are we maybe too fixated on it?
JSG: Well, the wars we have been fighting in the last 10 years in Iraq and in Afghanistan have been, compared with previous wars, very small potatoes. Now, war is always very, very expensive. But compared with Vietnam or the Korean War or World War II especially, they take up a very small part of the total federal budget. And therefore we could have funded them by cutting elsewhere or finding efficiencies in the government, which would not be hard to find if people would look for them. Unfortunately, bureaucrats are institutionally incentivized not to find ways to cut money. In the private sector, if you come up with a way to do something more efficiently, you are rewarded. You get a raise, you get a corner office, what have you. There’s no incentive in government to become more efficient.
TFT: Would you say that the size of the debt,now at 97.2% of GDP, warrants the kind of attention and priority we’ve given it in recent months?
JSG: Yes, very much so and here’s why: The debt has been higher in terms of GDP in previous eras. In 1946 it was almost 130% of GDP, but government expenses were radically reduced in ’46, ’47, ’48 as we unloaded the no longer necessary vast military apparatus that we had for the war. We can afford 97% of GDP—if that was the high point we could handle it. What’s very worrisome is the trend. We were at 68% two years ago, now we’re at 98%. Does that mean two years from now we’re going to be at 130? The time to start worrying about this is now rather than wait until we reach Greece levels of debt to GDP.:Yes, very much so and here’s why: The debt has been higher in terms of GDP in previous eras. In 1946 it was almost 130% of GDP, but government expenses were radically reduced in ’46, ’47, ’48 as we unloaded the no longer necessary vast military apparatus that we had for the war. We can afford 97% of GDP—if that was the high point we could handle it. What’s very worrisome is the trend. We were at 68% two years ago, now we’re at 98%. Does that mean two years from now we’re going to be at 130? The time to start worrying about this is now rather than wait until we reach Greece levels of debt to GDP.
TFT: But you have to look at the debt-to-GDP ratio in combination with the overall growth rate of GDP, right? Or is there a hard and fast limit for what the debt-to-GDP ratio should be?
JSG: AYou can’t borrow a dollar if you’ve already borrowed it. If we run up the national debt to as high as we can get it and then a real urgency comes along – I mean a repeat of the 1930s or a major war – suddenly we don’t have the ability to borrow money. If that happens we are going to lose that war.
TFT: You have noted that, since World War II, we have been able to grow our way into reducing the debt-to-GDP ratio. Do you think we can do that this time around?
JSG: We certainly could. If we cut spending back to what is was say in 2007–and I don’t remember anyone starving in the streets in 2007. It looked like a fairly prosperous country to me. We were taking care of the people who couldn’t take care of themselves; we were a compassionate country. If we cut government spending back to those levels, we’d be in surplus in 10 years or something like that. And we’d be reducing the national debt relative to GDP very quickly, just like we did after World War II.
TFT: What kind of balance do we strike between cutting spending, letting GDP growth handle some of the debt ratio, and increasing taxes?
JSG: I don’t like the idea of increasing taxes. Certainly not until we have completely and thoroughly reformed this utterly corrupt tax system that benefits people like—even though he protests his innocence—Warren Buffett. You know, he’s complaining he doesn’t pay enough taxes. Well, he also works very hard to see that he doesn’t, which is sort of slightly hypocritical. We’re not going to make [the tax system] perfect, but we certainly can make it better than the cesspool of legal corruption that it is now. Right now you have no idea what… taxes your neighbor is paying. You just know that if he has 10 times the income you have, he has 10 times better accountants and lawyers to make sure he isn’t paying as much as you are in percentage terms, and that’s just plain wrong.
TFT: How has public perception of the national debt changed over time?
JSG: It was a huge political question at the very beginning. It was a huge political battle between Hamilton on one side and Jefferson on the other as to exactly how to fund the payment of that debt. Hamilton won the battle, and by 1795 American bonds, which had been worthless in 1789, were selling at a premium in European markets because those markets regarded the American debt as being so well funded and so secure. Jefferson won the war and dismantled The Bank of the United States and other things. But the debt didn’t grow except for the War of 1812. And then Andrew Jackson, who was a thoroughgoing Jeffersonian when it came to economics, actually paid off the national debt. His political allies in Congress, of course, wanted to fund what were called internal improvements–today we call them earmarks. He said as soon as we have paid off the debt then there will be money for canals and roads and bridges. And he succeeded. The only major country in the history of the world that has ever paid off its national debt is the United States.
TFT: How long did that last?
JSG: Oh, it lasted about six months. Unfortunately Jackson was a man who was very firm in his opinions, but he was not deeply schooled in economics.
TFT: Was there concern about the level of national debt after World War II?
JSG: Oh sure. Because a lot of economists, their crystal balls as cloudy as ever, thought we’d plunge back into depression as soon as the war was over. They didn’t take into their calculation all of the enormous demand that had built up during the war when you couldn’t buy new houses, you couldn’t buy tires, you couldn’t buy washing machines or automobiles. So people were driving around in clunkers, and they couldn’t wait to buy a new car. And because they hadn’t been able to spend anything, their bank accounts were enormous. The savings rate in the United States during World War II was something like 30 percent. That’s why we had a big boom after the war and not a depression, which almost every economist had predicted.
TFT: What about the national debt during the Reagan years, when it actually went up considerably?
JSG: It went up considerably and anxiety about it went up. It was not an issue at all until around 1980. But then because of the end of inflation, suddenly the debt-to-GDP ratio started soaring. And there wasn’t a whole lot Reagan could do about it. Remember, the House of Representatives was always in Democratic hands while he was president. So in effect [the president and Congress] made a devil’s bargain. Reagan said he wanted to increase military spending in order to win the Cold War, which he did, and the Democrats wanted to have their usual increases in Social Security and earmarks. And so they just spent on both. And it wasn’t until 1994 when the Republican Congress came in, the first time you had a fully Republican Congress in 40 years, that spending restraint really took hold. Also, President Clinton tacked very firmly to the center.
TFT: How unusual is it for the government to run a surplus like we had in the late ‘90s?
JSG: In the last 50 years, almost unprecedented. And if you keep honest books, we haven’t done it. The last time we had true surpluses in the federal government was in the 1950s. Because those surpluses of the late ‘90s were predicated upon the money from the Social Security Trust Fund being counted as income. The national debt went up every one of those years we were theoretically running a surplus. If you are taking in more money than you are paying out, how can your debt increase? Well, because the money was coming in because we were handing out bonds for it to the Social Security Trust Fund. If a corporation tried a stunt like that they’d all be in jail, and they should be. It is totally phony books. One thing that you can say is that we will not definitely solve the government’s fiscal problems until the power to handle the books is taken away from the people who benefit from cooking them, which is to say Congress and, to a lesser extent, the president. As Madison said, if men were angels, we wouldn’t need government. Well, men aren’t angels, and that includes congressmen.