Federal Debt - Built on Compassion, but Dangerous

Sydney M. Williams

Thought of the Day

“Federal Debt – Built on Compassion, but Dangerous”

February 22, 2010

In the introduction to his 1997 book, Hamilton’s Blessing, John Steele Gordon quotes an 18th century British journalist trying to explain the magnitude of Britain’s national debt of ₤272 million, as it was in 1790: the debt was “a sum which the human mind can hardly form an impression. Were it to be laid down in Guineas (a gold coin worth 21 Shillings), it would extend upward of four thousand three hundred miles in length.”

Our debt can be expressed in equally dramatic terms. Yesterday the Space Shuttle Endeavor returned from sixteen days in orbit with the International Space Station, a trip that covered 5.7 million miles. If the astronauts had tossed out the window $250,000 for every mile they traveled, the total dropped would approximate our $14 trillion debt.

As a percent of GDP, the Federal debt, the current budget and the deficit are at the highest levels since World War II.

For decades Cassandra’s have been preaching the miserable fate that will be ours if we do nothing to reverse this trend that has been in place for the last fifty years. The very fact that these doomsayers have been proven premature and wrong has caused complacency to seep into Washington’s psyche. It is reminiscent of the Aesop story of the boy who cried wolf; when the wolf finally appeared, the boy’s cries went unheeded.

Nobody knows how far this band of debt can be stretched, but we all know there is a point of no return. And, if nothing else, the debt we have accumulated over the past five decades, a time of relative peace and reasonable growth, limits our ability to respond robustly during times of crisis. The current crisis has doubled our deficit in a year. Could we afford to double it again?

More than anything else, our debt is a function of compassion, of a willingness to share the great riches of this Country with those less fortunate. At home, the United States has a welfare system (Social Security, Welfare, Medicare and Medicaid) that increasingly consumes larger and larger portions of our budget – transfer payments that are considered inviolate. Abroad the United States acted as defender of the West during the forty-five-year-long Cold War. We are the first to respond in times of natural disasters. We do more to fund organizations like the IMF and the World Bank than any other country. We are the force and the check book behind the current War on Terror – the beneficiaries of which are free peoples all over the world. The United States is blessed in its natural resources, its climate and its people, but it is also blessed with an unparalleled work ethic and an innovative spirit that has permitted those resources to be converted into wealth.

No caring person wants to end such aid. No politician wants the government he serves to be less benevolent. But compassion without means is simply a deferral of an ultimate due date and eventually only an empty promise.

It is possible the Country goes on, digging an increasingly deep and difficult hole. No one knows the tipping point, the moment the rubber band snaps, but it will. President Obama’s decision to ask Erskine Bowles and Alan Simpson to head a bipartisan commission focusing on the deficit is a good first step. Peggy Noonan wrote in this weekend’s Wall Street Journal, the decision is “…politically shrewd and, in terms of policy, potentially helpful.” The irony is that, as the President announced the bipartisan committee, he also announced plans to re-spend returned TARP funds, money that was supposed to be used to reduce the deficit. With politicians, one must watch what they do, not what they say.

Spending will have to be reined in, as painful as that will be. On the other side of the ledger, revenues must be increased. There are three choices. We can increase tax rates, we can concentrate on economic growth, or we can implement some combination of the two. The Federal tax code has become so complex that very few individuals understand it – a boon to tax lawyers and accountants, but a bane to the people. There are so many special provisions and allowances for hiding income, which permit the very wealthy to escape. At the other end of the spectrum, almost half the working people in this Country pay no taxes, other than payroll, essentially suggesting they – with no skin in the game – are motivated to keep things as they are. With little expectations, I hope the Commission contrives a greatly simplified plan that encourages investment and growth and discourages consumption, and a tax which becomes difficult to dodge either legally or illegally.

But it is worth repeating that our enormous budget and subsequent deficits are not the result of evil politicians deliberately doing bad things. They result from a sense of unwitting compassion that exceeds our means and will result, if nothing is done, in an unconscionable burden being placed on our children and grandchildren.

It is easier to spend than to save, but the current recession has forced most companies and households to change behavior; government should be no different. Aggravating the future, artificially low rates have hidden the real burden of deficits – not a condition one can expect to last forever.

The World War II period is instructional. Deficits, in today’s dollars, for the years 1942-1946 totaled $2 trillion. For the years 1947-1951, the Federal government recorded $185 billion in surpluses. Debt remained high and it took years to repay it. But progress was almost immediate. It takes tough and unpopular decisions to achieve such gains, but history suggests it is possible.