America's Fiscal Constitution: Its Triumph and Collapse

by Bill White

Overview

What would Washington, Jefferson, Madison, Lincoln, the Roosevelts, Truman, and Eisenhower have done about today's federal debt crisis?

America's Fiscal Constitution tells the remarkable story of fiscal heroes who imposed clear limits on the use of federal debt, limits that for two centuries were part of an unwritten constitution. Those national leaders borrowed only for extraordinary purposes and relied on well-defined budget practices to balance federal spending and revenues.

That traditional fiscal constitution collapsed in 2001. Afterward — for the first time in history — federal elected officials cut taxes during war, funded permanent new programs entirely with debt, grew dependent on foreign creditors, and claimed that the economy could not thrive without routine federal borrowing.

For most of the nation's history, conservatives fought to restrain the growth of government by insisting that new programs be paid for with taxation, while progressives sought to preserve opportunities for people on the way up by balancing budgets. Virtually all mainstream politicians recognized that excessive debt could jeopardize private investment and national independence.

With original scholarship and the benefit of experience in finance and public service, Bill White dispels common budget myths and distills practical lessons from the nation's five previous spikes in debt. America's Fiscal Constitution offers an objective and hopeful guide for people trying to make sense of the nation's current, most severe, debt crisis and its impact on their lives and our future.

Product Details

ISBN-13:	9781610393430
Publisher:	PublicAffairs
Publication date:	04/01/2014
Pages:	576
Product dimensions:	6.40(w) x 9.40(h) x 2.10(d)

About the Author

Bill White is senior advisor at Lazard, a firm advising corporate leaders and governments worldwide. He served as Houston's mayor and was twice re-elected with an average vote of 88 percent. He also served as the deputy secretary of energy of the United States. He received the prestigious John F. Kennedy Profiles in Courage Award for his leadership in response to Hurricane Katrina and the Governing Official of the Year Award from Governing magazine. He has worked as the CEO of a successful business and as a member of numerous corporate boards. In 2010 he received more votes for governor of Texas than any Democratic candidate in the state's history.

Read an Excerpt

This book tells the story of generations of Americans who fought for their nation’s future by limiting federal debt. As debt steadily soared following the last balanced budget in 2000, their achievement seems more remarkable.

I shared the frustration so many who have watched the federal government lurch from one budget crisis to another in each of the last several years. My business experience taught me that poorly defined problems are difficult to solve. I set out to use the history of federal debt as a backdrop to clarify what recently went wrong. In doing so I discovered the neglected and inspiring story of what had once gone right.

Before 2001 the federal government had not always balanced its budgets. However, it had borrowed according to informal but well-understood rules, an unwritten fiscal constitution. For most of the nation’s history, federal leaders incurred debt to finance spending for only four accepted purposes. Time-tested budget practices curbed the temptation to use debt for the purpose of hiding the routine cost of government.

The triumph of an unwritten or traditional American fiscal constitution would not have surprised James Madison, the architect of the written Constitution. He had hoped that the new US government would limit debt by application of principles that would be clearly “visible to the naked eye of the ordinary politician.” Many generations of ordinary politicians used those principles to make budget decisions that now seem extraordinary. The very nature of federal borrowing, not just its magnitude, changed fundamentally after 2000. Never before had the federal government waged prolonged wars without raising taxes. Never before had the federal government relied so heavily on foreign creditors. Never before had the president and Congress intended to finance a permanent vast new domestic program—the Medicare Prescription Drug, Improvement and Modernization Act of 2003—entirely with debt. Never before had a Democratic president and Congress tolerated, much less insisted on, the substitution of federal debt for payroll contributions supporting the Social Security trust fund. Never before had “conservatives” spearheaded opposition to a constitutional amendment requiring a balanced budget. Never before had mainstream leaders in both major political parties claimed that balancing the budget in normal economic conditions would damage the nation’s long term economic growth.

Trends in public opinion or ideology cannot adequately explain these shifts in budget policy. Americans did not wake up some morning and resolve to saddle their children with debt. The photo-finish 2000 election furnished no mandate to borrow. Even excluding debt incurred to pay for wars and recession-related relief, the federal government borrowed large amounts with a Republican president and Republican Congress, a Democratic president and Democratic Congress, a Republican president and Democratic House, a Democratic president and Republican House.

Many people believe that it is now politically impossible to balance the budget. My practical experience makes me more optimistic. For much of the last decade I served as the mayor of the nation’s fourth largest city, with a population greater than many states. Like most other cities, counties and states, it abided by laws that prevented the use of debt to fund routine operating expenses. Almost daily I explained to citizens the tradeoff between taxes and spending. They did not always agree with the choices we made, but I learned that people from across the political spectrum respected the need to balance public obligations and tax revenues.

I do not believe that Americans suddenly chose to elect short-sighted people to public office. Most members of Congress in 2001 who supported borrowing for routine expenses had worked hard in the 1990s to balance the budget. For some of that time, as a chief operating officer of a cabinet department who worked to cut spending, I found that leaders in each party supported good faith efforts to promote financial discipline. For two decades I have known our presidents and many congressional leaders in each party. They and others willing to endure the ordeal of elections care at least as much about their country’s future as do other citizens who sit on the sidelines.

History offers a valuable perspective on the nation’s sixth, and current, debt crisis. Budget battles have raged in every session of Congress since Washington took office. Today rising federal debt does threaten the value of investments, the availability of medical care for older Americans, and the viability of future American international leadership. But contemporary budget dilemmas seem manageable when compared to those that confronted Americans immediately after the Revolution, the Civil War, and tough sixteen years of Great Depression and World War II.

Americans have often treated their nation’s exceptional history as a form of secular scripture, a source of inspiration and instruction. Citizens who despair of a government lurching from one annual budget crisis to another can find new hope in some old traditions. The federal government steadily paid down debt during Thomas Jefferson’s administration. Jefferson believed that the nation could ultimately invest more in public improvements if federal leaders reduced the share of tax revenues required to service prior debts. He believed future voters would best be able to judge budget policies by comparing the track record of “different epochs.” I wrote this book with Jefferson’s vision in mind.

Table of Contents

Author's Note ix

1 The American Fiscal Tradition 1

Part I A New Nation and Democratic Party Limit Federal Debt: 1789-1853

2 Debt Gives Rise to a New Nation and Political Party 19

3 Jefferson's Party Defines the Limits On Debt 45

4 A Revived Democratic Party Pays Off the Debt 69

Part II The Tradition Sustains a Growing Nation and the Republican Party: 1854-1900

5 Republicans Embrace the Tradition 93

6 Borrowing and Taxing to Restore the Union 103

7 Shrinking Debt and Drifting Parties 121

Part III Progressive Reformers Embrace the Tradition: 1901-1940

8 Reformers Redefine the Parties and Government 141

9 Financing a World War and Paying Down Debt 159

10 Debt During the Great Depression 183

Part IV Containing the Burden of World War II Debt While Increasing Commitments: 1941-1976

11 War and Taxes 207

12 Containing Debt While Funding Defense, Pensions, and Highways 225

13 Medical Needs, War, and Recession 247

Part V The Erosion, Revival, and Collapse of the Tradition: 1977-2013

14 Structural Deficit: Pressures for Tax Cuts and a Revived Cold War 271

15 The Tradition Survives, Though Its Pillars Erode 291

16 Traditionalists Battle Back 305

17 The Tradition Collapses 327

18 The Great Recession and Budget Stalemate 343

Part VI Restoring the Tradition

19 Reviving Traditional Budget Practices 363

20 Balancing the National Security Budget 375

21 Paying for Medical Care 383

22 Growth, Taxes, and the Federal Reserve 393

23 Reforming the Political Parties 403

Acknowledgments 409

Notes 411

Bibliography 453

Appendices

A US Treasury Debt, 1790-2013 492

B Unmonetized Debt Compared to National Income and Tax Revenues, 1790-2012 499

C Federal Funds Revenues, Outlays, and Surplus/Deficit, 1789-2013 507

D Foreign Holdings of US Debt, 1976-2011 514

E US State and Local Debt, 1970-2009 516

F Trade Balances, 1790-2010 518

G Corporate Income Tax: Effective Rates and Share of National Income, 1960-2009 525

H Personal Income Tax: Effective Rates and Share of National Income, 1950-2010 527

Index 531

Editorial Reviews

…America's Fiscal Constitution mostly lets the numbers speak for themselves. White resists ideologically easy answers, like taxing the rich, because he says the numbers don't work…He also compiles a list of what he calls "myths concerning federal debt"…This is an important book, but not an easy one.

The New York Times Book Review - Bethany McLean

“…Lucid and pioneering…a compelling and illuminating formula for both economic growth and fiscal restraint."–James MacGregor Burns, Pulitzer Prize-winning historian and Professor Emeritus at Williams College

“There are few Americans I trust more than Bill White. With history as his guide, White trailblazes through the Washington, D.C. bureaucratic jungle, revealing Big Truths that are bolstered with Hard Facts.”–Douglas Brinkley, Professor at Rice University and CBS News Historian

“A thought-provoking and well-told history of our nation's traditional financial principles. Every citizen can benefit from this book's practical insights.”–Ross Perot

“Bill White's thorough understanding of both finance and government allows him to trace the history of America's path to the edge of fiscal irresponsibility.”–Erskine Bowles,Co-Chairman of National Commission on Fiscal Responsibility

“Powerful, penetrating and persuasive…a tour de force of our fiscal history. A timely and important contribution to the raging debate on our fiscal future.”–Kent Conrad (D), former Chairman of the US Senate Budget Committee

“However, rather than merely argue in the abstract, the author undergirds his case by recommending specific steps to alleviate the crisis, including, among others, establishing solely tax-financed budgets and putting bonds up for national election. Reading between the lines, White is recommending much more—and therein lies controversy, especially when it comes to military spending. A book that deserves much attention.”– Kirkus Reviews

“With its powerful blend of national history and government analysis, America's Fiscal Constitution is a pick for any political studies collection.” —Midwest Book Review

“Our nation cannot be strong militarily, diplomatically or politically unless it is strong economically, and we cannot remain strong economically unless we deal with our massive debt burden…A must read for those who believe that we should get our economic house in order.”–James A. Baker III, former Secretary of the Treasury and Secretary of State

“In order to understand our fiscal plight, it's crucial to appreciate how carefully America has dealt with debt in the past. Bill White makes that tale fascinating.”–Walter Isaacson, best-selling author and former CEO of CNN and managing editor of Time magazine

“Will be music to the ears of budget hawks everywhere…This is an important book.”–New York Times Book Review

“Something remarkable…a fascinating book about our economic history …America's Fiscal Constitution tells the story of how America has dealt with its debt since its founding, and in doing so provides a compelling roadmap to a more responsible fiscal future.”–President Bill Clinton

“Perhaps the best chance to avoid fiscal Armageddon will come from educating the public in the pre-Keynesian virtues of balancing the nation's books. To this end, ‘America's Fiscal Constitution' serves a noble purpose.” –the Wall Street Journal

“An unusual and important book…[White] is no starry-eyed optimist and recognizes the serious political obstacles to his program. But he argues that because the reforms he supports aim to revitalize a fiscal tradition that has deep roots in American culture and history, the public can be brought around to support the sometimes painful choices they would require.”–Foreign Affairs

From the Publisher

2014-01-23
Looking to beat up on George W. Bush some more? There's plenty of ammunition in this chronicle of the collapse of federal fiscal discipline during the previous administration. The federal government is no stranger to debt, writes former Houston mayor and Texas gubernatorial candidate White. But by virtue of "informal but well-understood rules, an unwritten constitution," the government, from the end of the Revolutionary War through 9/11, borrowed during severe downturns to make up for lost revenue and then promptly balanced the budget. It also borrowed to expand national borders, as with the Louisiana Purchase, and in times of war—though it also financed war with new and expanded taxes. That ended in 2001, when, for the first time in American history, the Bush administration took the wars in Afghanistan and Iraq off the books and financed them strictly by debt, which flies in the face of all fiscal wisdom. Moreover, the Bush administration even pressed to lower taxes; only John McCain and two other Republicans, White notes, "opposed cutting taxes during war" by voting against a Bush-fomented bill that did just that. Writing in vigorous, plain English, the author turns a few falsehoods on their heads while making his argument—e.g., Franklin Roosevelt did not sink the nation into debt through federal spending in the Depression; the Social Security trust is sound; it would not harm the economy to balance the budget. White's battle is certainly uphill, given that both parties have become accustomed to staggering levels of debt that he warns are unsustainable. However, rather than merely argue in the abstract, the author undergirds his case by recommending specific steps to alleviate the crisis, including, among others, establishing solely tax-financed budgets and putting bonds up for national election. Reading between the lines, White is recommending much more—and therein lies controversy, especially when it comes to military spending. A book that deserves much attention.

Kirkus Reviews