From Mole Hills to Mountains
By Tyler Grimm
with sidebars by Burton Folsom
The U.S. Treasury Department updates our national debt on a daily basis. The current debt—to the penny—is $13,203,473,753,967.10 (that's $13 trillion). With our country on the hook for such an incomprehensible sum, it's worth asking: How the heck did we get here?
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Is our current level of debt a result of under-taxing? Over-spending?
Was it the wars in Iraq and Afghanistan and security buildup after 9/11? The Bush tax cuts? The bailouts? Obama's "stimulus"?
Before we get to that, let's start with a quick look at the history of U.S. debt. (All figures below refer to debt per person, adjusted for inflation to be comparable to the worth of a dollar today.)
For the Founding Fathers, the nation's debt obligations were a grave matter. In George Washington's farewell address, he was thankful the United States secured financing for the Revolutionary War but warned against excessive debt. He admonished the country's liabilities should be paid down quickly. "Cherish public credit," Washington implored, "... avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertions in time of peace to discharge the debts which unavoidable wars have occasioned, not ungenerously throwing upon posterity the bur[d]en which we ourselves ought to bear."
For the first 50 years of our nation's existence, the federal debt was reasonably low—on average, less than $130 per person. In fact, Andrew Jackson paid off the national debt (which he called a "national curse") entirely in 1835— the only time this has occurred in our country's history. The national debt remained low, averaging less than $35 per person, until the Civil War.
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That War – the deadliest in our nation's history – and the Reconstruction era that followed were costly but not extremely burdensome; debt peaked at around $1,100 per person and, for the most part, declined until World War I, when debt made its way up to around $3,000 per person. Not great, but still manageable. Then came the New Deal and World War II.
Franklin Roosevelt's vast expansion of the federal government under the New Deal drove up the debt to $4,000 per person (the amount would have been much higher but was offset with punitive tax increases).
Nevertheless, things weren't really grim until World War II, which plunged our country deep into the red. In per person terms, debt rose to $22,000 – a staggering 526 percent increase over 10 years prior. Total debt was well over 100 percent the size of the economy.
New York Times columnist Paul Krugman and other deficit-spending champions often claim, "we did it during World War II so we can do it now." But you should be aware of two very important distinctions between national debt during World War II and now.
First, we did not have a choice:
The nation was fighting an existential war against fascist foes that sought world domination. Second, the government was able to use the fervor of patriotism to sell War Bonds (think of the iconic Rosie the Riveter posters). While they helped finance the war effort, the bonds were actually an awful investment that would not pass muster today.
As Harvard historian Niall Ferguson has explained, "War bonds were among the worst investments of the 20th century, and it was just unfortunate that nobody had explained to my grandmother what her real interest rate was. If they had, she might have realized that she was earning negative real returns on her patriotic investment."
Besides, it's not as if there's an appetite for Cash for Clunkers bonds.
In the 1950s, the Korean War took a small toll on our nation's finances, but the next debt milestone worth mentioning is the "Great Society." Launched in 1965, this was President Lyndon Johnson's attempt to build upon the Big Government foundation laid by the New Deal. The effort included vastly expanding America's safety net with a series of new social welfare initiatives: Medicare, Medicaid, and Head Start were just a few of the programs created.
Initially, these did not have a huge impact on the country's debt burden. In fact, real debt mostly declined for the decade after 1965 (which Ted Kennedy called "the breakout year" for modern liberalism). However, the limited debt impact was an illusion based on artificially rosy economic assumptions. According to economist Herbert Stein, the Great Society "reflected a misconception of the long-run budget situation, if not a total neglect of the long run." These programs have since become a tumor in U.S. fiscal policy – by 2014, Medicare and Medicaid will be larger components of the budget than defense spending.
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The Vietnam War, while perceived to be very costly, was not that expensive in historical terms. At roughly $700 billion in today's dollars, it cost less in total than the price of Social Security this year alone. It was the Cold War military buildup that cost us big.
While Ronald Reagan was the most fiscally conservative president in modern history, he did not shy away from a serious ramp up in defense spending. He wanted to keep government small, but Reagan knew that stopping the spread of Communism was paramount. As you can see in the nearby chart, debt soared in the 1980s. The debt per person in 1981 was about $10,000. By the time the Berlin Wall fell, that figure doubled to $20,000.
The 1990s saw a modest increase in the national debt. Per person, debt increased less than 15 percent under Bill Clinton. Things would have been a lot worse, but our balance sheet was aided by the gridlock resulting from Bill Clinton having to work with a Republican congress.
Now, let's fast-forward to the year 2000, where things really start to get interesting.
By the new millennium's start, debt reached roughly $25,000 per person. This, however, didn't stop George W. Bush from going on a spending binge that would make shopaholics wince. He increased spending on income security programs by 44%; education by 63%; community development by 134%. Bush increased spending more than Bill Clinton in nearly every category of the budget. In just eight years, Bush managed to raise debt per person to over $38,000.
Believe it or not, there is an actual "limit" on our debt. The limit is more of a political tool than a real barometer of our debt. Nevertheless, it does provide some context for how bad our current situation is. Congress first established the debt ceiling at the onset of WWII in 1940; it was set at $49 billion (adjusted for inflation, that's equal to about $5,700 per person). It has since been raised 99 times and is now set at $14.3 trillion ($47,000 per person).
If you ask a liberal how our debt exploded in recent years, they will likely say Bush's expensive wars and tax cuts. The truth is that defense spending accounted for only 40 percent of all new spending under Bush.
Washington now hopes to cut the deficit in half by 2013.
But consider this: according to Congressional Budget Office (CBO) data, had Obama done nothing, the deficit would have declined by more than 75%. This is not fuzzy math coming from a right-wing think tank; that statistic is based on cold hard facts from the CBO's budget calculations.
Before a president proposes the annual budget, there is an established "baseline" – that is, what spending would have been had the previous budget trajectory continued. In March of 2009, the baseline (this included the "stimulus") projected that the deficit would decrease to $300 billion by 2013. In the same document, the CBO estimates that President Obama's proposed spending would mean that the deficit would be $672 billion that year.
In the year and a half since then, the situation has only gotten worse. The White House said in late July that, based on the latest spending assumptions, debt in 2013 would be $736 billion. Sure, that is still half of this year's $1.47 trillion deficit, but that's like applauding a smoker for cutting down from eight to four packs a day.
As of this writing, total debt stands at roughly $43,000 per person. To service this obligation, we are paying interest of about $188 billion (more than 10 times what Wal-Mart will make in profits this year). Unlike other areas of the budget, with interest payments we get absolutely nothing in return – the money simply goes to finance past overspending.
By 2020, debt per person is slated to reach more than $75,000 and interest payments will more than quadruple to $900 billion. That means we will be paying more in interest than the current size of Switzerland and Sweden's economies combined. And that's a best-case scenario – it assumes we continue to enjoy relatively low interest rates.
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But it gets much worse. Over the next 75 years, Medicare and Social Security are slated to spend $46 trillion more than they will take in. Former Treasury official Bruce Bartlett has estimated the total amount by which future spending is unfunded to be over $100 trillion. To put that in perspective, that's equivalent to taking this year's income from all Americans… nine times.
We are in the midst of a fiscal crisis that threatens to undo the financial fabric that makes America the land of plenty. We are doomed unless our elected officials can find the courage to make the politically unpopular spending cuts that are needed to put the country back on a sustainable path.
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