February 10, 2012
The
issue of national debt in the United States is that it has become too pervasive
and unsustainable. A large debt can have major ramifications, such as
constraining long-term economic growth, constraining government spending and
flexibility, increasing interest rates, etc. Another major problem is that
there is major disagreement about how the debt should be reduced. There are a
variety of different economic policies and options that this paper will outline
that has been used throughout history to reduce the debt. This paper will argue
that although the US has been in debt for the majority of its existence, the
issue of debt reduction has only become most salient after the 2008 global
financial crisis. The first part of the paper will explain the history of
national debt and the different policy responses that have occurred. However, the
second part looks at the period after Ronald Reagan’s administration to analyze
how the issue did not become salient until 2008 election.
Part I: History of US National Debt
America’s history of national debt
began as early as 1771 after the Revolutionary War, which led to an accumulated
debt of more than 75 million dollars. President George Washington tried to
strengthen US credit by advocating against the “accumulation of debt, not only
by shunning occasions of expense, but by vigorous exertions in time of peace to
discharge the debts.”[i]
To address the problem, he passed a tariff and a whiskey tax in order to
generate revenue so that the debts could be paid off. The Secretary of the
Treasury, Alexander Hamilton, also took steps to target the debt by creating a
more central government, which would control payments, create banks, and
implement taxation policies. Washington also recognized that a way to decrease
the debt was “by cultivating peace” because historically wars have led to
increases in the debt; while there have been decreases during times of peace.[ii]
This trend explains why the period of peace after the Revolutionary war led to a
decrease in the debt to less than 34 million dollars in 1803. There were spikes
in the debt during the War of 1812 and the Mexican War, yet the following
presidents decreased the debt to such an extent that Andrew Jackson was able to
pay the debts off entirely and establish a surplus by 1836.[iii]
Jackson perceived the debt as a “national curse” so he took many steps to reduce
the debt, such as cutting spending, “internal improvements,” and liquidating
the Second Bank of the US.[iv]
The trend continued with debt
increases occurring during the Civil War from $60 million to more than $2
billion.[v]
In order to generate revenue and decrease the debt, the government implemented
an income tax; passed the Legal Tender Act of 1862, which sold bonds and US
notes; and the National Bank Act of 1863.[vi]
Although income tax was removed after the war, following presidents became
recommitted to decreasing the debt, which was evident with 28 consecutive years
of surpluses, and the income tax being reinstated in 1913.[vii]
World War I increased the debt as well but the US government tried to fund the
war with Liberty Loans.[viii]
The US government also implemented a debt ceiling on the US Treasury, which put
a limit on the amount of money that they could borrow from the public before
appealing to Congress.[ix]
Although the peace of the 1920s led to a reduction in the debt, the largest
debt increase began in the 1930s with the Great Depression. The policy that was
implemented during this time was the beginning of Keynesian economics, which was
the idea that private sector decisions did not always lead to efficient
outcomes as was traditionally believed.[x]
John Maynard Keynes argued that during a recession, a government needs to be
willing to use deficits to increase spending and/or cut taxes in order to bring
the economy out of the recession. Instead of a laissez-faire policy, Franklin
D. Roosevelt adopted some aspects of Keynesian economics as he began
implementing the New Deal, where he had farm subsidies, public works, and
social security. In 1945 the debt had increased to $259 billion because FDR tried
to get out of the depression by federal borrowing and it increased during World
War II.
Following WWII there was a postwar
expansion but it was not until the administration of President Ronald Reagan in
1981 that the debt began increasing at a faster rate due to his policies,
called Reaganomics.[xi]
Reagan’s policies consisted of an increase in defense spending, and a reduction
in government spending, government regulation, inflation, and income taxes. Reagan’s
tax cuts mostly benefited higher level earners with the reduction of the top
marginal tax rate from 70 to 28 percent.[xii]
He believed excessive taxation would reduce tax revenues by lowering the
incentive to produce. At this time, Reaganomics was a move away from Keynesian
economics and was unconventional among the Republican Party. This was evident
in 1980 when George Bush criticized Reaganomics as “voodoo economics.”[xiii]
The administration also generated an increase in the debt from $997 billion to
$2.85 trillion, which changed the US from being the “world’s largest
international creditor to the world’s largest debtor nation.”[xiv] Despite these issues, Reaganomics has gained
popularity among subsequent Republican candidates. The next part of this paper
will analyze the period following Reagan’s administration to the present
because the tremendous increase of federal debt did not have an adverse
political impact and was largely ignored by voters until the 2008 election
where it became a salient issue. Each election since Reagan’s administration
will be examined, with an emphasis on how the election was influenced by the debt
issue, and the different policies that were passed to address this.
Part II: The Impact
of the National Debt Issue on Elections
After Reagan, the federal debt
continued to be ignored politically because “voters and politicians became
anesthetized to big deficits,” and there were no short-term impacts that
dissuaded the public.[xv]
When Reagan was elected in 1980 and served his first term he increased the debt
from $997 billion to $1.37 trillion even though he promised a balanced budget
by 1983.[xvi]
This did not have an adverse political impact on Reagan because he was able to
get re-elected for a second term in 1984. Reagan ran on the idea that the
deficit will disappear with tax cuts; whereas, Walter Mondale argued that the
debt needs to be decreased “to get the interest rates down so the economy will
grow and people will be employed” and if it “won’t come down, the economy’s
going to slow down, [and] maybe go into a recession.”[xvii]
The fact that Reagan was re-elected for an additional term shows that voters did
not agree with Mondale that the debt was an important issue and instead chose
to ignore it or they continued to support Reagonomics.
In the election of 1988 similar
positions and outcomes occurred when George Bush I and Michael Dukakis competed
for the presidency. Bush I advocated for tax breaks, maintaining the strategic
defense system, and a flexible freeze. Dukakis’ position was that he would
decrease the deficit by cutting the weapons program and due to his experience
at balancing ten budgets in a row in Massachusetts.[xviii]
The fact that Bush was elected explains that the debt issue had yet to gain
salience because Reaganomics already proved that it was ineffective at debt
reduction.
In the 1988 election between Bush I
and Bill Clinton, the issue of rising deficits were raised once again. Bush ran
on the basis of decreasing the deficit, controlling spending, and not raising
taxes, while Clinton wanted to reduce the deficit and decrease military
spending. Although Clinton was victorious, the rising debt was not the major
reason but rather the fact that Bush broke his 1988 campaign pledge to not
raise taxes, because the economy was in recession, and because the end of the
Cold War and Gulf war meant that foreign policy (which was Bush’s strength) was
less important. Clinton increased taxes with the Deficit Reduction Act, and
implemented budget controls, which limited spending by Congress. In 1996
Clinton was reelected because the deficit had been reduced significantly and
Bob Dole`s criticism that Clinton cut the defense budget too much, did not gain
support from voters since it was a period of relative peace. By the end of
Clinton’s second term, a surplus had been generated.
In the election of 2000, Al Gore and
George Bush II each had different arguments for what they would do with the
surplus. Gore said that he would continue to balance the budget, cut taxes for
the middle class, and use the surplus to pay off the debt. However, Bush II
argued that he would distribute a half of the surplus to social security, a
quarter to important projects, and half would be for tax cuts. The fact that
Bush II was not going to use the surplus for debt reduction and yet was elected
showed that the public did not see debt reduction as a salient issue. Bush
increased the debt as a result of a slow economy, the tax cuts, and the “War on
Terror.” However, the debt increase did not impact the 2004 election between
Bush II and John Kerry because foreign policy and homeland security dominated
the debate. Spending no longer had a negative connotation but rather Bush says
that he is “going to spend what it takes to win the war” and how it is “an
obligation to spend that kind of money”[xix]
Kerry based his campaign on criticism of the Iraq war, its high cost, the tax
cuts, and the large deficits. The public re-elected Bush, which showed how
voters supported his foreign policy and high military spending.
The next election in 2008 led to the
national debt becoming the foremost issue because of the global economic crisis
and the large, unsustainable debt.[xx]
Both candidates, Barack Obama and John McCain agreed on the importance of
decreasing the debt and improving the economy. McCain advocated for tax cuts, cutting
government spending, and implementing a spending freeze. Obama wanted to give a
tax cut for those earning less than $250,000 while removing the tax cuts for
those earning more, and increasing regulation. The election of Obama explained
that voters were dissatisfied with the years of Reaganomics. Obama’s
administration reverted back to Keynesian economics by implementing a stimulus
plan to stabilize the economy before trying to reduce the debt, yet he
appointed a commission to study and make recommendations for deficit reduction,
and has put a freeze on non-defense spending. There has been an increase in the
debt from $11.9 trillion to more than $15 trillion. The disagreement over how
to approach the debt issue has also led to clashes between Republicans and
Democrats with the debt ceiling crisis. The Republicans want to stop spending and
limit the debt ceiling, while the Democrats believe that spending is needed.
After the Democrats and Republicans failed to reach an agreement, the credit
rating agency, Standard and Poors, downgraded the American government’s credit
rating because they lost confidence in the ability of the US government to
reach agreements. This current government has faced difficulty in deficit
reduction because of the continued military obligations in Iraq and
Afghanistan, extensions in the Bush tax cuts, and increased spending with the
stimulus plan and bailouts.
In
conclusion, by examining the history of national debt, it is evident that there
have been a variety of different tactics, ranging from Jacksonian spending
cuts, laissez-faire governments, Keynesian economics, Reaganomics, etc. Early
history tends to follow the pattern of debt increases during wartime and
decreases during peacetime; whereas, after Reagan’s administration this trend
has deteriorated. The debt issue has
[i]
George Washington, “The Farewell Address: The
Transcript of the Final Manuscript,” The
Papers of George Washington (19
Sept. 1976.): 1-32, http://gwpapers.virginia.edu/documents/farewell/transcript.html (accessed February 10, 2012) 21.
[ii]
Ibid, 21.
[iii]
Burton Folsom, “Our Economic Past: Our Presidents and the National Debt,” The Freeman Ideas on Liberty 56, no. 6 (August 2006).
[iv]
John Steele Gordon, “A Short History of the National Debt,” Wall Street Journal, 18 Feb.
2009., under “Opinion,” http://online.wsj.com/article/SB123491373049303821.html (accessed February 10, 2012)
[v]
Folsom
[vii]
Jim Saxton, “Budget Surpluses, Deficits and Government Spending,” United States
House of Representatives,http://www.house.gov/jec/fiscal/budget/surplus2/surplus2.htm (accessed February 10, 2012).
[viii]
Ibid
[ix]
“A Look at Government Bonds and National Debt,” Investopedia,http://www.investopedia.com/articles/04/011404.asp#axzz1lwkYan3y (accessed February 10, 2012)
[x]
Saxton
[xi]
William Niskanen, “Reaganomics,” Library of Economics and Liberty,http://www.econlib.org/library/Enc1/Reaganomics.html (accessed February 10, 2012).
[xii]
Jonathon Weisman, “Reagan Policies Gave Green Light to Red Ink,” Washington Post, June 9, 2004,
under “Business,” http://www.washingtonpost.com/wp-dyn/articles/A26402-2004Jun8.html (accessed February 10, 2012)
[xiii]
Weisman.
[xiv]
ibid
[xv]
Weisman.
[xvi]
Stephen Bloch, “U.s. Federal Deficits, Presidents, and Congress,” Department of
the Treasury,http://home.adelphi.edu/sbloch/deficits.html (accessed February 10, 2012).
[xvii]
Ibid
[xviii]
Ibid
[xix]
Debate Transcripts.
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