Simon Johnson - White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You

Copyright 2012 by Simon Johnson and James Kwak

All rights reserved. Published in the United States by Pantheon Books, a division of Random House, Inc., New York, and in Canada by Random House of Canada Limited, Toronto.

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Library of Congress Cataloging-in-Publication Data
Johnson, Simon, [date]
White House burning : the founding Fathers, our national debt, and why it matters to you / Simon Johnson, James Kwak.
p.cm.
Includes index.
eISBN: 978-0-307-90712-7
1.Debts, PublicUnited States.2.Government spending policyUnited States.3Budget deficitUnited States.
I.Kwak, James.II.Title.
HJ8101.J64 2012336.340973dc232012000435

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Cover design by Brian Barth
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v3.1

To Sylvia, Willow, Boo,
Mary, Celia, and Lucie

Nothing is more important in the face of a war than cutting taxes.

House majority leader

On June 1, 1812, President

With war approaching, it fell to Treasury Secretary On June 18, 1812, the United States declared war against Great Britain. Less than a month later, Congress adjourned.

Hampered by Congresss reluctance to raise taxes, the Treasury Department struggled to pay for soldiers in the field and ships at sea. In 1813, with the government only weeks away from running out of money, Gallatin was forced to rely on Philadelphia banker

In August 1814, British forces sailed into the Patuxent, an inlet of Chesapeake Bay that points toward Washington. They cornered the overmatched defensive flotilla, forcing the Americans to scuttle their ships, and landed ground forces in Benedict, Maryland, less than

For the Americans, the burning of the White House was the low point of the war, a moment of national humiliation that remains an iconic image in U.S. history. Despite the symbolism, it was not a decisive turning point in the conflict; the two sides negotiated a peace later that year after deciding the war was no longer worth fighting.

This deep fiscal crisis was the product of one of the most bitter, revenues dependent on tariffs, which were gutted first by an embargo against Great Britain and then by war. It was this battle over taxes and spending that led to the countrys fiscal weakness in 1812.

Ironically, the Republicans, who voted for war but not for the taxes to pay for it, were the political victors of the War of 1812. The Federalists opposition to the warwhich, in some cases, extended to attempts to undermine the Treasury Departments efforts to raise moneymade the party appear unpatriotic, and it never again gained power on the national level. Some things, everyone agreed, were worth paying for.

Fast forward to 2011. Once again, Washington is embroiled in a bitter partisan fight over taxes, spending, and debt. This time, unlike two centuries before, it is not primarily about war, although troops are still on the ground in the

And yet, on August 2, 2011, political squabbling brought the United States within a few days of defaulting on its debts. The agreement cut spending by $900 billion over the next ten years and called on a bipartisan congressional committee to come up with a plan to reduce deficits by an additional $1.2 trillion over the same period. Three months later, just before its deadline, the so-called supercommittee gave up, unable to agree on anything.

This latest battle over taxes and spending was provoked by record federal government budget deficits, which in 2009 and 2010 exceeded $1 trillion for the first and second times in history. These deficits were not the result of war, although a decade of fighting in Afghanistan and Iraq certainly contributed to them. They were primarily due to the 20072009 financial crisis, which triggered a severe recession, reducing tax revenues and increasing government spending under existing programs. The second most important cause of those deficits was major tax But the real debate is over future spending.

In 1812, some Republicans like Randolph opposed the war because they did not want higher spending or higher taxes; Treasury Secretary Gallatin, under orders from President Madison to prepare for war, wanted higher taxes to help pay for the higher spending,need for higher taxes. Another possibility is to maintain those spending commitments while raising taxes to pay for them. A compromise positionsome spending reductions and some tax increasesis also conceivable. But our highly polarized political system is on the course set by the 1812 Congress: higher spending without higher taxes. This inability to make any fiscally responsible choice is how a dysfunctional political system could cause a true fiscal crisisin one of the richest, most powerful nations in the history of the world.

In the Over the past thirty years, inflated rhetoric about the national debt has mainly served as a rhetorical tool that politicians use to argue for unrelated policy objectives, which as often as not increase the debt.

But we should not be too quick to place all the blame on the political

It is no surprise that people can be illogical. After all, its not fair to expect most people to know what proportion of federal spending goes to popular programs like many commentators laughed. But the joke is on all of us. People who do not realize that they benefit from the governments largest social programs unsurprisingly think that the government is too big, their taxes should be lower, spending should be lower, and yet their favorite programs should not be touched.

Politicians behave accordingly. So, during the health care debate of 2009, Republicans positioned themselves as defenders of Medicare spending, opposing cuts proposed by the Obama administration (remember, people like Medicare). On December 6, Senate majority leader This is not an encouraging picture.

As a nation, however, we will make a choice, one way or another. The government budget deficitthe difference between spending and revenues in a single yearwill decline in the next few years as the economy eventually recovers, but will then begin to climb again. Each year that the government runs a deficit, it must borrow money (by selling bonds) to make up the difference, and that borrowing adds to the And since the economy as a whole generates the resources available to pay off the debt, what really matters is the debt as a proportion of the economy, most commonly measured in terms of gross domestic product (GDP)the total value of all the goods and services produced in the country in a given year.

Figure I-1: National Debt as a percentage of GDP, 17902010

At the end of 2010, the national debt was $9 trillion ($29,000 per person), or 62 percent of GDP ($14.5 trillion)the highest level ever recorded except during could lose their appetite for Treasury bonds, making it impossible for the government to borrow money at any priceas almost happened in 1813.

The most immediate problem facing our nation is the high level of unemployment that persists years after the peak of the financial crisis, leaving the economy operating significantly below capacity. But our national debt, and the spending and tax policies that underlie its growth, will be a major challenge for at least the rest of the decade, as we figure out how to adapt our government and our society to ongoing demographic trends and rising health care costs. We could end up in a world with low taxes and limited government, where people are largely left to make do as they can, or in a world with high taxes and expansive government services, where people are protected from the risks of unemployment, disability, old age, and poor health. The choices we make during this transition will help determine the nature of American society for generations to come.