I, however, place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared --Thomas Jefferson
Updated Disclaimer: THis Diary is discussing long-term budget issues and is not intended to be a discussion of the current economic crisis.
The dangers of our National Debt is the most important issue enough Americans do not know enough about. Just to grab your attention, this National Debt Crisis has the potential of simultaneously destroying the American Economy and America's National Security.
But first,in Part 1 here's a short history of America as viewed in the perspective of the National Debt!
Here' the National Debt as a percent of GDP from 1790 all the way to the present.
First things first, National Debt is the amount the federal government owes to its creditors, creditors include , foreign gvts., individual American citizens, foreign citizens, and itself ( what!more on that later).
More below the fold.
GDP is a measure of the output of the American economy, and it is what we currently measure our national debt against.
But back to history. Many states, mostly in the North had run up debts fighting the Revolutionary War. As a way to unify the country and establish a financial reputation, Alexander Hamilton decided to take these debts, and thus in 1790 began our history as a debtor! However, as illuminated by the Jefferson quote, most of our founding fathers viewed debt as enslavement and worked in killing it to 0 by the 1830's. Andrew Jackson, the founder of the Democratic Party, brought the American government to 0 debt for the first time ever! Unfortunately, that's never happened again! As noted until 1930s, the American tradition was to only incur large debts during wartime (spikes for the War of 1812, the Civil War, WWI). This consensus was disrupted by Hoover/FDR, who engaged in massive deficit spending for the first time in peacetime . By the end of WWII we had such a large debt that we spend the next 35 years pushing it downwards to get to its Pre /FDR levels.
But how is that possible? No president from Truman to Carter had particularly large surpluses, most had net deficits. It's simple. From 1790 to 1930, the inflation rate was close to 0! Inflation devalues the value of the dollar. That's why old people always think everything is too expensive. To them it is! However, in the debt era we inflate our economy, usually by only two or three percent a year. However, as everyone in who lived in the 1970's can tell you, high inflation is destructive, and we'll discuss why that matters later.
In the 1980's we cut taxes and increased spending at the same time. Surprise! The debt went up. and up and up. In 1992 it was so bad that guy with the big ears (no the white guy from Texas, not the black guy from Illinois) became somewhat popular. Debt went down, comparatively. Why? Because we increased taxes in 1993 and cut spending. Funny how that works. And in 2001, we repeated what we did in 1981 and debts went up again, not surprising.
So why should you CARE? Debts have gone up and down and America is still standing. OR is it?
It's different now because of four reasons we're going to discuss in detail.
1. America is getting older as a population.
2. We now have spending entitlements (Social Security + Medicare
3. We have tax entitlements, special provisos to interest groups that reduce taxes for them at your expense!
4. A common saying is we owe our debt to ourselves, but one-half of public debt is now owned by foreigners!
See you tomorrow for Part 2.