The current American government seems ambivalent, at best, about deficit spending. In his State of the Union address President Barack Obama warned that, “If we don’t take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery.” Yet besides offering a spending freeze that won’t effect the greatest expenditures of government — defense, Medicare, Medicaid and Social Security — the president volunteered no solution the problem.
In all fairness, the record debt that America now struggles with is not Obama’s fault entirely. Massive bailouts of banks, insurers and automakers as well as billion-dollar government guarantees produced an $8.7 trillion increase in federal obligations in the second half of 2008 alone. To put this number in perspective, consider that one year earlier, the United States’ entire debt amounted to $9.3 trillion; that the country’s economic output in 2007 was $14 trillion; and that government spent about $3 trillion that year.
The Obama Administration went with the current however and budgeted a spending of $4 trillion in 2009 which represents 28% of GDP, compared to 21 percent in 2008.
There are those, like economist Paul Krugman, who demand that government spend even more. Obama is “wrong”, he argues, to suggest that more spending isn’t “necessary” while the economy hasn’t fully recovered yet. The announced three-year spending freeze meets Krugman’s strong disapproval therefore.
Krugman is an economist of the Keynesian school which always promotes government spending whenever the economy suffers a downturn. Only the state can boost the flow of credit and the recovery of consumer demand under such precarious circumstances, say the Keynesians. As proof, they offer President Franklin D. Roosevelt’s “New Deal” which, supposedly, dragged the American economy out of the Depression through a massive expansion of government compulsion and controls.
The truth is that after two of President Roosevelt’s terms in office, the economy hadn’t recovered at all. Indeed, in 1938, five years after the “New Deal” was enacted, the United States underwent a second recession in spite of all of Roosevelt’s efforts to get the country moving again. The reason? Prosperity demands freedom. Men cannot and will not produce under restraint.
Compared to the trillions of dollars borrowed and owed by the American government today, the New Deal was a fairly modest package, costing, adjusted to inflation, about $500 billion. If ever a Keynesian will admit that it didn’t work (and that it was, in fact, the massive production surge demanded by America’s involvement in World War II which prompted recovery), he will probably argue that Roosevelt spent too little; that the New Deal wasn’t big enough. Reiterating Paul Krugman: if the economy is in trouble, government must always spend — and spend more if things don’t get any better.
Yet, until the early twentieth century, the United States had largely done without “big government.” Throughout the century before, government spent little; it had to borrow little; and it interfered in few industries. Consequently, the United States prospered. As industrialism reached the American shores after the Civil War, the country experienced unprecedented growth and peoples’ lives improved significantly as a result.
This experience had its roots in the philosophy which the United States were founded upon. From its very inception, the United States were a nation of limited government whose constitution didn’t so much dictate what government should, rather what government shouldn’t do: never restrict peoples’ freedoms nor infringe upon their rights; some of which the Declaration of Independence had even referred to as “inalienable”.
The Founding Fathers were staunch proponents of small government and the principal author of the Declaration of Independence, Thomas Jefferson (1743-1826) explicitly warned against mounting government debt.
In July of 1816, writing in a letter to Samuel Kercheval, Jefferson declared that in order to preserve the independence of the people, on whom the “continued freedom” of the nation depended, “we must not let our rulers load us with perpetual debt.” According to Jefferson, “We must make our election between economy and liberty, or profusion and servitude.”
If we run into such debts, as that we must be taxed in our meat and our drink, in our necessities and our comforts, in our labors and our amusements, for our callings and our creeds, as the people of England are, our people, like them, must come to labor sixteen hours in the 24, give the earnings of fifteen of these to the government for their debts and daily expenses; and the sixteenth being insufficient to afford us bread, we must live, as they now do, on oatmeal and potatoes; have no time to think, no means of calling the mis-managers to account; but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers.
Observe that many countries, in Europe especially, maintain a value-added tax on all goods, typically adding 20 percent or so to the cost of products. Most American states know a retail sales tax instead which is more modest than their European counterparts but still follows the logic which Jefferson so dreaded. And note that House speaker Nancy Pelosi suggested in October 2009 that a VAT is “on the table” to help the federal government garner needed revenues.
Jefferson warned against such endeavors. “A departure from principle in one instance becomes a precedent for a second,” he wrote; “that second for a third; and so on, till the bulk of the society is reduced to be mere automatons of misery, and to have no sensibilities left but for sinning and suffering.”
Then begins, indeed, the bellum omnium in omnia [war of all against all], which some philosophers observing to be so general in this world, have mistaken it for the natural, instead of the abusive state of man. And the fore horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression.