Deficit Politics in the United States

Taxes, Spending and Fiscal Disconnect

Dennis Ippolito

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000538991
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

From the clashes between Federalists and Republicans in the 1790s until today, partisan battles over taxing, spending, and public debt have shaped American political development. These battles were formerly constrained by fiscal norms that mandated balanced budgets and low debt. In his Farewell Address, President George Washington counseled the nation to "cherish public credit" by using "it as sparingly as possible".

In the 1980s, however, tax cuts and spending increases created large structural deficits and much higher debt levels. With only a brief interruption in the late 1990s, deficit politics has been a mainstay ever since.

Over this period, the Republican Party has passed large tax cuts but failed to retrench the large entitlement programs that continue to raise spending. Likewise, the Democratic Party has expanded the domestic role of government but has abandoned the broad-based taxation it supported in the 1990s. Funding their domestic agenda with matching revenues is now as unappealing for Democrats as entitlement cutbacks are for Republicans, contributing to the current stalemate of Republican tax policy, Democratic spending policy, and soaring deficits and debt. The economic risks this entails are serious, yet an end to the era of deficit politics is nowhere in sight.

1 From Balanced Budgets to Deficit Politics

DOI: 10.4324/9781003167266-1

The First Federal Congress met in New York City on March 4, 1789, and the challenges it faced were enormous. Foreign threats—that Alexander Hamilton had characterized as “the dangers … from the arms and arts of foreign nations”—had been mounting, and Hamilton was even more concerned with the “dissensions between the States themselves and from domestic factions and convulsions.”¹ The new Constitution called for “a more perfect Union,” but Congress first had to translate its design and principles into a functioning and effective government.²

Congress also inherited the seemingly mundane but critically important task of restoring the nation’s credit. When the Revolutionary War ended in 1783, the United States had accumulated an enormous debt—an estimated $43 million held by foreign and domestic creditors.³ Lacking the power to tax, the Articles of Confederation government could not meet its debt obligations. Interest payments were delayed or missed entirely, the size of the debt continued to grow, and the public credit rapidly deteriorated. Hamilton, the nation’s first secretary of the treasury, was directed by Congress to prepare a “proper plan for the support of the Public Credit.”⁴ His plan was reported to Congress on January 14, 1790, and its key recommendations were adopted later that year. But debates over the plan were bitter and protracted, and Hamilton’s subsequent Report on a National Bank further galvanized critics of his broad interpretation of federal fiscal powers.⁵

The Federalist “High Finance” program that Hamilton implemented achieved its immediate goal. By the mid-1790s, the public credit of the United States was firmly established in both domestic and European credit markets.⁶ Nevertheless, Hamilton’s belief that the federal government should manage and secure, rather than retire, its debt prompted Thomas Jefferson (and James Madison) to organize an opposition party that rejected deficit finance. For Jefferson, whose antipathy to federal debt was visceral, balanced budgets were a vital safeguard against corruption and economic inequality.⁷ Balanced budgets with limited taxation and spending would further insure that the federal government upheld what Jefferson believed were the “genuine principles” of the Constitution.⁸ When the Jefferson administration took office in 1801, it pledged to eliminate federal deficits and debt. Jeffersonian Republicans, reorganized and rechristened as Democrats in the late 1820s, would go on to dominate national elections for more than half a century. Although intraparty factions fought over many issues, Jefferson’s beliefs about balanced budgets and a limited federal government defined this first fiscal era in American political development.

The Civil War gave rise to a political majority with a more positive view of federal power. While the new Republican party believed in balanced budgets and low debt, it also embraced federal support for economic and industrial development. A protective tariff system was created to subsidize American manufacturers and industries, and tariff revenues (and excise taxes) were used to fund public works projects and other spending programs. Instead of limiting what the federal government could do, post-Civil War balanced budgets supported federal efforts to meet domestic needs. Then, when income taxes became the main source of federal revenues during World War I, the Republican party’s approach to balancing the budget changed. Lower taxes and lower spending were now Republican priorities. The federal budgets of the 1920s were larger than Jefferson’s small government ideal, but balanced-budget conservatism was a limiting vision nonetheless.

With onset of the Great Depression and World War II, federal budgets reached entirely new levels of spending, taxation, and debt. This transition to modern government was the work of a Democratic party majority whose electoral dominance would continue until the 1980s. Over this period, the balanced-budget rule became more flexible, as policymakers adopted countercyclical fiscal policies to stabilize and strengthen the economy. Nevertheless, presidents and Congresses were still expected to balance budgets when possible and otherwise to limit deficits and debt burdens.

For roughly two decades after World War II, for example, a political consensus on Cold War defense budgets provided the necessary support for tax policies and revenue levels that kept budgets at or close to balance. With the social welfare expansions of the late 1960s and 1970s, that consensus eroded, and balanced-budget discipline was more difficult to maintain. Finally, in the 1980s, electoral realignment and partisan divisions over spending and taxation ushered in the era of deficit politics—a willful disregard of deficits and debt without precedent in the nation’s history.

The balanced-budget rule that Jefferson advocated so forcefully in the early 1800s was more than an accounting device. It incorporated ideas about the role of the federal government in American life and the spending and tax policies that defined that role. While ideas about the size and role of government later changed, the rule itself proved markedly resilient for nearly two centuries. A closer look at this history provides a helpful perspective for understanding the deficit politics phenomenon that ultimately subverted it.

Jeffersonian Balanced Budgets, 1789–1860

The framers of the Constitution were intent on remedying the fiscal defects that had plagued the Confederation government, and the Article I powers to tax, spend, and borrow they approved were deliberately broad. The borrowing authority was, as a prominent nineteenth-century historian noted, “well-nigh complete; there is no limitation as to time, manner, place, amount, security, payment, or interest.”⁹ During the constitutional ratification process, this unchecked federal borrowing authority raised serious concerns, and some states called for a constitutional amendment requiring congressional supermajorities to authorize any federal borrowing.¹⁰ Similar reservations were raised about the taxing and spending provisions, which contained elastic language as well. Ratification was secured despite these concerns, but debates over federal fiscal powers continued during the 1790s and beyond.

There was greater acceptance, by comparison, of constitutional provisions that assigned to Congress the power of the purse—which Madison hailed as “the most complete and effectual weapon with which any constitution can arm the immediate representatives of the people.”¹¹ Congressional control of taxing, spending, and borrowing was, for Madison, a necessary check on the executive. Almost immediately, however, the First Congress found itself trying to defend that authority against executive encroachments.

Rejecting the Hamilton Model

In establishing the Department of the Treasury in 1789, Congress debated whether the secretary of the treasury should be authorized to report “plans for the improvement and management of the revenue.”¹² While the departments of Foreign Affairs (State) and War created earlier that year were directly accountable to the president, the Treasury’s unique role raised concerns about executive interference with congressional prerogatives. This possibility was sufficiently troubling that Congress debated whether a multimember Treasury board might be a safer alternative for managing the federal government’s financial affairs.¹³

In the end, Congress decided that a single executive should head the new department, but the word “report” was rejected. The final text of the Treasury Department statute approved on September 2, 1789 provided instead that the secretary could “prepare” revenue plans, along with plans “for the support of public credit.”¹⁴ Despite this precaution, Alexander Hamilton, who was then unanimously confirmed as treasury secretary, seized the initiative on fiscal matters and championed executive policy leadership. Congress eventually rebelled against executive direction, but Hamilton’s spending, tax, and debt program encountered strong opposition almost from the beginning.

Hamilton’s tenure began with a highly controversial plan for managing the nation’s debt. Article VI of the Constitution mandated that “All Debts contracted and Engagements entered into, before the Adoption of this Constitution, shall be as valid against the United States under this Constitution, as under the Confederation.” Hamilton’s plan included honoring the nearly $55 million in domestic debt and foreign debt at its original, or par, value and assuming the approximately $25 million in outstanding debt incurred by the states.¹⁵ Congressional approval for these measures was secured only after Hamilton agreed to support relocating the nation’s permanent capital to a federal district on the Potomac.

In 1791, Hamilton again marshalled congressional support for legislation chartering the First Bank of the United States. He then persuaded President Washington to sign the measure, despite Secretary of State Thomas Jefferson’s strong objections to its constitutionality.¹⁶ At Hamilton’s urging, and again in the face of opposition from Jefferson and his followers in Congress, the first federal excise tax was enacted in 1791. Other internal taxes soon followed, including federal taxes on carriages and land. The far-reaching tax program implemented by Hamilton and his successor, Oliver Wolcott, included sinking funds (or pledged revenues) for servicing the debt, and within a remarkably brief time the public credit had been restored and strengthened.¹⁷ Hamilton’s focus, however, was on managing the debt rather than eliminating it. A secure public credit, in his view, would allow the nation to borrow easily and cheaply during wartime or other emergencies. It would also help to buttress an expansive federal spending and tax program and “promote the development of the central state.”¹⁸

The political aims of Hamilton’s debt program and national bank proposal were complementary. The assumption of state debts, for example, was intended to build support for the new federal government among the prosperous and influential individuals who held those debts. Tying their self-interest to the federal government would, Hamilton believed, counter interstate tensions and rivalries that had proved so troublesome. Th...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of figures
• List of tables
• Preface
• 1. From Balanced Budgets to Deficit Politics
• 2. From Deficit to Surplus: The Reagan-Clinton Transition
• 3. From Surplus to Deficit: The George W. Bush Presidency
• 4. Stabilizing the Deficit: The Obama Presidency
• 5. Raising the Deficit: The Trump Presidency
• 6. The Future of Deficit Politics—And Why It Matters
• Bibliography
• Index