By William C. Shelton

(The opinions and views expressed in the commentaries of The Somerville News belong solely to the authors of those commentaries and do not reflect the views or opinions of The Somerville News, its staff or publishers.)

I’ve never written a book review. But a recent work on the fiscal crisis is so sensible, thoroughly researched and non ideological that its ideas are worth sharing.

It is White House Burning: The Founding Fathers, our National Debt, and Why it Matters to You. Its authors, Simon Johnson and James Kwak are professors at MIT and the UConn respectively. Johnson was Chief Economist for the International Monetary Fund.

They show that arguments over national debt and taxes are as old as the Republic. The Continental Congress had borrowed heavily to finance the War of Independence. So the new nation was bankrupt when the war ended.

Treasury Secretary Alexander Hamilton restructured the debt and successfully argued that taxes must be imposed to pay it down. This reassured lenders, but Thomas Jefferson and James Madison held that taxation gave the federal government too much power.

Simon and Kwak identify six episodes in which the nation has gone deeply into debt. The first five were to support wars. Americans paid down those debts with increased taxes, but did so over decades rather than years so as not to stifle economic growth.

Nonmilitary events since 2000 are responsible for the sixth and toughest debt problem:  the George W. Bush tax cuts, adoption of the Medicare drug benefit, and the 2008 financial crisis that wrecked the economy. A Congressional Budget Office (CBO) analysis says that the financial meltdown’s total impact, including reduced tax revenues, was a 50% increase in federal debt relative to gross domestic product (GDP).

They present simple and unequivocal evidence disproving the notion of runaway government spending. With the exception of defense, most government spending categories, as a percent of GDP, have remained flat or declined since the late 1990s.

As a share of GDP, our government spending is low in comparison to that of other nations with advanced economies. And investors around the world are lending us money at an incredibly low interest rate—around 2%.

So do deficits matter? Dick Chaney famously told then Treasury Secretary Paul O’Neill that Ronald Reagan had proven they don’t matter.

They do. We cannot keep borrowing indefinitely. Nor is there any way of knowing when international investors will demand higher interest rates. And our dysfunctional Congress is not giving them confidence.

We need to convince investors that we can stabilize the debt and then bring it down, relative to the size of the economy. Higher interest rates would retard economic growth, slow or reverse job creation, reduce tax revenues, and indiscriminately reduce the needed services that government can provide.
Johnson says that, “Politicians deal in illusions and dreams.” And Republicans and Democrats are both doing it.

President Obama wants to tax those earning over $250,000 per year. But his proposal would produce only a quarter of the total revenue lost by the Bush-era tax cuts. The wealthiest 1% that we have heard so much about is still only 1%. Although the Bush tax cuts disproportionately favored the rich, the bulk of taxes comes from the middle class.

Republican politicians say that the crisis is driven by excessive spending, and that deeper tax cuts would stimulate the economy, producing increased tax revenues. Harvard Economist Gregory Mankiw was Chairman of George W. Bush’s Council of Economic Advisers and is now a key consultant to Mitt Romney. His exhaustive research shows that even under the most optimistic projections, cutting taxes does not lead to greater revenue. Romney, however, is saying the opposite.

Simon and Kwak identify the greatest expense-side threat to future budget balancing as Medicare and Medicaid. Republican Congressman Paul Ryan, Chairman of the House Budget Committee, offers one solution. He would replace Medicare with a voucher with which to buy healthcare in the private market. Its value would be capped. So what could be bought would continually decline.

But the private market has been unwilling to insure people in their 70s, 80s, and 90s. This is why Medicare was first created. And the CBO says that healthcare costs would rise with this plan because the government has much more bargaining power than do individuals and companies.

The authors advocate a free and open debate about such basic issues as what we want government to do. But it should be a fact-based debate.

What is their prescription? The worst economic medicine would be to precipitously stop borrowing. We should phase in fiscal adjustment gradually, balancing it with economic growth, as we did responsibly with past debt crises. But we must start now.

The Bush tax cuts should be allowed to lapse for everyone. This would take us back to the levels of the late 1990s, but would still be much lower than those of the 50s and 60s. The cost to the average American family would be a few hundred dollars per year.

If the economy is still weak at the time that the tax cuts expire, we should implement a temporary payroll tax cut. They do propose increasing taxes on the wealthy, but by closing tax loopholes and raising the rate on capital gains to 28 percent—still lower than historic levels.

Ultimately, say Simon and Kwak, the national debt is a political problem rather than an economic problem. I would agree, but I would add that the political problem continues because of politicians who encourage and exploit voters’ misunderstanding and ignorance.

The authors quote James Madison, writing in 1822:  “Knowledge will forever govern ignorance, and the people who mean to be their own governors must arm themselves with the power which knowledge gives.”