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US debt: What would George Washington do?

America has been here before.
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A statue of George Washington is seen in front of the New York Stock Exchange October 17, 2007 in New York City. (Mario Tama/Getty Images)

Debt is a dirty word in America.

The staggering amount of money that the U.S. government owes (and to whom) fuels many ongoing, and rather raucous, economic and political debates.

But as the always provocative Simon Johnson notes in the New York Times Economix blog, it's important to know that we've been here before. His post is also today's must-read for American economic history buffs.

Johnson writes that huge federal debt, and how to deal with it, is a recurring situation that stretches back to the birth of the country:

On the first day of 1791, the recently founded United States Treasury had nearly $75.5 million in outstanding debt. This was roughly around 40 percent of gross domestic product, a large amount of debt relative to the size of the economy — but not out of proportion to what we have become accustomed to in recent decades.

However, relative to federal revenues, the debt was enormous — about 20 times the amount that the government was then capable of taking in. In contrast, the total Treasury debt outstanding since 1950 has fluctuated between 30 and 90 percent of G.D.P., with the debt-revenue ratio never worse than 5 to 1 — and in recent decades between 2 to 1 and 3 to 1.

The founders solved this problem, eventually, by implementing Alexander Hamilton's plan to use tarrifs on imports to pay down the debt, as well as for the running of the federal government.

"The tariff revenue fight was nasty and drawn out, pitting North against South in a way that would generate resentment and friction throughout the 19th century," Johnson writes. "After losing repeated votes in the House of Representatives, Hamilton eventually prevailed – part of a larger deal with Thomas Jefferson and James Madison that was very much about who would pay what amount to create and sustain the new federal government."

Of course, today's situation is very different. But we are facing the return of such Hamiltonian questions as "who will pay how much, to whom, and for what?"

That's because most of the government's money goes to paying for wars, and for looking after the needs of the country's older and poorer citizens.

So the real issue, Johnson writes, is "how much relatively rich people are willing to pay, and on what basis, in the form of transfers to relatively poor people — and how rising health-care costs should affect those transfers."

What can we learn from the founders' approach to these issues in the 1790s?

For Hamilton, Madison, Jefferson and others, the answer was simple: No significant social spending was paid for by the young federal government.

But Johnson, the former chief economist of the International Monetary Fund, has other ideas.

"What we should do is figure out the transfers we want to make and then agree on how to pay for them," he argues.

"But are we now willing to debate the real issues: taxes, health care costs and what kind of redistribution we think is fair and sustainable?"

And here's another question for all you history buffs: What would George Washington do today?

Discuss.

http://www.globalpost.com/dispatches/globalpost-blogs/macro/us-debt-what-would-george-washington-do