Archive for the ‘national debt’ Category

On a Balanced Budget Amendment

On_A_Balanced_Budget_Amendment <== PDF version

The idea of adding an amendment to the U. S. Constitution requiring a federal balanced budget has been circulating since the Reagan era.  Although it was proposed a few times in Congress over the years, it was never able to attain the required two-thirds affirmation in either House of Congress, which is necessary before any proposed amendment can be sent to the States for consideration.  But with the large budget deficits of the past 5 years or so, this concept is coming into fashion again.  A recent poll [1] shows that a large majority of Americans now favor such an amendment.  Advocates for a federal balanced budget amendment argue two points. First, they point out that most states have this requirement; the logic being, what is good for the states is good for the federal government.  Their second argument is that the Congress would be forced to prioritize spending and balance those priorities with tax policies necessary to meet the revenue requirements.  It is this lack of restraint, they say, that caused Congress to run up large deficits in nearly every year since the Carter administration.  Generally the advocates allow two exceptions to the balanced budget rule: a) when the nation is in a state of war or some emergency; and b) by a supermajority of both Houses of Congress.

It appears to me that a balanced budget amendment is a bad idea whose time has come.  First, there is no reason to believe that what is good for the states is necessarily good for the federal government, since they have inherently different duties.  States do not have a role in foreign policy; they do not manage wars; they do not manage the currency.  All of these pertain to situations relegated to the federal department because they represent existential threats; the cost of combating these, should it ever become necessary, must be paid.  More than that, they must be paid regardless of any budget deals made by Congress.  As for the stated exceptions, they will either be too restrictive (and thus potentially deadly), or so loose and subject to interpretation as to result in more talk than action.  The great fallacy in the whole concept of exceptions is that no mention is made of who shall determine the conditions under which an exception applies consistent with the separation of powers between the President and the Congress.  Shall conflicting claims of emergencies be arbitrated by the Supreme Court?  If so, we would surrender our fiscal situation to robed masters who may not even understand the question, or who might impose their ideology on the budget.  If not, we are back to the usual rhetoric between the President and the Congress — all pain, no gain.

As to the advocates second line of reasoning, I doubt it will actually restrain Congress.  Keep in mind that a considerable portion of the federal government’s spending is considered “off-budget”.  In this context, “off-budget” refers to expenditures that are not called out on any budget document, including, at the present time, a) Social Security, b) the Postal Service, c) some funding for the wars in Iraq, Afghanistan, and Libya, and d) all of the bailouts.  Fortunately, both on-budget and off-budget status is included when calculating the impact on the national debt.  But under the proposed amendment, balancing the “budget” will be easy: Congress can simply relocate all the excesses to new categories of “off-budget” spending.  It will not force Congress to set priorities in the normal sense of the word.

If any “balanced budget amendment” is to be considered, it must first specify that all revenue and all expenditures by the federal government must be included in the definition of “budget”.  Otherwise, Congress will simply continue to expand the fiscal deceptions and fail to make progress on achieving fiscal stability.  In order to force Congress to face the actual facts, we should require, if anything, a “zero-deficit” amendment rather than a “balanced budget” amendment.

[1]        Sachs/Mason-Dixon, 27 May 2011.  The results indicated that a balanced budget amendment is favored by Republicans and Independents by 81% and 68% respectively; even Democrats favored it by 45%.

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A Comparative Scale of the National Debt

Comparative_Scale_of_the_National_Debt  <== PDF version

We are all aware of the enormous national debt that has been accrued by Congress over the past 35 years or so.  For those too young to recall, the national debt began to accelerate in the mid-1970’s, and has continued to increase steadily since then except for a few years in the late 1990’s.  In this paper, I will relate the total debt to median household income, and calculate the total indebtedness in terms of number of years of median income owed per household, if every household were held to account equally.  This calculation will be done for 2010 and for 1784.  The year 1784 is instructive because that was the year Congress (then under the Articles of Confederation) defaulted on the national debt as it then existed.

The mark of an educated mind is to be content with an approximation as Aristotle informs us.  We do not have the data necessary to make a computation to nine decimal places, but we can, with a few assumptions, get a reasonable sense of the relative magnitude of the indebtedness in 1784 compared to the current total national debt.  To start, we shall use round numbers as shown next.

In round numbers, according to the 2010 census, the median household income is about $50,000, the total national debt is about $14,000,000,000,000, the total population is about 310,000,000, and the total number of households in the U. S. is about 110,000,000.  If we divide the total debt by the number of households, we obtain an average indebtedness per household of about $125,000 in round numbers.  If we divide this by the median income per household, we obtain 2.5 — this is the number of years of total income the median household would have to pay if each were held equally responsible for paying the national debt.  How does this compare to 1784?

The census closest to 1784 is the one in 1790, which showed that the total population was 3,893,635, of which 694,280 were slaves.  There was an influx of people in the few years just prior to 1790, so, as an approximation, we will assume the population in 1784 was about 3,500,000.  The census collected data on households, but they were mixed in with the number of males and females above age 16.  To avoid this problem, we will assume that the ratio of households to population was the same then as now, that is, about 1:2.8.  This gives, in round numbers, about 1,250,000 households in 1784.

The median income data is a little more difficult.  McMaster [1] reports that the median wage in Boston for a typical workman was 12 shillings per week, which is 60% of a Massachusetts pound.  The Massachusetts pound was set at 1289 grains of silver.  For convenience, we will convert the Massachusetts pound to Spanish Milled Dollars (SM$), which was the de facto currency of that time; the milled dollar was reckoned at 386.7 grains of silver.  Hence, the weekly wage of a workman was SM$ 2 Spanish milled dollars (surprisingly, an exact number).  Therefore, at 52 weeks per year, the median annual income was approximately SM$ 104.

It may be objected here that most people in 1784 did not work for money wages.  That is true; but it is also true that a money-wage is nothing more than a convenient conversion factor that represents the amount of labor necessary to procure the necessities of life.  So, the typical household had to expend a certain amount of labor whether it was paid in money or not, and if held responsible for a fraction of the debt, that payment would have to be made either in-kind, in-labor, by taxation on land, or by converting a portion of labor to money.  In the end, the debt is paid by the proceeds of labor and land, whether represented directly in money or not.  We may therefore convert all households, whether agrarian or wage-earners, to the equivalent of money.

The total debt in 1784, converted from colony pounds, French livres, depreciated Continentals, and hard money was SM$ 68,000,000 at the above-mentioned conversion rate [2].  Performing the same calculations as before, we obtain a per-household share of the national debt as SM$ 55, which is 0.5 years of median income per household necessary to pay its share of the debt.

Now compare our two results.  In 1784, the total debt translated into about a half-year of median income per household; now, it translates into two-and-a-half-years of median household income — a factor of five larger.

It may be objected that the dollar is worth a lot less today than in 1784, and this comparison is not valid.  But note that I have compared debt in 1784 with income in 1784 in consistent units, and likewise for modern times.  I have not tried to compare dollars now with dollars then; had I done so, the objection would be perfectly justified.

The Congress in 1784 could not pay that debt because of a defect in the Articles of Confederation: the Articles did not give Congress authority to raise a direct tax or to levy import duties.  It could only ask the states for money, and often did not receive the amount requisitioned.  Now, Congress has arbitrary power to tax, yet we will have great difficulty paying this debt because of a defect in the members of Congress: they believe they have a power to spend borrowed money on anything they want, whether authorized in the Constitution or not.

[1]   John B. McMaster, A History of the People of the United States from the Revolution to the Civil War, New York: D. Appleton & Co., 1900, p. 96.

[2]   Gaillard Hunt, ed., Journals of the Continental Congress, Washington, DC: U. S. Government Printing Office, 1928, Vol. 24, pp. 206-210 and 276-287; Vol. 25, pp. 954, 955

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Posted in Articles of Confederation, Congress, Early American history, national debt, U. S. Constitution | No Comments »