When speaking to Moses on Mount Sinai, Jehovah gave explicit instructions on the Year of Jubilee. Once the people came into the Promised Land, every 50 years they were to observe the Jubilee. Loans were to be written off, slaves freed, and land that had been sold returned to the original owner. Those who had fallen into debt would be given a fresh start.
In 2014, Americans need relief in biblical proportions from the heavy burden of our national debt. Right now, the national debt is approximately $17.3 trillion. Were we to pay this off, each citizen—every man, woman, and child—would have to contribute over $54,000. If we levied an assessment on just current taxpayers in an effort to retire the debt, the bill would be about $150,000 per person.
The size of the debt is truly staggering. Although America ain’t what she used to be, this country still produces a whopping amount of goods and services. Yet, if we could somehow devote our entire Gross Domestic Product for 2014 to retire the debt, we would still be over a trillion dollars in the hole.
Just 14 years ago, the national debt was a mere $5.7 trillion, well below the annual GDP. A paltry $20,000 per citizen could have erased the whole thing.
One would think that the numbers involved would scare our leaders and lead them to implement drastic spending cuts and perhaps some tax increases. Congress, however, appears unfazed. On February 12, 2014, Congress voted not to raise the debt ceiling, as many media outlets reported, but to suspend the debt ceiling through March 2015. The debt ceiling is a legislative device that restricts the amount of national debt that can be issued by the Treasury; it limits how much money the government can borrow. Before the February vote, the debt ceiling was $16.69 trillion. Now, the federal government has a blank check.
The possibility that we will ever again have a balanced budget, much less reduce the debt, becomes more remote every year. In 2013, the federal government spent $3.8 trillion ($1 trillion more than revenue received), and about two thirds of this amount was mandatory. “Mandatory spending” means government expenditures that are required under previously enacted laws. Social Security, Medicare, Medicaid, and federal poor relief accounted for 60 percent of federal spending. If we add the interest payments on the national debt, this nondiscretionary amount rises to 66 percent of all dollars spent by the federal government. With an aging population, mandatory spending will only increase for the foreseeable future.
Discretionary spending for 2013 was a mere 34 percent of all federal outlays. The big-ticket item was the military, which constituted 18 percent of total federal spending. So, when Congress debates spending “reductions” or increases, they are really fighting over only one third of the budget.
With things in such a mess, more commentators are seriously discussing the idea of debt repudiation. We should write off the entire $17.3 trillion, they argue, and start afresh. Before considering the benefits and disadvantages of such a move, it would be wise to examine just what is owed to whom.
Almost one third of the debt is characterized as intragovernmental holdings. For example, the Social Security Trust Fund has for many years taken in more money than it has needed to distribute in benefits. This surplus has been used to buy Treasury bonds. In other words, the government has spent all the money received from Social Security taxes and has placed IOUs in the Trust Fund. Right now the Social Security Trust Fund holds approximately $2.7 trillion in Treasury bonds. Other large governmental holders of IOUs include the Federal Employees Retirement Fund with $826.8 billion, the Military Retirement Fund with $419.5 billion, and the Uniform Services Retiree Health Care Fund with $189 billion.
According to the U.S. Treasury, the remainder of the debt is characterized as “Debt Held by the Public.” Foreign governments and investors are owed $5.7 trillion. Of this amount China and Japan are each owed over $1 trillion. During the latest recession, the Federal Reserve purchased large quantities of Treasury bonds in an effort to keep interest rates low. Thus, the Fed is owed $1.7 trillion. Other significant holders of the debt include state and local governments with $703 billion, mutual funds with $946.4 billion, private pension funds with $457 billion, and banks with $341 billion.
The way things are heading, repudiation of intragovernmental holdings is inevitable. For 2014, the Congressional Budget Office (CBO) estimates that the federal government will take in $3 trillion in revenue and spend $3.5 trillion. This might be a somewhat optimistic guesstimate, but even if it is correct we will still be adding half a trillion dollars to the national debt. Neither intragovernmental nor other creditors are paid off when the debtor spends more than he takes in.
The news gets even worse:
CBO projects that under current law, outlays will grow faster than the economy during the next decade and will equal 22.4 percent of GDP in 2024. With no changes in the applicable laws, spending for Social Security, Medicare (including offsetting receipts), Medicaid, the Children’s Health Insurance Program, and subsidies for health insurance purchased through exchanges will rise from 9.7 percent of GDP in 2014 to 11.7 percent in 2024, CBO estimates. Net interest payments by the federal government are also projected to grow rapidly, climbing from 1.3 percent of GDP in 2014 to 3.3 percent in 2024, mostly because of the return of interest rates to more typical levels.
While a repudiation of what we owe to ourselves might not raise the dander of most Americans, the “Debt Held by the Public” is another matter. Most would probably agree with Alexander Hamilton that “States, like individuals, who observe their engagements, are respected and trusted: while the reverse is the fate of those, who pursue an opposite conduct.” Hamilton wrote these words in 1790 while arguing that the federal government should assume the Revolutionary War debts of the states. Hamilton feared that if one or more of the states repudiated the debts from the war, this would give the entire Union a black eye and would inhibit Congress from borrowing money if another emergency arose. Of course, Hamilton also had more sinister motives for debt assumption. He wanted the wealthy creditors to have a stake in the national government and thus to support it over the states. “If all public creditors receive their dues from one source,” Hamilton wrote, “distributed with an equal hand, their interests will be the same. And having the same interests, they will unite in the support of the fiscal arrangements of the government.”
But Hamilton wanted to go further than debt assumption. He believed that a funded national debt would assist in establishing public credit. By a funded debt, Hamilton envisioned the Congress setting aside a portion of tax revenues to pay each year’s interest without an annual appropriation. Redemption of the principal would be left to the government’s discretion, and Hamilton preferred that the debt be perpetual.
Jefferson had a much different view of the blessings of perpetual debt: “I sincerely believe . . . that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.” Jefferson was all for sound credit, but he opposed government’s dependence on creditors for its yearly expenses. “I am anxious about everything which may affect our credit,” Jefferson wrote to George Washington in 1788. “My wish would be, to possess it in the highest degree, but to use it little. Were we without credit, we might be crushed by a nation of much inferior resources, but possessing higher credit.”
Repudiation of the national debt would certainly imperil American credit—something neither Hamilton nor Jefferson would relish. In case of a real national emergency, the United States would find it difficult to borrow money that might be needed to address exigent circumstances. What creditor would trust an American promise to pay?
The risk, however, would be worth the reward if, to borrow a line from Jefferson, the earth could be restored to the living. Writing to Madison from Paris in 1789, Jefferson questioned “whether one generation of men has a right to bind another.” Jefferson postulated that “no man can, by natural right, oblige the lands he occupied, or the persons who succeeded him in that occupation, to the payment of debts contracted by him.” If a man had such a power to bind those who succeeded him, he would be tempted to “eat up the usufruct of the lands for several generations to come, and then the lands would belong to the dead, and not to the living, which would be the reverse of our principle.” Jefferson believed that his guiding tenet of the earth belonging to the living applied not only to individuals but to societies. No generation in power should be allowed to “contract debt greater than may be paid during the course of its own existence.” Jefferson envisioned a Jubilee every 34 years (his estimation of a generation’s period of power), where the rising generation took possession of the land free and clear.
In defending his theory, Jefferson asked whether the debts of a contemporary generation should be paid by succeeding generations if the contemporary generation “said to the money-lenders of Genoa, give us money that we may eat, drink, and be merry in our day; and on condition that you will demand no interest” until another generation rises to power. Would the generation succeeding the dissolute generation “be obliged to apply the produce of the earth and of their labor to replace [the] dissipation? Not at all.”
The so-called Greatest Generation and their serpentine progeny known as the Baby Boomers could certainly be compared with the irresponsible generation described by Jefferson. One would not blame Americans born after 1964 for stepping forward, repudiating the debt, and declaring that the earth belongs to the living.
If there were any indication that the current generation is different from the preceding two and sought to revive thrift and other qualities associated with an independent people, then debt repudiation would be the answer. Unfortunately, there are few signs that Americans born after the baby boom are serious about taking care of themselves. For instance, the number of Americans receiving subsidized food assistance from the federal government is approximately 101 million. This is a third of our entire population. The number of Americans receiving government assistance with groceries exceeds the number of full-time private-sector workers.
According to the Tax Policy Center, 76.1 million American households pay no income taxes. For all Mitt Romney’s faults, he was absolutely correct about the 47 percent who contribute little to the stream of federal revenue and instead prefer to live off the government dole. These individuals are hardly pioneer stock prepared to make sacrifices to right our fiscal ship.
Despite CBO estimates that raising the minimum wage to $10.10 as proposed by President Obama would mean the loss of 500,000 jobs, a recent Gallup poll indicates that 76 percent of Americans are in favor of an increase. Three quarters of the country are comfortable with Washington setting a minimum wage with no tie to the actual value of the labor supplied to the employer. Americans believe that every person is entitled to the amount of money he “needs” without regard to the rights of the employer. As for job growth, who cares? The federal government will simply extend unemployment benefits.
And what about the economic dislocations that debt repudiation would cause? In the long term, if we had a population interested in supporting themselves, repudiation would be beneficial. In the short term, there would be much pain and hardship. No sane person can imagine our urban/suburban people surviving an economic catastrophe. During the Great Depression the number of farms in the United States peaked at 6.8 million, and roughly 27.5 percent of the population still lived in rural environments. Many of those off the farms and in towns and cities were recent migrants from the countryside and had the skills to grow their own food and to survive without conveniences. Today, only about two percent of Americans live on farms. The bulk of the population is so removed from the land that they would not have a clue how to plant or tend a garden. Without the basic skills to survive, urban America would riot and cause a breakdown of order.
If a significant number of Americans were interested in supporting themselves and chose to repudiate the debt, they should first amend the Constitution to make it harder for Congress to repeat the mistakes of the past. The Articles of Confederation imposed the requisition system on Congress in an effort to check the general government’s power. By issuing paper money during the American Revolution, Congress tried to outmaneuver this restriction. In the short term it enjoyed some success, but soon the paper issued became almost valueless. From this experience, most Americans agreed that Congress needed some independent source of revenue. Paper money was no panacea, and there were real issues in persuading all the states to make their payments of the funds and items requisitioned by Congress.
The Constitution of 1787 sought to remedy this by providing Congress with the power to tax as well as to spend for enumerated purposes. Antifederalists rightly sensed that the demise of the requisition system and the general government’s power to levy its own taxes might lead to pernicious fiscal results. The New York convention, for example, recommended an amendment by which “[n]o money [may] be borrowed on the credit of the United States without the assent of two thirds of the senators and representatives present in each house.” Under such an amendment, Congress would have full discretion—so far as permitted by the Constitution—to spend the revenues received from taxation. But to the extent Congress wants to live beyond its means and borrow, a supermajority in both houses would have to agree to this course. Such a provision would give fiscally responsible senators and representatives a club to beat back reckless spending. To the extent a real emergency arose, borrowing could occur so long as the supermajority requirement was satisfied.
America needs a Jubilee to rid herself of a national debt that will never be paid. The only question is whether we are ready for the Jubilee. Unfortunately, the answer is no. The earth should belong to the living, but only if the living have a better plan than the profligate dead.