Raising Debt Ceiling, Cutting Spending is Crux of Issue

by Lowell L. Kalapa, Tax Foundation of Hawaii

Last week’s partial shutdown of the federal government broke records on the airwaves of twitter and other social media with much of the criticism aimed at a dysfunctional Congress or the handful of Republicans “holding the country hostage.”

However, many seem to miss the point that it is not so much the effort to repeal the Affordable Care Act, otherwise known as “Obamacare,” as it is the fact that very little has been done to curb the federal government’s appetite for spending. The problem has long been known and while acknowledging that one has a problem is the first step toward recovery, one has to admit that it is a problem and then take action to correct the problem. Unfortunately, both Congress and the administration don’t like doing the dirty work in taking back what they have already promised constituents.

In fact, elected officials at all levels love to pander to their constituents and try to be everything to every one of their voters. Government at the federal level has gone far beyond the vision of the founding fathers which was to provide national defense for the struggling original thirteen colonies. Financing the Revolutionary War and later the War of 1812 is a good study in understanding the use of credit to finance emergencies and the importance of maintaining credit worthiness.

The colonies struggled to finance the Revolutionary War as they were just that, colonies with little infrastructure for the collection of taxes and a fledgling economy that was largely an agricultural society. Great Britain, on the other hand, had an established system by which it could levy and collect taxes to run the government and, in this case, to finance the war against the colonies.

Fortunately for the thirteen colonies, they found an ally in France which had for centuries been an arch enemy of Great Britain. It was from France that the young American colonies were able to borrow money. It was not that there was unanimity among America’s leaders that borrowing was a good idea. It was Alexander Hamilton who had observed that Great Britain had used the power of credit to issue notes or bonds in order to borrow funds from the private sector with the promise of repayment with very attractive interest rates.

Opposed to the idea of borrowing funds were Thomas Jefferson and James Madison, two future presidents of the country. Fearing that the new found country would be obligated to France with no resources with which to repay those funds, both sides struggled to win the favor of the Continental Congress and its leaders. In the end, Hamilton was able to convince the delegates and leaders that the only way the young country could be able to beat back the British was to have sufficient money with which to supply the troops and to purchase the resources to do battle.

Thus, the Revolutionary War and, subsequently the War of 1812, were won not on the battle fields but in the financial markets. What Alexander Hamilton saw was that a victorious young nation could rebuild its economy and generate the wealth that would help repay the debt incurred to pay for the war. It was only years later that both Jefferson and Madison admitted that borrowing funds in time of emergencies was an alternative to raising taxes. Indeed leaders of the fledgling country did everything they could to accelerate the repayment of that debt.

Such is not the case with the debt that the country owes today. The money that is being borrowed today is not only for national defense but in many cases those borrowed funds are being used to basically keep the doors of the federal government open, to fund programs that would otherwise be considered operating costs. Certainly the need to borrow is the plain and simple truth that the country’s leaders are spending well beyond the resources that taxpayers are willing to provide in the way of taxes and tariffs.

Federal leaders have borrowed so much that a good portion of every dollar raised by either issuing debt or collecting taxes goes toward servicing the debt that is outstanding. While elected officials dislike cutting programs and, therefore, spending, doing so would be the only realistic solution to the dilemma the nation faces. What is frustrating for most taxpayers is not so much that the federal government will shut down, but the fact that officials, both in Congress as well as in the administration, have known about this dilemma for a long time and have not been willing to address it.

Until Congress and the administration are willing to sit down and decide what are essential programs and what has been nice to have, the American taxpayer will be faced with this same crisis every few years.

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