The Federal Debt


The federal government was still in the process of establishing itself in 1792 and did not have a good year financially. Total income was only $3,670,000, or 88 cents per capita. Outlays were $5,080,000. The budget deficit therefore amounted to fully 38 percent of revenues. The next year, however, the government sharply reduced expenses while enjoying increased tax receipts and showed its first budget surplus. Except during periods of grave economic or military crisis, the government would never again run up so large an annual deficit in terms of a percentage of total revenues.

Not, that is, until the peaceful and relatively prosperous year of 1992. That year the federal government had revenues of $1.076 trillion and outlays of $1.475 trillion, a budget deficit equaling 37 percent of revenues. Everyone, conservative and liberal alike, agrees that something is terribly wrong with how the United States government conducts its fiscal affairs today. The last eighteen years of the nation’s history have been marked by a more than 25 percent increase in federal revenues (in constant dollars) and the collapse of our only significant external military threat. Yet in those years the United States has spent as much of tomorrow’s money as we would have spent fighting a major war or new Great Depression. That will have no small consequences if tomorrow we actually have to fight one.

How did the world’s oldest continuously constituted republic lose control of so fundamental a responsibility as its own budget? The answer is, as with most governmental policy disasters in a democracy, one innocuous step at a time. While politicians, economists, and many others pursued their self-interests, the national interest largely got lost in the shuffle.

Over the last sixty years five trends have increasingly affected government fiscal policy. First, a powerful but fundamentally flawed concept in the discipline of economics has completely changed the way both economists and politicians view the national economy and their responsibilities toward it. Second, the responsibilities of government in general and the federal government in particular, as viewed by the public, have greatly increased. Third, a shift in power from the Executive to Congress has balkanized the budget process by sharply limiting the influence of the one politician in Washington whose constituency is national in scope, the President. Fourth, the decay of party discipline and the seniority system within Congress itself has further balkanized the budget process, dividing it among innumerable committees and subcommittees. This has made logrolling (you vote for my program and I’ll vote for yours) the order of the day on Capitol Hill. Finally, the political-action-committee system of financing congressional elections has given greatly increased influence to spending constituencies (often called special interests, especially when they are funding someone else’s campaign) while sharply reducing that of the electorate as a whole, which picks up the tab.


The result is a budget system that has become ever more heavily biased toward spending. As a consequence, the national debt has been spiraling upward, first only in absolute numbers and then, in the last twelve years, as a percentage of the gross national product as well. Today it stands at about 68 percent of the annual GNP, higher than it has ever been in peace-time except in the immediate aftermath of a great war.

To be sure, a country as rich and productive as the United States can well afford to service its present debt. But the current trend is ominous, to put it mildly. Just consider: In the first 204 years of our independence, we took on the burden of a trillion dollars of debt, mostly to fight the wars that made and preserved us a nation. In the last fifteen, however, we have taken on four trillion more for no better reason, when it comes right down to it, than to spare a few hundred people in Washington the political inconvenience of having to say no to one constituent or another.

A debt crisis forced the drafting of the Constitution in 1787. Its authors put few restrictions on taxing, borrowing, and spending.

Adam Smith’s Good Housekeeping

The new United States emerged from the Revolution sovereign but in a state of fiscal chaos. The Continental Congress had been forced to resort to printing fiat money, the so-called continentals that sank quickly into worthlessness. The various states had borrowed heavily to meet the demands of the war.

The central government under the Articles of Confederation was financed solely by contributions from the various state governments (just as the United Nations is funded today) and had no power to tax or borrow on its own authority. Because the state governments had pressing needs of their own (as governments always do), their contributions were often late and sometimes nonexistent. As a result, the central government had grave difficulties meeting even its current obligations.

It was this financial crisis that helped force the drafting of the new Constitution in 1787. The document that the Founding Fathers created that summer in Philadelphia—the desperate poverty of the old government all too fresh in their minds—put remarkably few restrictions on the new government’s power to spend, tax, and borrow.