By James Kwak
Simon and I wrote an article for the November issue of Vanity Fair about—well, about a lot of things. It’s about the eighteenth-century rivalry between Great Britain and France, the lessons of the American Revolutionary War, the Hamilton-Jefferson debates (again), and the War of 1812. It’s also about present-day fiscal policy and budgetary politics. The main question we take up is what the Founding Fathers (from the Constitutional Convention through their involvement in the War of 1812) thought about a strong central government, the national debt, and the taxes necessary to pay for them, and what that means for today. All that in less than 3,000 words, so there isn’t a lot of room for all the details.
You can read the article online here.
The Baseline Scenario 
Pretty freaking awesome. Although I’ve always thought of Vanity Fair as mainly a women’s magazine (I’m only saying my personal perception of it, I’m sure someone will tell me I’m “off base”) it far outshines the other female periodicals in both its sense of fashion and its writing. Maybe the great J.e.w.i.s.h photographer Annie Leibovitz migration there from Rolling Stone had something to do with that?? The only other “glossy” female type mag that I can think of where it doesn’t seem to come across so phony and “poser” like is maybe Elle. There has been some other impressive stuff from Vanity Fair, but one thing that really impressed me was Barrett Brown’s defense of Michael Hastings.
http://www.vanityfair.com/online/daily/2010/06/why-the-hacks-hate-michael-hastings
This defense was made after Lara Logan seemed to be upset that General McChrystal didn’t invite her to the beer buddy bullsh*t session. I guess when someone spends months digging on a story, instead of hopping on an international flight whenever there’s a high-profile skirmish is highly annoying to Lara Logan. I guess hopping on an international flight after the story has developed, or nearing its closure seems like a more sophisticated/hygienic form of journalism to Logan. She was later “finger raped” in Egypt by some mob.
It’s also great to see Kwak and Johnson co-write an article together, gives BaselineScenario a more “TEAM” feel. I’ll try to find this November issue at a newsstand to support the cause.
That article was excellent. The analysis of Hamilton and his ideas is exactly correct.
“the power of a duly elected legislature to tax its citizens”? The possessive “its”, meaning the citizens are owned by the State? What a charming, and characteristic, turn of phrase.
Well, at least you made your fundamental perspective clear in paragraph two.
Of course we live in Hamilton’s America. This is not exactly news, nor is it particularly relevant. The idea of a government inserting itself into every aspect of our lives from cradle to grave, however…. Quite a bit more relevant.
Todays situtation is much different, good credit based on the ability to tax it citizens only works when good gvt is not overwhelmed by taxation. Since big business started taking over gvt in the early 80’s they have designed and written tax laws to avoid them paying much tax, placeing instead the tax burdon directly on the citizens in the form of real estate and consumption taxes. This new distribution method further separates the rich and poor and creates a larger portion of indigient peoples and a rebelous tax paying citizen. Once those currently being taxed can find a way to reduce their burdon, the good credit status stagecoach rapidly falls off a cliff. The 9-9-9 Herman Cain policy includes no used taxes, only new items would be taxed, which would put the ability to tax, back into the tax payers hands.
Owen wrote: “Since big business … designed and written tax laws to avoid them paying much tax, placeing instead the tax burdon directly on the citizens…”
It is a fiction that taxing businesses doesn’t burden citizens. Taxes are a cost of doing business, just as materials, labor, utilities, etc. The taxes are incorporated into the cost of the product. Ultimately, the consumers are paying the taxes.
This is an old, tired cliche about the tax expense being flowed-through to the consumer….a favorite talking point unsupported with empirical evidence.
Here’s another piece of disinformation: that the corporate income tax is actually being paid by some of the largest US multi-nationals, even with income statement net profits showing huge numbers.
The Vanity Fair article strikes me as a dishonest bait & switch. You relate Hamilton’s (& others’) recognition of the importance of being able to borrow in times of emergency and the necessity of being able to raise revenue, then try to use it to discredit those who object to our current level of taxation and spending. Perhaps I haven’t been paying attention, but I am not aware of the Tea Party declaring that all taxes should be abolished and that borrowing should be outlawed. The debate is simply on the level of taxing and spending that is appropriate.
Consider that prior to WW1, spending averaged 3% of GDP, except for the Civil War period, during which time it peaked over 14%. From 1930-39, spending as a percent of GDP averaged just under 8%, even with all the New Deal spending. It peaked at 43% during WWII, but then averaged 17.8% for a quarter century before climbing over 20%. Today, spending is over 25% of GDP.
Given that spending averaged just 3% of GDP for the first century of our country, I think it is safe to say that our founding fathers would be appalled with today’s 25% level.
this comment directed @ bigD commenter above
bigD, what part of the statement “every dollar” is confusing to you???
Of course, I will give you, bigD, it is a little confusing when the Tea Party darling, Michele Bachmann has received hundreds of thousands of dollars in federal government money for her “family” farm (in Wisconsin) and her husband’s “counseling” clinic:
http://www.latimes.com/news/nationworld/nation/la-na-bachmann-20110626,0,1896024.story
I guess since most Teabaggers have obviously yet to receive the gift of literacy, this comment will be lost on most of them.
Simon and James,
Great article. However, you fail to mention an important detail which also happens to contradict your claim that “the (U.S.) federal government would always honor its debt”. More on this here:
http://www.polycapitalist.com/2011/10/default-myth-busting-sorry-simon-and.html
Poly, you can’t be serious about that article now can you. Its a political history which has many interpretations, you fly over the important details and throw around some newly made political words and suddenly Simons and James’s article fails to mention an/your important detail of contradition. Technically speaking, the country has defaulted in different ways, but 1792 was not one of them.
“The lessons of the British-French rivalry were clear to Alexander Hamilton and the other founders of our nation. After all, it was our Revolutionary War that pushed the French monarchy to the brink of collapse. And a major question for the American government, taking office in 1789 under the new Constitution, was what its fiscal policy should be.”
James, is this true in the financial sense? Yes our Revolutionary War helped seed the French Revolution in terms of an applied philosophy, but I wasn’t aware that the French involvement in the last phase of the Revolutionary War was ruinous for them financially.
We’re taught in schools are rather self-centered view of the Revolutionary War. While it was obviously important, France and Britain had been fighting for years in a multitude of limited engagements prior to the Revolutionary War, and continued to fight in our region (mostly the Caribbean) for years after the Revolutionary War. In a sense the Revolutionary War was but one of a series of continuous engagements between two combatants, both jockeying for position in an effort to acquire colonial assets.
Wonderful article from what I’ve read thus far…
Moses, thanks for the youtube link; I enjoyed it. If you pay attention to Ms Bachmann’s answer, she does acknowledge that taxes are necessary to run the government. Other than the occasional anarchist, no one really claims taxes are unnecessary. Everyone admits taxes and government are necessary, the debate is on the level of taxation and the role of government in our lives. To state otherwise is hyperbole at best, but usually just dishonesty.
I did find Ms Bachmann’s choice of wording, when acknowledging the need for taxes, rather ironic. She criticized Pres. Obama for thinking our money “belongs him and we are lucky to get just to keep a little bit of it.” But she followed that by stating “We obviously need to give some of it back….” Certainly sounds like she shares the “it’s the government’s money” mindset. Politicians!
As for Ms Bachmann receiving federal farm subsidies, I don’t see the conflict. According to the article you linked, she opposed the subsidies and voted against them. They passed and became law despite her opposition. She is simply taking advantage of the fact that a majority in this country voted to make it law.
It is no different than someone opposing capital gains taxes and the home mortgage interest deduction. When both become law over his opposition, I see no problem with that person then claiming the HMI deduction. Since he cannot opt out of paying the capital gains taxes, why should he reject the benefit of HMI deduction?
But all this distracts from my original point, which is that the Vanity Fair article tries to justify increasing taxes by pointing to Alexander Hamilton support of taxes to raise revenue for the government, ignoring the fact that spending in Hamilton’s day (an for the first 100+ years) was just 3% of GDP and that spending has risen since WWI to 25% of GDP today. I seriously doubt Hamilton ever envisioned that.
@free owen owens free,
I’m not sure I understand your comment fully (e.g., what do you mean by “newly made political words”?). But yes, I am serious about my post.
And you don’t have take my word on the U.S. having defaulted. Read the work of other academics I link to in my post, such as Sylla et al, Reinhart and Rogoff, who also consider the U.S. to have defaulted in the early 1790s.
I’m a big fan of this site and Simon and James book, 13 Bankers, but I also would have expected them to better informed about the U.S.’s history of default.
Sincerely,
The PolyCapitalist
Hamilton undoubtedly executed the right policy by creating a stable mechanism for funding the debt. The manner in which he did it, however, had considerably more mixed results than Johnson and Kwan indicated. Most of the wartime debt instruments had depreciated to pennies on the dollar after the end of the war. Hamilton’s plan was to assume them at face value. A number of his rich buddies had inside information on Hamilton’s plan (sound like crony capitalism?), so they bought up as much of the debt as they could, at huge discounts, and reaped big windfall profits when Hamilton redeemed them at face value. This created some of the first great post-War of Independence fortunes in America.
The debt thereby assumed would be paid in part by an excise tax on whiskey. This was extremely regressive, as all consumption taxes are. Very little hard cash circulated on the frontier, and many inhabitants were pretty much reduced to bartering. Because of the extreme difficulty of transporting bulk items like crops over the virtually non-existent east-west roads, they were pretty much reduced to distilling it into whiskey for virtually the only cash available to them, or else bartering the distilled product.
Therefore, the frontiersmen saw this regressive tax on one of their few sources of cash income as an exaction to pay off Hamilton’s cronies.
Kevin Phillips’ Wealth and Democracy has a discussion on this issue.
@Lofgren – History would not be littered with so much *war* if it wasn’t for the booty….interesting info from those early days, thanks.
What was world’s population in 1776?
Easier to survive and pick yourself up by the bootstraps (okay, okay, they didn’t even have bootstraps after the ones they sailed over with disintegrated from use) when it was still 100 of us and 1000 buffalo and so much wide open spaces that you couldn’t get the crops from there to here…
Money lenders – world’s oldest profession steeped in savagery…
The world’s population did not reach one billion until about 1880, after a century of industrialization and rapid population growth due to rising living standards, vaccination, improved sanitation, and less barbarous medical techniques. So I would suspect that the world population was maybe 500-600 million tops in 1776.
@Lofgren – English: “Skansen is an open air museum and zoo located on the island Djurgården in Stockholm, Sweden. It was founded 1891 by Artur Hazelius (1833-1901) to show the way of life in the different parts of Sweden throughout history.”
Let’s not re-write history as to who and what propelled “….industrialization, rising living standards, vaccination, improved sanitation, and less barbarous medical techniques…”. That was HUMAN BEINGS giving themselves permission to make their lives less miserable through honest work. Something everyone can experience as a TRUTH if not constantly engaged in savage battles with armed cretins – and now psycho game boys doing it through gizmology…ludicrous….
There was INFINITE wisdom in separating *inwestor* banking activity and commercial banking activity – especially in a soverign, global FIAT $$$ scheme based on fractional reserve banking.
This is NOT a true statement, no matter how many times you repeat it or how many fortresses you erect to keep it *real* as a power over others nor how many LAWS you re-write endowing the Secretary of the Treasury with omniscense via spying and Fed Chairmen with a “can’t be fired by Presdient or Congress clause…”
“….in the beginning there was $$$$ and then came life….”
ended up among cretins as a MATH formula:
More misery for others = More $$$$ for ME ME ME
Northern European tribes/cultures got serious about genetically cleansing their own gene pool after the knowledge of how to run an empire without running it to the ground was re-discovered and that self-regulated cleanse of sociopaths did more for your list of HONEST WORK advancements than anything else!
Industialization was ABUSED by the money lenders – in their vicious sociopathically greedy monkey brains, HONEST WORKERS were turned into time-clock punching slave labor – and that’s all they’ve still got – that *conservative* view of how to be a trillionnaire…
Like I said, time to try stupid ideas as the genius ones did not WORK :-)
Hi!
Re-twit you post: to my @lpnpihio twitter