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Government Debt: Jefferson and Gallatin Were Right

June 30, 2015 in Economics

By Chris Edwards

Chris Edwards

The world economy is getting rattled this week by the consequences of excessive government debt. Greece may be cut off from its international creditors, and Puerto Rico announced that it cannot make full payments on its massive debt. In both cases, years of excessive spending are sadly dealing a crushing blow to the living standards of millions average citizens.

These jurisdictions have fallen into the abyss, but debt has risen to dangerous levels in many places around the world, including in our federal government. The root of the problem is Keynesian economics, which has taught governments since the 1930s that deficit spending is good for the economy. That message has been fiscal catnip for politicians, who have eagerly run deficits year after year, and built up debt to massive levels. To compound the problem, some economists—such as Paul Krugman—have been falsely recommending that we not worry too much about rising debt because it is “money we owe to ourselves.”

The effects of Keynesianism can be seen in federal budget data. From 1791 to 1929, the federal government balanced its budget in 68 percent of the years. But from 1930 to 2015, the government balanced its budget in just 15 percent of the years. The result is that federal debt has risen to levels unprecedented in our peacetime history.

Alexander Hamilton was a brilliant man and an important Founding Father, but he was on the wrong side of the crucial debt issue.”

Economist James M. Buchanan pointed his finger squarely at Keynesianism for the decline in beneficial “Victorian fiscal morality,” which had constrained the political incentive to deficit-spend in our early history. With the rise in Keynesianism, the “modern era of profligacy” was born, he said. Looking ahead, official projections show federal debt soaring in coming decades unless we get the profligacy under control.

Battles over federal government debt go back to the beginning of our nation, as I discuss in recent testimony to the House Budget Committee. On one side in the 1790s were Treasury Secretary Alexander Hamilton and other Federalists, who favored a perpetual federal debt, believing that it would create economic and political benefits.

On the other side were Thomas Jefferson and Albert Gallatin, who were appalled by high debt, and led the opposition to Hamilton’s fiscal policies. They believed that government debt was economically dangerous and politically corruptive. And they argued that debt enriched the financial elite …read more

Source: OP-EDS

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