America Invicta

America is still quite strong, and most of its fiscal problems stem from entitlements, which might be reduced or eliminated. So it is possible that war might be financed and armies manned. But war usually causes debt and tax rates to increase. America is for the first time fragile on both accounts before facing such a crisis. We should heed the words of George Washington from his farewell address of 1796:

As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible, avoiding occasions of expense by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it, avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertion in time of peace to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden which we ourselves ought to bear. The execution of these maxims belongs to your representatives, but it is necessary that public opinion should co-operate.

In his era, the Revolutionary War had caused debt to rise to $84 million in the year of his speech, and it had been climbing slightly in the previous five years (1791 is the earliest record kept by the U.S. Treasury) after having run up to finance the war. Washington’s warning was indeed heeded, for the nation paid down its obligations to $45 million by 1812, enabling the young nation to resist a second British conflict by borrowing another $82 million by 1816. (It also built a strong Navy to resist the Muslim Barbary pirates, who impressed over one million on the high seas, condemning them to slavery in North Africa.) Twenty years later, the country would be essentially debt free. Washington goes on to say that as citizens we should be willing to accept taxation to pay down debt from unavoidable wars:

To facilitate to them the performance of their duty, it is essential that you should practically bear in mind that towards the payments of debts there must be revenue; that to have revenue there must be taxes; that no taxes can be devised which are not more or less inconvenient and unpleasant; that the intrinsic embarrassment, inseparable from the selection of the proper objects (which is always a choice of difficulties), ought to be a decisive motive for a candid construction of the conduct of the government in making it, and for a spirit of acquiescence in the measures for obtaining revenue, which the public exigencies may at any time dictate.

Washington lived in a time when there was no income tax, much less a progressive version. Hence he speaks of choosing “objects” to tax, such as tea or stamps (which were affixed to items). His message to accept taxation applies to the citizenry as a whole, not to a situation as it exists today when the top 25 percent of earners pay 86 percent of all income tax, which would have been unimaginable in his time.

Unlike the citizens of Rome who had no say about their level of taxation, Americans could seize the moment and elect a slate of candidates that truly would abandon the formula of the last century, rather than just tweak the dysfunctional structure of the present in a bipartisan compromise. The trajectory begun under Wilson and Roosevelt has led to a bloated government structure with a fourth branch composed of unelected rule makers — yet another concept inconceivable in Washington’s time.

Today’s government spends heavily, and our elected representatives within it compete for our vote by making promises to spend at an ever-higher level, which has resulted in GAAP obligations that are more than six times greater than the over $10 trillion of public debt outstanding today. Such wanton extravagance is the polar opposite of what Washington advocated, and it is precisely the fallacy which Lord Macaulay predicted.

As surely as the War of 1812 followed the Revolutionary War, another threat from the known unknown of Islamic jihad could erupt, or seemingly from out of the blue such as the Russian advance on Georgia. And if it would not, as even the supposed bipartisans who thoughtfully pontificated on the I.O.U.S.A. town hall panel admitted, the persistence of entitlements and the debt they would perpetuate or grow at a reduced rate would be immoral.

What is missed in their argument is that we have already crossed the Rubicon, for the magnitude of present levels of debt spread over the 25 percent who pay nearly all taxes would place them deeply into bankruptcy.

The remaining majority of the citizenry that has shirked its civic obligation by egging on its representatives to dig surrounding our foundation will ultimately lose the most, for they may be condemning themselves or their children to lives of serfdom. It is a privilege to have democracy, for which the blood of Washington’s soldiers was spilled. For the people to expend it by seizing it for socialistic aims is the veritable immorality of our times.


Bill Baker,
for The Daily Reckoning

[Editor’s note: This passage is reprinted from William W. Baker’s book, Endless Money: The Moral Hazards of Socialism, with the permission of John Wiley & Sons, Inc (©2010). You can get your own copy of his book here.]