Why does the U.S government refuse to pay its debts?

Great Debates
1

This seems to be a recent phenomena.

When you look at the chart of U.S debt, there is a predictable cycle where debts are rapidly incurred followed by a quick discharge of that debt. The Revolutionary War Debt was cut in half in less than ten years, likewise, in the span of 20 years (1812-1832; 1861-1881) debt from the War of 1812 and Civil War was paid in full and halved in 20 years, respectively. Similarly, the cumulative debt from World War I and World War II were cut in half by 1965 and paid down to less than 24% of GDP by 1974.

The decline stops there, however.

In 1981, there was a big tax cut that didn’t increase revenues (as was advertised) but, instead, contributed to historic peacetime deficits that persist to this day. And, despite the brief, shining surplus of the 1990’s, U.S debt has exceeded - at the writing - 105% of GDP. In 2000, George Bush said the following after accepting the Republican nomination at the RNC:

[QUOTE=George W. Bush, 2000]
Today our high taxes fund a surplus. Some say that growing federal surplus means Washington has more money to spend. But they’ve got it backwards. That surplus is not the government’s money: the surplus is the people’s money. . . Now is the time to reform the tax code and share some of the surplus with the people who pay the bills.
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This, of course is at irreconcilable with one of the sages of the Revolution. Although George Washington acknowledges that while taxes are “inconvenient and unpleasant”, there has to be revenue.

[QUOTE=George Washington, 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 exertions in time of peace to discharge the debts which unavoidable wars have occasioned, not ungenerously throwing upon posterity the burthen which we ourselves ought to bear. The execution of these maxims belongs to your representatives; but it is necessary that public opinion should cooperate. To facilitate to them the performance of their duty it is essential that you should practically bear in mind that toward the payment 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 thee 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.
[/QUOTE]

Even Andrew Jackson, who as anti-tax as they come said:

[QUOTE=Andrew Jackson, 1837]
There is but one safe rule, and that is to confine the General Government rigidly within the sphere of its appropriate duties. It has no power to raise a revenue or impose taxes except for the purposes enumerated in the Constitution, and if its income is found to exceed these wants it should be forthwith reduced and the burden of the people so far lightened.
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Why is George Bush’s narrative more sexy than Jackson’s or Washington’s? Shouldn’t the primary goal be pay the debt as to not burden future generations with it? Why do we have people, like Eric Cantor who refuses to enter budget talks unless Democrats drop demands for revenue.

[QUOTE=Eric Cantor, July 19, 2013]
We don’t want to go into a discussion if the prerequisite is, you have to raise taxes. That’s the bottom line. It’s not process, it’s substance. It is one of those issues that continues to make the divide between the parties.
[/QUOTE]

How can we possibly ever solve this debt crisis with political gridlock like this? Why does most of the electorate believe that they’re “taxes enough already” and that any surplus should be “returned to the American people” instead of paying the debt? What is the cause of hatred of the federal government? And, finally, why does the U.S refuse to pay down the debt and what will occur if we continue not to?

  • Honesty
2

GWB hasnt been President since 2008. Its time to move on and blame the current government.

3

You must’ve missed the part where I quoted Eric Cantor. The past is not in a vacuum, though. Reagan and Bush II are the primary reasons we’re in the current debt crisis.

4

The US government does pay its debts. If it defaulted people would stop lending it money.

5

He clearly means, why does the United States lately prefer continual deficits, when the overall fiscal history of the country shows a record of more responsibility?

That’s a very tough question.

6

shrug It’s a misleading thread title.

7

Exactly. The OP is asking about something that’s never happened. The US government has always paid its debts.

The real question is why do we keep taking out new loans? The answer is mostly because we’re weak. It’s easy to spend money and people like that (even the people than complain about government spending in theory, support it in practice). It’s collecting the money to support that spending that’s unpopular. So the government responds to what we’re telling it and spends borrowed money.

8

Sure, if you don’t read the OP. The last line is as straightforward as they come.

9

What is meant by “pay down the debt?” Our longest term debt is in the form of 30 year bonds. We make payments on all of our Treasury issued debt, there’s really no reason to “pay it down.” This makes me think you believe our debt to be like a credit card balance, it isn’t, and I don’t know why people think it is.

If we stopped issuing new debt today, we’d have to do nothing special and the entire country would be debt free in 30 years. We’d also have to pay for everything we consume in real time, which would cause some uncomfortable realities.

10

If it’s permissible for me to just stop in to try to provide some broad background information w/o expressing an opinion, from a purely (that’s ‘purely’ son) economic perspective, if the main concern of govt is managing the business cycle (which probably is never the case, but f*** you that’s what we’re assuming), then the way fiscal policy is supposed to work is that during economic expansions, when the govt is receiving more revenue, it’s supposed to run a surplus.

As the business cycle turns and the economy slows down, govt is supposed to use that surplus and spend MORE than it did when times were good. The reason is that under various flavors of Keynesianism, the gov’t acts like ballast in a hot air balloon. When things are light and ebullient, you need the govt draining tax dollars to help put a drag on things. But as the economy starts feeling heavy and sluggish, you need govt to put money back into the economy to try to balance things out.

There’s actually some monetary policy in there too since govt spending increases the money supply via the money multiplier, but it’s not Fed directed monetary policy, just hitching part of its ride on a similar mechanism.

11

In my opinion, the size of the national debt is a concern. Mostly because there’s no particular reason for it. It’s one thing to run up a big debt during a national emergency like a war but it’s not good to be doing it routinely. What happens when we have a national emergency and we’re already deeply in debt?

More importantly, the system of running the government through debt is bad economics. It means that everything the government spends money on has a hidden extra cost. If the government builds a million dollar bridge and collects a million dollars in taxes to do it, we pay a million dollars for a million dollar bridge. If the government builds a million dollar bridge and borrows a million dollars to do it, we have to pay interest on the money we borrow. We end up paying $1,300,000 for a million dollar bridge.

The huge government debt also sucks up investment capital. People looking to start a new business or develop a new product often need capital to get going. Investors with capitals are looking for opportunities to buy into these new businesses and products. And the rest of us get to patronize new businesses and buy new products. Everyone ends up winning - yay, capitalism! But if investors are buying treasury notes, there’s less capital for other investments like businesses and products. The growth of the economy is slowed down by this missing capital.

12

If you want to kill your housepet but lack the gumption, you can just stop feeding it and let it die. “Starve the Beast” is this strategy applied by the modern GOP to emasculate government so they can move toward their Laissez-faire Utopia with its Caveat Emptor gods. Note that this obscene name was not invented by centrists to describe the GOP’s strategy, but rather proudly embraced by the obscene practitioners.

Oh my. Before you come back, Google “Goebbels Big Lie.” Reagan and GWB-43 were the drivers of our huge debt. Period. Recently Obama helped avert a Major Depression with his Stimulus. To avoid GOP filibuster he had to agree to make a huge portion of the stimulus … (are you sitting down?) … tax cuts.

This article has some graphs you might want to show your Facebook friends when they claim Government’s size has increased under Obama.

Taxes can also suck up private capital. My concern is less how the government gets its investment capital and more how it invests it. I’d like to see money spent on science and technology, educating our children, repairing America’s bridges and roads. Many in the GOP oppose such Marxist ideas but would be happy to fund more boondoggles in Central Asia for their buddies at Halliburton. YMMV. HTH.

13

Yes, but you still have the contrast between the $1,000,000 bridge paid for with taxes and the $1,300,000 bridge paid for with borrowing. Physically, they’re identical. So how do you justify paying the extra $300,000?

And keep in mind that $300,000 you pay in interest doesn’t go anyplace very useful. It’s just paid to people who bought treasury notes. It’s hard to imagine that as an investment likely to produce advances in science or education or infrastructure. Especially when a lot of that interest will be paid to investors outside the United States.

Overall, if you’re going to spend money, tax-and-spend is a better plan than borrow-and-spend.

14

How convenient. Everyone dodges the real question of why don’t we pay off our debt
of $2 trillion to China?

The short answer is that the Chinese will not accept our bitcoins.

15

Until the interest checks from your bonds or T-bills stop arriving as due, you have no grounds to say the U.S. government refuses to pay its debts.

16

We’re not dodging the question. We’re saying there is no question. The United States is paying off its debt to China and other lenders. So there’s no need to invent an explanation for something that didn’t happen.

17

The U.S. government doesn’t have callable bonds outstanding, at least to my knowledge (you can get lots of callable fixed income things issued by banks and other companies, but at least in my lifetime I don’t remember the U.S. Treasury ever issuing them.) So that means to actually “pay down the debt” any faster than normal coupon payments we’d basically have to repurchase our own Treasury securities on the open market.

The problem is, many of them right now sell for more than face value, meaning we’d have to actually pay a premium to original principal to get the bond back from whomever is holding it.

18

Because for 30 years, the Republicans have been getting deeper and deeper into the fallacy that “Government is always wrong” and “taxes are theft”. Lacking the will or votes to bring spending down through other means, Republicans have pushed this absolutely asinine idea (that has been proven historically incorrect) that if they can deny revenues, they can “starve the beast” and reduce government.

“Most” of the electorate doesn’t believe this.

As I said, 30 years of Republicans and the Conservative Media Entertainment Complex (CMEC) playing with fire by pushing a “Government is Evil” propaganda campaign.

Pretty much every modern nation has debt. We are not “refusing” to pay it down at all. We’re not in a position to. Unfortunately, the other side of the foolish anti-government position we get from CMEC says that if there is a surplus (as there was under Clinton), it is a sure sign that TAXES ARE TOO HIGH!!! and we need to cut taxes (rather than paying off any debt). I challenge you to show me a single Tea Partier who screams about our nations debts, but believes we should run a surplus to pay some of it off.

19

I don’t think you and I are in disagreement here, but to enforce this hyper-literal interpretation of “pay down the debt” (as many do in answer to this oft-repeated question) is to degrade debate. If the U.S.G. simply stopped issuing new debt as old debt comes due, the debt would start falling ferociously. To debate whether that should be called “paying down the debt” is a pointless diversion.

(BTW, a USG agency called the FRB does purchase huge quantities of Treasury securities on the open market but, again, to focus on that would be diversionary.)

20

The Federal Reserve mostly buys Treasury bonds to decrease the supply of “safe” fixed income assets and increase the attractiveness of equity investments (it also generally increases prices of the remaining fixed income securities on the market as well, but has shown to have an upward impact on all investments as the whole market is losing access to safer haven investments.) I don’t believe this retires any of the Treasury debt, because bonds held by the Federal Reserve still receive coupon payments. The only way Treasury can retire a bond early is if Treasury itself buys a bond back. The Treasury and the Federal Reserve are not the same thing, and the Federal Reserve is best thought of as a government overseen public-private partnership bank. The U.S. Treasury has a big account at the Fed, but it doesn’t own the Fed or get the Fed’s assets (like Mortgage Backed Securities and others) when the Fed buys them.