Thursday, 20 March 2014

Washington’s Farewell Address, Part III: Debt and Taxes

I recall that I may have hinted in a previous post that it’s something of a pet peeve of mine when politicians and pundits in the United States invoke the Founding Fathers when arguing for or against whatever the issue of the day happens to be. They claim to know, often with startling specificity, what the Founders intended or would have said about this or that subject. While I think it’s creditable that a people should seem to be so in touch with their own history, I am often baffled by the arguments the Founders are regularly drafted into, and am driven to wonder how many of these politicians and pundits have actually sat down and read what Jefferson, Washington, or Hamilton actually wrote.

I say this because, in addition to being a sort of primer on classical republicanism, Washington’s Farewell Address contains a number of cautions which the first president saw fit to impart as he left office. While these warnings all have their roots in contemporary, 18th-century issues, their relevance in the present context is, at a glance, startlingly apparent. Consequently, if someone wanted to know what the first man to hold the office of president, hero of the Revolution, and Founding Father par excellence George Washington had to say on the subject of the national debt, taxation, foreign relations, free trade and partisan politics, they need look no further than his valedictory address for eloquent statements on each of those topics.

If it pleases the court, I’d like to highlight a few of them now.

I’ll start with the national debt, which has been a topic of heated conversation for several months now, and will likely continue to be for the foreseeable future. Should the debt be totally paid off? Is it an unreasonable burden to pass on? Is it growing out of control? How can it best be managed?  Not being an economist, and having only come to something like a competent understanding of the function of the debt recently, I’ll leave the in-depth discussion to those more qualified. That being said, and for the benefit of those that know even less about sovereign debt than I do (which wouldn't be difficult), allow me to sketch out the basic concepts.

Any government, in its regular operations, must spend money. They spend it on social programs, on national defence, on infrastructure, and on financial aid. There are, essentially, two ways for a government to accumulate this money: taxation, and borrowing. Taxation comes in many forms, like sales taxes, income taxes, tariffs, and capital gains taxes. However, taxation, unless it is to become excessive to the point of ridiculousness, can never hope to account for the billions of dollars that the average government spends every year. Thus, governments must also borrow money, from private citizens, banks, and foreign countries. In so doing they accumulate a debt which fluctuates from year to year as portions of it are paid off and more money is borrowed. As long as a government is able to pay off the interest on it debts from year to year, and avoid defaulting on any payments, actually having a debt is not really an issue. In fact, the debt is really what helps governments borrow the money they need. By showing themselves to be trustworthy borrowers, governments can effectively establish a line of credit that enables them to borrow even larger sums further down the line. That being said, it is inadvisable for any government to allow its debts to grow out of control, especially to the point that they eclipse the total amount of money that a country is able to generate on a yearly basis.

During Washington’s first term in office, the United States of American began the process of generating its first public debt. Mainly, this meant permitting the state governments to transfer the debts that they’d accumulated during the Revolution (some of which were sizeable) to the Federal government. New taxes would be implemented, mainly on items considered luxuries (like whiskey), in order to create a stable line of credit by reliably paying the interest on this consolidated debt. Having proven its reputation as a reliable borrower, the United States could then freely issue bonds to foreigners and American alike, generating significant revenue for the federal government. The brainchild of Treasury Secretary Alexander Hamilton, this debt assumption scheme met with mixed reactions and became one of the most hotly debated issues in America in the 1790s. Negative responses were particularly common among the Southern states, many of who were on their way to paying off their debts and felt that they were being punished for their diligence. Soldiers who had been paid in state bonds at the end of their service during the Revolution also had cause to complain, as many of them had sold their IOUs at a time when they were at a low value, only to have that value sky-rocket in the lead-up to the federal purchase. Nevertheless, a compromise was reached and the assumption went forward.

By 1796, the debt had become one of the central issues of debate between the emerging political factions in United States. Generally speaking, Northerners, who tended to value commerce over agriculture, saw the debt as a useful way to promote investment and economic stability. Southerners, who tended to own land and made their living either working it or renting it to those who did, saw the debt as a tool of bankers and speculators who wished to manipulate the nation’s finances to their own ends. Washington, though he was a Southerner, was in favour of the debt, or at least saw it as a potentially useful tool. In his Farewell Address he referred to public credit as an important source of security and stability and called on his countrymen to cherish it, with certain qualifications. It should be used, he wrote, sparingly, and occasions for added expense should be avoided by cultivating peace (war being a notoriously costly endeavour). At the same time he cautioned that timely investments aimed at preparing for a potential danger would likely alleviate the much greater cost of repelling said danger once it had arrived (essentially, good preparation is cheaper than good damage control). These admonitions he coupled with the assertion that though it is not always possible, the accumulation of debts is best avoided and that once accumulated great effort should be exerted to discharge them, thereby “not ungenerously throwing upon posterity the burthen, which we ourselves ought to bear.”           
This is, I think, a reasonable position to take; that debt could be a very valuable tool, but only when used skilfully, moderately and prudently. And it was likely the product of Washington’s effort to chart the middle course between the opposing factions, both of whom looked to him for moral leadership and mediation. It is, I think, worth acknowledging that Washington did not claim that it was desirable to pay off the debt entirely. This would, after all, render it useless as a means of generating much-needed revenue, something which the federal government, even in the 1790s, was increasingly in need of. In fact, though the United States actually did pay off its debt completely in 1835, it began borrowing again at the start of 1836 (at which point, in January, the total debt amounted to $37,000).  

In the same section (the 30th), Washington also discusses the necessity of taxation as a means of discharging the nation’s debts. His opening statement on that topic is, to my mind, one of the most even-tempered and pragmatic I've read or heard from an American politician on the subject of taxes.

He wrote:

“Towards 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 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.”

    18th-century linguistic contortions aside, there can be no more plain explanation of the purpose and necessity of taxation in a free society. Taxes are unpleasant but necessary. Because they are unpleasant, the objects which they apply to (investments, property, imports, income, etc…) must be very carefully chosen, and the process of selecting and enforcing them must be as transparent as possible. And at the same time, the public must be willing to accept the implementation of taxes aimed at providing revenues for measure or programs from which they benefit directly. At no point does he say that taxes are what make life worth living, nor does he claim that they spell the end of American civilization. They are, to his thinking, an inconvenience, but one that must be tolerated because they ultimately serve the public good.

    I can’t speak for anyone else, but I think this is a view worth considering. 

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