Copyright © 2012 by Simon Johnson and James Kwak All rights reserved Published in the United States by Pantheon Books, a division of Random House, Inc., New York, and in Canada by Random House of Canada Limited, Toronto Pantheon Books and colophon are registered trademarks of Random House, Inc Library of Congress Cataloging-in-Publication Data Johnson, Simon, [date] White House burning : the founding Fathers, our national debt, and why it matters to you / Simon Johnson, James Kwak p. cm Includes index eISBN: 978-0-307-90712-7 1. Debts, Public—United States. 2. Government spending policy—United States. 3 Budget deficit—United States. I. Kwak, James. II. Title HJ8101.J64 2012 336.3′40973—dc23 2012000435 www.pantheonbooks.com Cover design by Brian Barth Book design by M Kristen Bearse v3.1 To Sylvia, Willow, Boo, Mary, Celia, and Lucie Contents Cover Title Page Copyright Dedication Introduction Immortal Credit End of Gold Deficits Don’t Matter What Does the Federal Government Do? Why Worry Arguing First Principles Where Do We Go from Here? Conclusion Technical Appendix Notes Acknowledgments Index About the Authors In Praise of White House Burning Other Books by This Author INTRODUCTION Nothing is more important in the face of a war than cutting taxes —House majority leader Tom DeLay, 20031 On June 1, 1812, President James Madison sent a letter to Congress asking it to consider a declaration of war against Great Britain The Democratic-Republican majority in Congress was happy to oblige For the original War Hawks, only military force could avenge repeated British infringements on American sovereignty—“the spectacle of injuries and indignities which have been heaped on our country,” in Madison’s words.2 The insults to the United States ranged from seizing American ships on the high seas and impressing their sailors into the Royal Navy to supporting Native American attacks along the Western frontier Attempts to apply economic pressure had back red, and diplomacy appeared to be leading nowhere; as Madison said, “Our moderation and conciliation have had no other e ect than to encourage perseverance and to enlarge pretensions.”3 With war approaching, it fell to Treasury Secretary Albert Gallatin to pay for it Gallatin hoped to nance the war with borrowed money, but he wanted to raise taxes enough to cover the interest on new debt.4 Without higher taxes, he worried that bond investors would not be willing to lend large amounts of money to a young country ghting with a European superpower But the War Hawks were ideologically and politically opposed to taxes—particularly the excise (internal trade) taxes that Gallatin wanted to impose As the party of small government, the Democratic-Republicans believed that higher federal tax revenues constituted a threat to individuals’ and states’ rights.5 Perhaps more importantly, they feared that raising taxes to ght a war could hurt them at the ballot box.6 Congress did increase some tari s (taxes on external trade) in the run‑up to war, but failed to approve the internal taxes that Gallatin had pressed for, instead authorizing the Treasury Department to borrow money But there were not enough investors willing to lend the amount needed, even before war began, forcing the government to print paper money.7 On June 18, 1812, the United States declared war against Great Britain Less than a month later, Congress adjourned Hampered by Congress’s reluctance to raise taxes, the Treasury Department struggled to pay for soldiers in the eld and ships at sea In 1813, with the government only weeks away from running out of money, Gallatin was forced to rely on Philadelphia banker Stephen Girard to underwrite a massive loan—because, at that point, Girard’s credit was better than the government’s.8 The United States military could win individual victories, but was unable to achieve any of its major objectives, su ering repeated defeats on the border with Canada, even with Great Britain distracted by the much larger war against Napoleon in Europe Congress nally agreed to impose excise taxes in 1813,9 but it was too late to build a world-class military After a decade of tight budgets, the U.S Navy began the war with all of seventeen ships The Royal Navy commanded over one thousand ships; even with many of them committed elsewhere, it was still able to blockade the Eastern shoreline and raid the coast almost at will.10 Chesapeake Bay, the broad waterway leading to both Washington and Baltimore, was defended by a collection of barges and gunboats that were outclassed by the British navy and soon trapped in the Patuxent River.11 The approach to Washington along the Potomac River was guarded by Fort Warburton, completed in 1809, about ten miles downstream from the capital.12 But when Pierre Charles L’Enfant, the architect and city planner who had designed the city of Washington, inspected the fort, he found it severely de cient and recommended a redesign, more heavy guns, and construction of a second fort nearby The secretary of the navy added some more guns, but there was no money for further improvements.13 In August 1814, British forces sailed into the Patuxent, an inlet of Chesapeake Bay that points toward Washington They cornered the overmatched defensive otilla, forcing the Americans to scuttle their ships, and landed ground forces in Benedict, Maryland, less than forty miles from the U.S capital The soldiers marched overland from Benedict, defeated an American militia at the Battle of Bladensburg, and eventually reached Washington, where they encountered little resistance On the night of August 24, they burned the Capitol, the Treasury Building, and the White Housea — after eating the dinner that had been set for that evening Another British squadron sailed up the Potomac and bombarded Fort Warburton, whose defenders quickly abandoned their positions From there, they continued upriver to capture the city of Alexandria, which was commercially more important than Washington at the time, seizing twenty-one merchant ships and their cargo.14 For the Americans, the burning of the White House was the low point of the war, a moment of national humiliation that remains an iconic image in U.S history Despite the symbolism, it was not a decisive turning point in the ict; the two sides negotiated a peace later that year after deciding the war was no longer worth fighting.15 But the vulnerability of America’s capital highlighted the danger of going to war against one of the world’s superpowers unprepared As Admiral George Cockburn supervised the destruction of official Washington, someone called out to him, “If General Washington had been alive, you would not have gotten into this city so easily.” “No,” Cockburn replied “If George Washington had been president we should never have thought of coming here.”16 But Washington, who had been forced to ght the Revolutionary War with an under-equipped, underpaid army, knew as well as anyone that any military was only as strong as the treasury that backed it What the British had, more than anything else, was money—money to out t and equip hundreds of ships and to ght simultaneous land wars in Europe and North America By contrast, without a stable source of tax revenue, the United States struggled to attract lenders willing to bet on the country’s unproven armed forces Right up until the end of the war, military operations were hampered by failures to pay troops and contractors.17 This deep scal crisis was the product of one of the most bitter, divisive political struggles in American history Beginning in 1790, Treasury Secretary Alexander Hamilton pushed through a controversial series of scal policies that included restructuring the national debt, federal government assumption of state debts, a national bank, and excise taxes Opposition to Hamilton’s policies led Thomas Je erson and James Madison to found the Democratic-Republican Party (often known simply as the Republican Party), which faced o against Hamilton’s Federalists b The smallgovernment, antitax Republicans swept the elections of 1800, with Je erson defeating Federalist incumbent president John Adams, and proceeded to reverse some of Hamilton’s policies, repealing the excise taxes in 1802 To pay for these tax cuts, the Republicans cut defense spending, which was one reason for the military’s unpreparedness in 1812.18 The elimination of internal taxes also made government revenues dependent on tari s, which were gutted rst by an embargo against Great Britain and then by war It was this battle over taxes and spending that led to the country’s fiscal weakness in 1812 Ironically, the Republicans, who voted for war but not for the taxes to pay for it, were the political victors of the War of 1812 The Federalists’ opposition to the war—which, in some cases, extended to attempts to undermine the Treasury Department’s e orts to raise money—made the party appear unpatriotic, and it never again gained power on the national level.19 In a sense, however, the war also vindicated the principles laid out by Hamilton two decades before Both Federalists and Republicans had always been “ scally responsible” in the shallow sense that they believed the country should make required payments on its debts But there is a deeper meaning of scal responsibility: the recognition that if you want something, you have to pay for it, either now or in the future If a government cannot demonstrate that type of scal responsibility—through the willingness and capacity to levy and collect taxes when necessary—it will have trouble borrowing money in a time of crisis This was missing in the Congress of 1812 As Representative John Randolph (an antiwar Republican) said sarcastically to his prowar colleagues, “Go to war without money, without a military, without a navy!”20 By 1813 and 1814, however, it was Republican majorities in Congress that voted to reinstate and then raise the internal taxes originally imposed by the hated Federalists.21 Some things, everyone agreed, were worth paying for Fast forward to 2011 Once again, Washington is embroiled in a bitter partisan ght over taxes, spending, and debt This time, unlike two centuries before, it is not primarily about war, although troops are still on the ground in the Middle East The United States is the world’s only true superpower, with the largest military and the largest economy on the planet, and its national survival is not in question Nor does the Treasury have any trouble borrowing money The dollar is the backstop currency of the global economy, and Treasury bonds are used in nancial markets as the very de nition of a safe asset.c Although the national debt is more than $10 trillion,d interest on that debt is barely $200 billion per year—less than 10 percent of the federal government’s tax revenues.22 Investors around the world, seeking safety from economic problems elsewhere, are hungry to lend money to the United States: interest rates on Treasury bonds are at their lowest level in more than half a century.23 And yet, on August 2, 2011, political squabbling brought the United States within a few days of defaulting on its debts.24 Because of the debt ceiling—a legal limit on the total national debt—the Treasury Department could no longer borrow new money and would soon run out of cash to pay all of its bills.25 Republicans in Congress demanded that any increase in the debt ceiling be accompanied by equivalent, dollar-for-dollar reductions in spending;26 Democrats, led by President Barack Obama, insisted either that the debt ceiling be increased without conditions or that any deal to reduce the de cit also include increased tax revenues (Both sides declined to mention the fact that they had just months before collaborated on a major tax cut that increased the national debt by almost $860 billion.)27 A minority of in uential Republicans even argued that defaulting on the nation’s debts would be a good thing, and they were seemingly backed by a plurality of the public, which opposed raising the debt ceiling in the abstract.28 There the two parties stood until, on August 2, the Senate passed and the president signed a complicated compromise hammered out just two nights before.29 The agreement cut spending by $900 billion over the next ten years and called on a bipartisan congressional committee to come up with a plan to reduce de cits by an additional $1.2 trillion over the same period Three months later, just before its deadline, the so-called supercommittee gave up, unable to agree on anything This latest battle over taxes and spending was provoked by record federal government budget de cits, which in 2009 and 2010 exceeded $1 trillion for the rst and second times in history These de cits were not the result of war, although a decade of ghting in Afghanistan and Iraq certainly contributed to them They were primarily due to the 2007–2009 nancial crisis, which triggered a severe recession, reducing tax revenues and increasing government spending under existing programs The second most important cause of those de cits was major tax cuts in 2001 and 2003 that—unlike the 1802 tax cut—were not o set by spending reductions 30 But the real debate is over future spending In 1812, some Republicans like Randolph opposed the war because they did not want higher spending or higher taxes; Treasury Secretary Gallatin, under orders from President Madison to prepare for war, wanted higher taxes to help pay for the higher spending,31 but the majority of Republicans wanted war without the necessary tax increases Today, the central debate is over increasing federal government spending on retirement, disability, and health care programs such as Social Security, Medicare, and Medicaid, which threatens to outstrip growth in tax revenues One possibility, favored by most Republicans, is to scale back those programs to avoid the need for higher taxes Another possibility is to maintain those spending commitments while raising taxes to pay for them A compromise position—some spending reductions and some tax increases —is also conceivable But our highly polarized political system is on the course set by the 1812 Congress: higher spending without higher taxes This inability to make any scally responsible choice is how a dysfunctional political system could cause a true fiscal crisis—in one of the richest, most powerful nations in the history of the world In the War of 1812, Congress quickly learned that ghting a war without the money to pay for it was a dangerous proposition, leading to the tax increases of 1813 and 1814 This time, there may be no such wake‑up call The primary forces behind increasing government spending—an aging population and rising health care costs— move slowly but surely, eroding the government’s scal foundation over decades This gives politicians ample time to rail against de cits while failing to anything about them, dent that the true crisis will not arrive on their watch The specter of national de cits has been a xture of American politics for most of the three decades since Ronald Reagan won the presidency by promising higher defense spending, lower taxes, and lower de cits.32 Reagan then oversaw what were, at the time, the largest peacetime de cits in history, caused largely by a huge 1981 tax cut,33 yet su ered no political consequences as a result The lesson, according to George W Bush’s vice president, Dick Cheney, was that “Reagan proved de cits don’t matter.”34 In 2005, Bush attempted to use Social Security’s long-term de cit to gain support for reforming the popular retirement program The president traveled to a Bureau of Public Debt o ce in West Virginia and dramatically warned, “The retirement security for future generations is sitting in a ling cabinet”; according to his eyewitness account, he said, “There is no trust fund Just i.o.u.’s that I saw rsthand.”35 Yet his proposal to reform Social Security —diverting some contributions into individual accounts, similar to 401(k) accounts— would have added close to a trillion dollars to the national debt over the next decade.36 Over the past thirty years, in ated rhetoric about the national debt has mainly served as a rhetorical tool that politicians use to argue for unrelated policy objectives, which as often as not increase the debt But we should not be too quick to place all the blame on the political class Politicians, after all, are elected by ordinary people And ordinary people, at least as measured by opinion polls, are also deeply divided—within themselves In early 2011, 64 percent of Americans worried a great deal about “federal spending and the budget de cit” (second only to the “economy”).37 In one survey, 95 percent of respondents supported reducing the de cit by cutting government spending (on its own or in conjunction with tax increases) At the same time, however, 78 percent opposed cuts in Medicare spending, 69 percent opposed cuts in Medicaid spending, and 56 percent opposed cuts in military spending.38 It is no surprise that people can be illogical After all, it’s not fair to expect most people to know what proportion of federal spending goes to popular programs like Social Security (20 percent) and Medicare (13 percent), or how much of the deficit is due to their favorite tax breaks like the home mortgage interest deduction ($94 billion) or the deferral of taxes on retirement accounts ($142 billion).39 But the problem goes deeper: many people have no idea what the federal government does According to a 2008 survey, 44 percent of people who receive Social Security retirement bene ts say that they “have not used a government social program.” The same goes for 40 percent of Medicare recipients and 43 percent of people who have collected unemployment insurance bene ts.40 Of the people who denied using any government social programs, 94 percent had bene ted from at least one.41 In 2009, when an attendee at a town hall meeting told Republican representative Robert Inglis of South Carolina to “keep your South Korea South Sea Bubble sovereign debt crises, 5.1, 6.1, nts.1 Soviet Union, 2.1, 2.2, 4.1, 5.1, 6.1 soybeans space program Spain, 1.1, 2.1, 2.2, 5.1, nts.1 Spanish milled dollar special interests, 6.1, 6.2, nts.1 specialists, medical, 4.1, 4.2 specie, 2.1, 2.2, 2.3, nts.1 Specter, Arlen speculation, 1.1, 5.1, 5.2 spending caps, 3.1, 4.1 spending programs, itr.1, 1.1, 1.2, 1.3, 1.4, 2.1, 2.2, 2.3, 2.4, 2.5, 3.1, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 5.1, 5.2, 5.3, 5.4, 5.5, 6.1, 6.2, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7, 7.8, nts.1, nts.2, nts.3, nts.4 Spiegel, 5.1 Spilimbergo, Antonio Spragens, Lynn Springstead, Glenn R Squires, David A., nts.1, nts.2 Standard & Poor’s (S&P), 5.1, 5.2, 500 standard distributional analysis Standiford, Les “starve the beast,” 3.1, nts.1 Stasavage, David state government, 1.1, 1.2, 4.1, 4.2, 6.1, 7.1, 7.2, 7.3, nts.1 states’ rights, itr.1, 1.1 Stavins, Robert N Stein, Sam Steinberg, Jacques Steinhauer, Jennifer, nts.1, nts.2 Stephens-Davidowitz, Seth “stepped-up basis,” Sterman, John D Stevens, John Austin Stevenson, Richard W Stewart, James B Stigler, George J Stiglitz, Joseph E stimulus measures, 3.1, 4.1, 5.1, 5.2, 5.3, 7.1, 7.2, nts.1 Stockley, Karen Stockman, David A., 3.1, 3.2, nts.1 stock market, 2.1, 3.1, 4.1, 5.1, 5.2, 7.1, 7.2, bm1.1 Stone, Chad Storm Surge Unit Stremikis, Kristof structural deficits, 4.1, 5.1 student loans, 4.1, 5.1, bm1.1, nts.1 subprime mortgages Subramanian, Arvind, nts.1, nts.2, nts.3 subsidiaries, corporate subsidies, agricultural, 7.1, 7.2, 7.3, 7.4, nts.1, nts.2 Suderman, Peter Suez Canal crisis (1956) Suffolk Bank system Sullivan, Martin A Summers, Lawrence sunset provisions Sunstein, Cass R “supercommittee,” 3.1, 6.1, app.1, nts.1 supplemental insurance plans, 7.1, nts.1 Supplemental Nutrition Assistance Program supply and demand supply-side economics, 3.1, 6.1 Supreme Court, U.S Surowiecki, James, nts.1, nts.2 surpluses, budget, 1.1, 3.1, 3.2, 3.3, 3.4, 4.1, nts.1, nts.2, nts.3 Surrey, Stanley Suskind, Ron, nts.1, nts.2, nts.3 Sustainable Defense Task Force Svahn, John A swaps, debt Sweden, 6.1, nts.1 Switzerland Sylla, Richard, 1.1, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6 Symanski, Steve Symonds, Craig L Taliban talk shows Tangeman, John Tanzi, Vito tariffs, itr.1, 1.1, 1.2, 1.3, 1.4, 6.1, nts.1, nts.2 Tavernise, Sabrina “Tax Day,” taxes: agricultural, 1.1, 6.1, 7.1, 7.2, nts.1, nts.2 alternative minimum (AMT), 3.1, 4.1, 7.1, app.1, app.2, nts.1, nts.2, nts.3, nts.4, nts.5 on assets, 7.1, nts.1, nts.2, nts.3 avoidance of, 4.1, 4.2, 4.3, 6.1, 6.2, 7.1, 7.2, nts.1, nts.2 base for, 4.1, 5.1, 6.1 on bonds, 5.1, 5.2, 7.1, 7.2 brackets of, 4.1, 7.1, 7.2, 7.3 capital gains, 3.1, 6.1, 6.2, 7.1, 7.2, 7.3, nts.1, nts.2 on carbon emissions, 6.1, 7.1, 7.2, 7.3, 7.4, nts.1 on charitable contributions, 7.1, 7.2, bm1.1, nts.1, nts.2 child credit for, 6.1, 7.1, 7.2, nts.1 code for, 3.1, 3.2, 4.1, 6.1, 6.2, 7.1, 7.2, nts.1, nts.2, nts.3 collection of, 1.1, 1.2, 1.3, 1.4, 5.1, nts.1 congressional policies on, itr.1, 2.1, 3.1, 3.2, 3.3, 4.1, 6.1, 7.1, app.1, nts.1, nts.2, nts.3 on consumption, 1.1, 1.2, 4.1, 5.1, 5.2, 6.1, 7.1, 7.2, 7.3, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6 corporate, 1.1, 4.1, 7.1, 7.2, 7.3, 7.4, nts.1, nts.2 taxes (continued): cuts in, itr.1, itr.2, itr.3, itr.4, 1.1, 2.1, 2.2, 2.3, 3.1, 3.2, 3.3, 3.4, 3.5, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 4.9, 4.10, 5.1, 5.2, 5.3, 5.4, 5.5, 6.1, 6.2, 6.3, 6.4, 6.5, 6.6, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7, 7.8, 7.9, 7.10, app.1, app.2, app.3, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6, nts.7, nts.8, nts.9, nts.10 deductions and exemptions for, itr.1, 3.1, 4.1, 4.2, 4.3, 4.4, 4.5, 6.1, 6.2, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6, nts.7, nts.8, nts.9 deferment of differential in direct on dividends, 7.1, 7.2 estate, 4.1, 4.2, 4.3, 4.4, 6.1, 7.1, 7.2, 7.3, 7.4, 7.5, app.1 excise, itr.1, itr.2, 1.1, 1.2, 1.3, 1.4, 6.1, nts.1 expenditures in, 4.1, 7.1 flat, 7.1, 7.2, 7.3 gasoline, 7.1, 7.2, nts.1, nts.2 income, 1.1, 1.2, 1.3, 2.1, 2.2, 3.1, 3.2, 4.1, 4.2, 4.3, 4.4, 6.1, 6.2, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7, 7.8, 7.9, app.1, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6, nts.7, nts.8 increases in, itr.1, itr.2, itr.3, itr.4, 1.1, 1.2, 2.1, 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 4.1, 4.2, 4.3, 4.4, 5.1, 5.2, 5.3, 5.4, 5.5, 5.6, 5.7, 6.1, 6.2, 6.3, 6.4, 7.1, 7.2, 7.3, 7.4, bm1.1, app.1, nts.1, nts.2 on investments, 7.1, 7.2, nts.1 loopholes in, 4.1, 4.2, 4.3, 6.1, 6.2 luxury, 1.1, 1.2 marginal rate of, 4.1, 6.1, nts.1 movement for reduction of, 3.1, 3.2, 3.3, 3.4, 4.1, 6.1, 6.2, 7.1, app.1, nts.1, nts.2, nts.3 payroll, 3.1, 3.2, 3.3, 3.4, 4.1, 4.2, 4.3, 4.4, 5.1, 6.1, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7, 7.8, 7.9, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6, nts.7, nts.8 progressive, 6.1, 7.1, 7.2, 7.3, 7.4, 7.5 property, 1.1, 3.1, 7.1 rates of, 4.1, 4.2, 4.3, 6.1, 6.2, 7.1, 7.2, 7.3, bm1.1, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6, nts.7 rebates on reforms for, 3.1, 7.1, 7.2 regressive, 1.1, 4.1, 7.1, 7.2, nts.1 representation and, 1.1, nts.1 revenues from, itr.1, itr.2, itr.3, 1.1, 1.2, 1.3, 1.4, 1.5, 1.6, 1.7, 1.8, 1.9, 1.10, 2.1, 2.2, 3.1, 3.2, 3.3, 3.4, 3.5, 4.1, 4.2, 4.3, 4.4, 4.5, 5.1, 6.1, 6.2, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7, bm1.1, app.1, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6, nts.7, nts.8, nts.9, nts.10, nts.11, nts.12, nts.13, nts.14 shelters for, 6.1, 7.1 on social insurance, 4.1, 4.2 state and local, 1.1, 1.2, 4.1, 7.1, 7.2 value-added (VAT), 7.1, 7.2, nts.1 in wartime, itr.1, itr.2, 1.1, 1.2, 1.3, 2.1, 3.1, 5.1, 7.1, bm1.1, nts.1 on wealth, 1.1, 1.2, 3.1, 3.2, 4.1, 4.2, 4.3, 5.1, 6.1, 6.2, 6.3, 7.1, 7.2, 7.3, 7.4, nts.1 “tax farmers,” Tax Increase Prevention and Reconciliation Act (2005) Taxpayer Protection Pledge, 3.1, 6.1, 7.1 Tax Reform Act (1986), 3.1, 7.1, 7.2, nts.1 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (2010) Tax Relief Coalition Taylor, Alan, nts.1, nts.2 tea teaching hospitals Tea Party Goes to Washington, The (Paul), 5.1 Tea Party movement, 3.1, 3.2, 3.3, 3.4, 3.5, 5.1, nts.1 technical appendix technology, 1.1, 4.1 Temel, Jennifer Temin, Peter, nts.1, nts.2, nts.3 Tempalski, Jerry, nts.1, nts.2 Temporary Assistance for Needy Families terrorism, 5.1, 6.1, 6.2, 7.1, 7.2, 7.3 Thailand Thaler, Richard H Thee-Brenan, Megan Theory of Justice, A (Rawls), 6.1 think tanks 13 Bankers (Johnson and Kwak), itr.1 Thomas, Elmer Thomas, G Scott Thomma, Steven Thorne, Deborah Time, 2.1 tipping point tobacco, 4.1, nts.1 Tobacman, Jeremy Toder, Eric J., nts.1, nts.2, nts.3, nts.4, nts.5 “too big to fail” institutions, 7.1, 7.2, 7.3 Toomey, Pat, 3.1, 6.1 Topoleski, John J Tories, 1.1, nts.1 toxic assets Toyota trade deficits, 2.1, 2.2, 2.3, nts.1 traditional values, 3.1, 3.2 transportation, 1.1, 7.1, 7.2 Treasury bills, itr.1, itr.2, 1.1, 1.2, 1.3, 2.1, 2.2, 2.3, 2.4, 3.1, 3.2, 3.3, 4.1, 4.2, 4.3, 5.1, 5.2, 5.3, 5.4, 5.5, 5.6, 5.7, 5.8, 6.1, bm1.1, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6, nts.7, nts.8, nts.9, nts.10, nts.11, nts.12, nts.13, nts.14, nts.15 Treasury Department, U.S., itr.1, itr.2, itr.3, 1.1, 1.2, 1.3, 2.1, 2.2, 3.1, 3.2, 4.1, 4.2, 5.1, 5.2, 5.3, 5.4, 7.1, 7.2, bm1.1, nts.1, nts.2, nts.3, nts.4 Trenton, Battle of Triffin, Robert, 2.1, nts.1 Triffin dilemma Tritch, Teresa Troubled Asset Relief Program (TARP), 3.1, 5.1, nts.1 Truman, Harry S., 2.1, nts.1 Truman Doctrine trust funds, 3.1, 4.1, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6 Turner, Philip 2011 Long-Term Budget Outlook, app.1 Tyson, Laura D’Andrea Ueda, Kenichi unemployment insurance, 3.1, 3.2, 4.1, 5.1, 6.1, bm1.1, nts.1 unemployment rate, itr.1, 2.1, 3.1, 3.2, 3.3, 3.4, 4.1, 4.2, 5.1, 5.2, 5.3, 5.4, 5.5, 5.6, 5.7, 5.8, 6.1, 7.1, bm1.1, bm1.2, bm1.3, nts.1, nts.2, nts.3, nts.4 unemployment savings accounts “unfunded obligations,” United Nations Monetary and Financial Conference (Bretton Woods agreements) (1944), 2.1, 2.2, nts.1 United States: agriculture of, 1.1, 1.2, 1.3, 2.1, 3.1, 4.1, 6.1, 7.1, 7.2, 7.3, nts.1, nts.2 banking system of, 1.1, 1.2, 1.3, 2.1, nts.1, nts.2 British relations with, itr.1, 1.1, 1.2 central bank of, see Federal Reserve System conservative movement in, 3.1, 3.2, 3.3, 4.1, 4.2, nts.1 credit rating of, 1.1, 1.2, 1.3, 1.4, 1.5, 2.1, 2.2, 2.3, 3.1, 5.1, 5.2, 5.3, 5.4 currency of, see dollar United States (continued): deficits and deficit spending in, itr.1, itr.2, 1.1, 2.1, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 5.1, 5.2, 5.3, 5.4, 6.1, 6.2, 6.3, 6.4, 6.5, 6.6, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, bm1.1, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6, nts.7, nts.8, nts.9, nts.10, nts.11, nts.12 democratic system of, 1.1, 1.2, 7.1, bm1.1 economic growth in, 5.1, 6.1, 6.2, 7.1, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6 economy of, itr.1, itr.2, 1.1, 1.2, 1.3, 1.4, 2.1, 2.2, 2.3, 3.1, 3.2, 3.3, 3.4, 5.1, 5.2, 5.3, 6.1, 6.2, 7.1, bm1.1, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6 financial program for foreign aid of, 4.1, nts.1 foreign investment in, 5.1, nts.1 foreign trade of, itr.1, 1.1, 1.2, 1.3, 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.7, 2.8, 5.1, 6.1, nts.1, nts.2, nts.3 future fiscal crisis of as global power, itr.1, 1.1, 2.1, 2.2, 5.1, 5.2, 6.1 gold reserves of, 2.1, nts.1 gross domestic product (GDP) of, itr.1, itr.2, 1.1, 1.2, 1.3, 1.4, 1.5, 1.6, 1.7, 1.8, 2.1, 2.2, 2.3, 2.4, 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 5.1, 5.2, 5.3, 6.1, 6.2, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7, 7.8, 7.9, 7.10, 7.11, 7.12, 7.13, 7.14, 7.15, 7.16, 7.17, 7.18, 7.19, app.1, app.2, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6, nts.7, nts.8, nts.9, nts.10, nts.11, nts.12, nts.13, nts.14, nts.15, nts.16, nts.17, nts.18, nts.19, nts.20, nts.21, nts.22, nts.23, nts.24, nts.25 health care costs in, itr.1, itr.2, itr.3, itr.4, 3.1, 3.2, 3.3, 4.1, 4.2, 5.1, 5.2, 5.3, 5.4, 5.5, 6.1, 6.2, 6.3, 6.4, 6.5, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7, bm1.1, bm1.2, bm1.3, app.1, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6, nts.7, nts.8, nts.9; see also Medicare; Social Security immigration to, 1.1, 4.1, 7.1, 7.2, nts.1 industrialization of, itr.1, 1.1, 1.2, 1.3, 4.1, 6.1, 7.1 inflation rate of, 1.1, 2.1, 2.2, 2.3, 2.4, 3.1, 4.1, 4.2, 5.1, 5.2, 5.3, 5.4, 7.1, 7.2, 7.3, 7.4, 7.5, app.1, app.2, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6, nts.7, nts.8, nts.9 infrastructure of, 1.1, 2.1, 4.1, 5.1, 5.2, nts.1, nts.2 interest rates in, itr.1, 1.1, 1.2, 1.3, 1.4, 2.1, 3.1, 4.1, 5.1, 5.2, 5.3, 5.4, 5.5, 5.6, 5.7, 5.8, 7.1, nts.1, nts.2, nts.3, nts.4 in international economic system, 1.1, 2.1, 2.2, 5.1, 5.2, nts.1, nts.2, nts.3, nts.4, nts.5 living standards in, 1.1, 1.2, 2.1, 2.2, 3.1, 4.1, 4.2, 4.3, 5.1, 6.1, 6.2, 7.1, 7.2, 7.3, 7.4, 7.5, bm1.1, bm1.2, nts.1, nts.2 military spending of, itr.1, itr.2, itr.3, itr.4, 1.1, 1.2, 1.3, 1.4, 2.1, 2.2, 2.3, 2.4, 3.1, 4.1, 4.2, 4.3, 4.4, 5.1, 5.2, 6.1, 6.2, 6.3, 6.4, 6.5, 7.1, 7.2, bm1.1, nts.1, nts.2 national debt of, itr.1, itr.2, itr.3, itr.4, 1.1, 1.2, 1.3, 1.4, 2.1, 2.2, 2.3, 2.4, 2.5, 3.1, 3.2, 3.3, 3.4, 3.5, 4.1, 4.2, 4.3, 4.4, 5.1, 5.2, 5.3, 5.4, 5.5, 6.1, 6.2, 6.3, 6.4, 7.1, 7.2, bm1.1, bm1.2, nts.1, nts.2, nts.3, nts.4, nts.5, nts.6, nts.7, nts.8, nts.9, nts.10, nts.11 population of, itr.1, itr.2, 1.1, 1.2, 4.1, 4.2, 4.3, 4.4, 5.1, 6.1, 7.1, 7.2 savings rate in, itr.1, 2.1, 2.2, 3.1, 4.1, 4.2, 5.1, 5.2, 5.3, 5.4, 6.1, 6.2, 6.3, 6.4, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7, 7.8, bm1.1, nts.1 social programs of, see Medicare; Social Security stock market of, 2.1, 3.1, 4.1, 5.1, 5.2, 7.1, 7.2, bm1.1 unemployment rate in, itr.1, 2.1, 3.1, 3.2, 3.3, 3.4, 4.1, 4.2, 5.1, 5.2, 5.3, 5.4, 5.5, 5.6, 5.7, 5.8, 6.1, 7.1, bm1.1, bm1.2, bm1.3, nts.1, nts.2, nts.3, nts.4 universal health care upper class, 1.1, 1.2, 3.1, 3.2, 4.1, 4.2, 4.3, 5.1, 6.1, 6.2, 6.3, 7.1, 7.2, 7.3, 7.4, nts.1, nts.2 U.S Chamber of Commerce utilization patterns vacation homes Valley Forge value-added tax (VAT), 7.1, 7.2, nts.1 Van Natta, Don, Jr veil of ignorance, 6.1, 6.2 Velde, Franỗois R Verhovek, Sam Howe veterans’ pensions vetoes, 1.1, 3.1 Vietnam War, 2.1, 2.2, 3.1, 5.1, nts.1 Viguerie, Richard, 3.1, nts.1 Virginia Volcker, Paul A., 2.1, 2.2, nts.1, nts.2 von Fremd, Charles voucher programs, 6.1, 7.1, 7.2 V-22 aircraft wage levels, 2.1, 2.2, 3.1, 4.1, 4.2, 5.1, 5.2, 5.3, 6.1, 7.1, 7.2, 7.3, bm1.1, nts.1 see also payroll taxes Waidmann, Timothy Wallis, John Joseph Wall Street Wall Street Journal, 3.1, 4.1 Walters, Raymond, Jr Wanniski, Jude warfare, itr.1, itr.2, 1.1, 1.2, 1.3, 2.1, 3.1, 5.1, 7.1, bm1.1, nts.1 War Hawks, itr.1, 1.1, 3.1 War of 1812, itr.1, itr.2, itr.3, 1.1, 1.2, 1.3, 1.4, 2.1, 2.2, 3.1, bm1.1, nts.1 War of the Spanish Succession Warren, Elizabeth Warren, Michael Washington, D.C., itr.1, 1.1, 1.2 Washington, George, 1.1, 1.2, 1.3, 1.4, nts.1, nts.2 Watkins, Thayer wealth, 1.1, 1.2, 3.1, 3.2, 4.1, 4.2, 4.3, 4.4, 5.1, 6.1, 6.2, 6.3, 6.4, 7.1, 7.2, 7.3, 7.4, 7.5, nts.1, nts.2, nts.3 wealth disparities, 4.1, 4.2, 5.1, 6.1, 6.2, 7.1, 7.2, nts.1, nts.2, nts.3 weapons of mass destruction, 6.1, 7.1 Weather Channel, 4.1, 4.2 Webster, Pelatiah Weingast, Barry R Weinstein, Milton C Weinzierl, Matthew Weisbach, David A., nts.1, nts.2 Weisberg, Jacob, nts.1, nts.2 Weisman, Steven R welfare programs, 3.1, 6.1, 6.2, 6.3, 7.1 see also entitlement programs West Virginia Whigs, 1.1, nts.1 whiskey, 1.1, 1.2, nts.1 Whiskey Rebellion, 1.1, 1.2 White, Harry Dexter, 2.1, 2.2, 2.3, 2.4, nts.1 White, Nathan I White, Richard White House, itr.1, 1.1 Whitten, David O Wicker, Elmus William III, King of England Williams, Cindy, nts.1, nts.2, nts.3 Williams, Roberton Williamson, Samuel H Williamson, Vanessa Wilson-Gorman Tariff Act (1894) Wing, Kennard T “Wirtschaftswunder,” Wise, Timothy A Wolf, Jim Woodward, Bob, nts.1, nts.2 Woolhandler, Steffie workers’ compensation World Health Organization (WHO) World Trade Organization (WTO) World War I, 1.1, 1.2, 2.1, 2.2, 2.3 World War II, itr.1, 1.1, 2.1, 2.2, 3.1, 6.1, 7.1 Wright, Jim Wright, Robert E., nts.1, nts.2 Wu, Vivian Yaling Wyden, Ron, 7.1, nts.1 Xiang Yu Yang, Shu-Chun Susan, nts.1, nts.2 yen Yohe, G W., nts.1, nts.2 Yorktown, Battle of yuan, 5.1, 5.2 Zandi, Mark Zettelmeyer, Jeromin Zinn, Howard, 1.1, nts.1 Zuckerman, Stephen ABOUT THE AUTHORS Simon Johnson is the Ronald A Kurtz (1954) Professor of Entrepreneurship at MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics He is a member of the Congressional Budget O ce’s Panel of Economic Advisers and of the Federal Deposit Insurance Corporation’s Systemic Resolution Advisory Committee He was previously the chief economist of the International Monetary Fund James Kwak is an associate professor at the University of Connecticut School of Law In 2011–2012, he is also a fellow at the Harvard Law School Program on Corporate Governance Before going to law school, he worked as a management consultant and cofounded a software company Simon and James cofounded The Baseline Scenario, a widely cited blog on economics and public policy They also wrote 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (Pantheon, 2010), a bestselling analysis of the nancial system and the recent financial crisis Simon and Johnson’s 13 Bankers is available in eBook format (ISBN: 978-0-307-379221) Visit them at: http://baselinescenario.com/ Follow: http://twitter.com/baselinescene Friend: http://www.facebook.com/pages/The-Baseline-Scenario/60785773804 For more information about Pantheon Books, Visit: http://www.pantheonbooks.com Follow: http://twitter.com/pantheonbooks Friend: http://facebook.com/pantheonbooks In praise of White House Burning “As they did in 13 Bankers, Simon Johnson and James Kwak imbed a crucial current policy debate in the history of the United States economy Their blueprint for resolving the budget problem without trampling on the basic needs of average Americans is mustreading.” —C Fred Bergsten, director, Peterson Institute for International Economics “If you are puzzled about how our country’s nances got so messed up, look no further Johnson and Kwak explain, with great lucidity and air, how the battle lines on debt and taxes have been drawn going back to the founding fathers and how things got o the rails in the last two decades And they have good news for you: even if our politicians are incorrigible, our problems are not insoluble.” —Daron Acemoglu, Elizabeth and James Killian Professor of Economics, MIT, and coauthor of Why Nations Fail: The Origins of Power, Prosperity, and Poverty “The politicians don’t care about the economics The economists don’t understand the politics Johnson and Kwak get both; that’s why you should read this book.” —James Robinson, David Florence Professor of Government, Harvard University, and coauthor of Why Nations Fail: The Origins of Power, Prosperity, and Poverty ALSO BY SIMON JOHNSON AND JAMES KWAK 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown ... and so today’s White House is the same building that was burned by the British The White House, ? ?White House History,” available at http://www.whitehouse.gov/about/history b The Democratic-Republican... tell the story of the national debt and the economic and political forces that have shaped it over time The next two chapters describe the factors behind today’s de cits, how they are likely to. .. August 24, they burned the Capitol, the Treasury Building, and the White Housea — after eating the dinner that had been set for that evening Another British squadron sailed up the Potomac and bombarded