White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You Hardcover – Apr 3 2012
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“A must-read for anyone who wishes to understand the true nature of our fiscal problems. A fascinating and lively history of how we got into this budgetary mess and a brilliant analysis, dispassionate and balanced, of what we need to do to get out of it.”
—Liaquat Ahamed, Pulitzer Prize-winning author of Lords of Finance
“In this powerful book, Johnson and Kwak cut through both the partisanship and the complexities of the debate over America’s national debt to give us a clear understanding of why it matters and what to do about it. America’s future depends vitally upon bringing our deficits under control while also investing in our growth, and this book tells us how to do both.”
—Charles Ferguson, director of the Academy Award-winning documentary Inside Job
“By skillfully placing the debt debate in an insightful historical context and providing detailed recommendations, Johnson and Kwak make a major and timely contribution to a national debate that will only get more heated in the years ahead. It’s a must-read for those wondering about the relationship between the national debt and America’s challenges; the choices that we must make to restore fiscal viability, promote growth, create jobs, and reduce inequality; and the way that polarized politics torpedoes coherent discussion of these complex issues.”
—Mohamed A. El-Erian, CEO of PIMCO and prize-winning author of When Markets Collide
“Johnson and Kwak have written a book every American should read. It gives us a rich context for understanding the problem of today’s national debt. Full of wisdom and specific recommendations, it reminds us that only when citizens understand the seriousness of our predicament will politicians take the necessary steps to strengthen our country. Let’s hope this book is a best seller.”
—Bill Bradley, former United States senator and cosponsor of the Tax Reform Act of 1986
“Could there be a more important subject today than the national debt? And could there be two smarter, clearer, more incisive writers to tell us about it than Simon Johnson and James Kwak? With precision and common sense, WHITE HOUSE BURNING tells the story of where our debt came from, what it means, and what we can do about it. This is the kind of important, informed, and accessible book a democracy can’t do without.”
—Noah Feldman, Bemis Professor of International Law, Harvard Law School, and author of Scorpions: The Battles and Triumphs of FDR's Great Supreme Court Justices
“As they did in 13 Bankers, Johnson and 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 must-reading.”
—C. Fred Bergsten, director, Peterson Institute for International Economics
“If you are puzzled about how our country’s finances got so messed up, look no further. Johnson and Kwak explain, with great lucidity and flair, how the battle lines on debt and taxes have been drawn going back to the founding fathers, and how things got off 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
“In their important, enlightening new book, White House Burning, economist Simon Johnson and lawyer James Kwak point out the absurdities of a budget debate dominated by partisan exaggerations and warnings of pending doom.”
“Johnson and Kwak bring dispassionate insights to bear on the bedeviling question of how to fix our fiscal mess before it gets fixed for us.”
About the Author
Simon Johnson is Ronald A. Kurtz Professor of Entrepreneurship at MIT’s Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He is a member of the Congressional Budget Office’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. He is currently a fellow at the Harvard Law School Program on Corporate Governance. He has also worked as a management consultant and cofounded a software company.
Johnson and Kwak 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 financial system and the recent financial crisis.
Visit them at: http://baselinescenario.com/
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But Johnson and Kwak also provide a clear and compelling vision for how our debt crisis can be solved while strengthening our economy and preserving the essential functions of government.
Anyone who CAN provide a "clear and compelling vision" for solving this nation-threatening problem will surely become known as the great prophet of our generation. A dozen or more other eminent authors from across the political spectrum have written similar books during the past few years, all proposing to rally the people and government behind their plans to "solve the debt crisis and strengthen our economy and government."
Despite all these "clear and compelling visions" our partisan leaders in Washington keep digging their heels in ever deeper in ideological struggles over whether to raise or cut taxes and whether to expand the Welfare State into new frontiers of healthcare or to rein in its existing domain of Social Security, Medicare, and Medicaid.
I thus started reading this book skeptically. However, I was immediately drawn into it by its opening discussion of the 1812 War, which occurred during the Democratic-Republican administration of President James Madison. The war may have been justified, but Madison's party refused to raise the taxes to fund it properly. Due to lack of funding and poor generalship the army floundered from disaster to disaster during the early years of the war.
Fortunately, late-war heroics compensated for early blunders and the war ended on terms that Americans interpreted as a reasonable facsimile of victory. But the Brits did inflict the humiliation of briefly occupying Washington DC and setting fire to the White House, hence the title of the book.
This is the authors' way of asking: ARE WE NOT DOING THE VERY SAME THING NOW --- in failing to raise taxes to fund our global military presence AND our ever-expanding social welfare commitments? Our reluctance to pay for the spending commitments we have asked our government to make on the military and social programs is as bullheadedly stubborn today as it was in those humiliating days two hundred years ago when the White House literally burned. Indeed this problem vexes almost every developed country. Everybody wants a robust welfare state and a strong military, just don't try to pay for it with their taxes!
Until now we have been able to pass the buck to future generations by saying, "We don't need to raise taxes. We can borrow the money today and trust that the economy will grow sufficiently in the future to pay it off." The authors make it clear that we have finally reached the plateau of slow economic growth whereby the old chimera of "paying off the debt with future growth" will be insufficient to the task:
The most immediate problem facing our nation is the high level of unemployment that persists years after the peak of the financial crisis, leaving the economy operating significantly below capacity. But our national debt, and the spending and tax policies that underlie its growth, will be a major challenge for at least the rest of the decade, as we figure out how to adapt our government and our society to ongoing demographic trends and rising health care costs. We could end up in a world with low taxes and limited government, where people are largely left to make do as they can, or in a world with high taxes and expansive government services, where people are protected from the risks of unemployment, disability, old age, and poor health. The choices we make during this transition will help determine the nature of American society for generations to come.
This book is our effort to explain how our country got into this situation and what is at stake in these debates. The first three chapters 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 deficits, how they are likely to evolve in the future, and why they matter to ordinary people. In the final two chapters, we offer our own thoughts on how to reduce the long-term national debt while preserving the most important services that the federal government provides to all Americans today.
We do not expect all or even most readers to agree with our proposals. But if the American people understand where our national debt came from, the stakes involved, and the tradeoffs involved in reducing the debt, we will be able to choose the future that we want for our government and our society. Until then, our politicians will continue to stagger from one election to the next peddling meaningless and contradictory slogans, full of sound and fury, signifying nothing. There is no need to convince you of that: the evidence is all around you.
Does the book live up to its lofty objective? For the most part it does. It provides a synopsis of monetary and tax policies from 1776 to contemporary times that is deep enough to be informative but brief enough to be enjoyable reading. There is an entire library of relevant information on taxing and spending policies packed into a few chapters. In order to understand the government's taxing and monetary policies today, we need to be economically literate on past economic history such as Alexander Hamilton's economic plan to rebuild our economy after the Revolution and to fund the government with adequate tax revenues; the financial disasters during the War of 1812; financing the Civil War; the "Cross of Gold" election of 1896; the Great Depression, and so on down to the Bretton Woods Agreement and its repudiation. This book provides a basic level of literacy in the economic history that is relevant to today's discussions --- no small accomplishment in a medium-sized book intended for a popular audience.
The book debunks some Republican myths such as the idea that cutting taxes is a panacea that promotes economic growth in all circumstances, but doesn't do so with the implied "Republicans are stupid" theme taken by many Liberal economists. I, a Conservative, happen to agree with this point. Cutting taxes revived the economy when Reagan cut them from 70% to 35% in the 1980s. But tax cuts seemed to be less effective in boosting thee economy during the 2000's when further reduced to as low 15% on capital gains and dividends. Instead we experienced the most severe economic debacle of our lifetimes.
On the other hand the authors don't discuss the Republicans' ideological argument against tax increases. Republicans believe that Democrats are prone to misdirecting tax increases toward expanding government instead of using them to pay down the deficit for programs that we are already committed to. The Republicans may be wrong in their idea that tax cuts will stimulate the economy in all circumstances, but correct in their opinion that tax increases are rarely if ever used for the responsible purpose of funding EXISTING government programs.
Of course the heart of the book will be found in its chapter on proposed solutions WHERE DO WE GO FROM HERE?
Their proposals are actually very moderate --- for example gradually raising the combined employer/employee Social Security contribution rate by 1% over a period of years and expanding the system to cover six million state and local government employees who are currently allowed to opt out of the system and thus don't pay anything into it. I'm more dubious on the idea of steadily raising the retirement age, because it is not possible for many people over the age of 50 to find ANY employment in these difficult times. How is a person supposed to retire at age 67 or 70 when corporations deny them the opportunity for employment at age 50?
Their proposal to reform healthcare is unfortunately given shorter consideration than it deserves. It is obviously going to be impossible to continue the policy we have today of asking the government to pay unlimited amounts of money to keep people on life support into their 80's, 90's and 100's. We are never going to solve our other budget problems until we get this one contained. The authors concede that it may be politically impossible to contain healthcare spending in a comprehensive way, such as by instituting a single-payer government-regulated system that imposes rationing and price controls. They recommend our continued piecemeal approach of gradually raising Medicare taxes, while imposing more subtle forms of price controls such as paying providers of Medicare and Medicaid patients on a per-patient instead of a per-procedure basis. Whether these piecemeal approaches will be cumulative enough to put a real dent in healthcare costs remains to be seen, but at least they are a place to start.
There are also the usual Liberal-aligned ideas of reducing defense spending (not at all a bad idea per se, but the devil is in the details) and imposing a carbon tax. They make a more credible argument for imposing a general VAT tax, which unfortunately is probably the only tax that will be broad enough to make a meaningful dent in the budget deficit.
Their idea of raising tax revenue by gradually phasing out many current deductions may have merit. With the current deduction-ridden tax code we seem to be saying: "Paying taxes to fund the Federal Government's obligations isn't a national priority. Obtaining deductions for your mortgage and state and local taxes is more important." This is a difficult idea at a time when the looming insolvency of the Federal Government may be threatening our nation's very existence.
This book is an excellent study of economic history that should be read by persons of any political ideology. It is also an excellent compilation of "medium scale" ideas for bringing the funding of our federal government into line with its commitments.
The book IS mildly disappointing in failing to express any really large ideas for structurally reforming the government. For example, why not pass a constitutional amendment giving the President a line-item veto, but only during times when Congress fails to balance the budget? Perhaps the President shouldn't be allowed a line-item veto in all circumstances, but there may be SOME circumstances when it can be justified. How about adding a separate "Rescission Vote" process to the Congressional budget process, whereby after passing a budget, Congress would be able to vote on across-the-board rescission's to bring it into balance with revenues? Perhaps structural ideas like this would mute the spending-driven process that seems to bias the Congress and Presidents into perpetually increasing spending at a rate far exceeding the economic growth. Perhaps the book also places insufficient emphasis on the most significant (and therefore controversial) ideas of raising tax revenue by phasing out tax deductions and imposing a VAT tax while reducing government spending in meaningful ways such as rationing healthcare by imposing per-patient limits on Medicare and Medicaid.
These mild criticisms aside, the book is an excellent compilation of medium-scale ideas for resolving the budget crisis, set upon a comprehensive foundation of economic history. These ideas are excellent starting points around which compromise by BOTH PARTIES should be possible in getting us started down the road to funding the government's military and social commitments.
The book's central premise that we must stop dilly-dallying around the budget crisis is indisputable. We got off lucky during the 1812 War when a thunderstorm extinguished the White House fires that the Brits intentionally set. Let's not push our luck again by letting the White House burn in 2012 because we couldn't figure out how to pay for its fire extinguishers.
The next few chapters discusses the current fiscal situation we face as a nation. You not only get a detailed primer on the national debt and deficit, you're also are given a clear explanation of the implications these staggering numbers have on the future of the economy.
This is one of the few books that handle this politically charged topic from an objective and non-partisan view. Other books I've read on the subject are basically selective information provided to reinforce someone's personal political agenda. This book is different. After reading the first 6 chapters, you'll have a firm understanding of our nations finances.
This book is for both liberals and conservatives. Regardless of which side of the political spectrum you come from, you'll most likely come away with a different perspective of our fiscal crisis after reading this book. At the very least, you'll most likely be better prepared to speak to the subject than anyone you know.
I highly recommend White House Burning.
before reading it. I started with the last chapter, "Conclusion", then read the previous
chapter, "Where do we go from here?", and then read the chapter before that, "Arguing first
principles". Reading in that order helped me understand what Johnson and Kwak were trying
to accomplish and what policies they believed would lead to those goals.
Johnson and Kwak's conclusion is that ultimately our argument is about what kind of world
we want to live in and what services and protections we want our government to give us in
order to have that kind of world. In an increasingly risky world (with a shredded social
contract, reduced labor union protection, the inequality generated by a winner take all
economic system, etc), Johnson and Kwak argue that we will want *more* protections and
services from our government, not *less*.
Why doesn't this sane, rational argument work? There are a number of reasons, in addition
to the fact that humans are at times just not rational. Among those reasons are: (1) Yes
we want those services and protections, but no, we're not willing to pay for them. (2)
Yes we want those services and protections, but, no, not for those who are undeserving
(where "undeserving" often is a stand-in for "brown", "black", "immigrant", and "other" in
general). Or, (3) simply that we believe we want and can have small government and are
not willing to accept that services, benefits, and protections that *we* use are provided
by our government, are expensive, and must be paid for.
But, it's not a hopeful picture. Because of our political situation in the U.S., Johnson
and Kwak, even as clear and rational and intelligent as their prescriptions are, will not
have much if any effect. Our political system in the U.S. is so tightly controlled and so
dysfunctional, that rational policy choices appear to be impossible. Amongst Republicans,
especially, any politician tainted with "compromise" automatically becomes targeted for
criticism and to be driven from office in the next election.
In their next to the last chapter, titled "Where do we go from here?", Johnson and Kwak
present a variety of proposals for changes and the funding and spending of our Federal
government. Many if not most of them taken individually are reasonable. And, certainly,
taken as a package, these are the kind of proposals that reasonable people could sit down
with and agree on some of one, more or less of another, some compromise here and there.
What is frightening is how, in our political climate, almost all if not all of these
proposals is politically impossible and laughable.
Examples of these impossible dreams, which likely would be practical reality in a more
sane nation, are: (1) Do not extend the Bush tax cuts. But, of course, a vote not to
extend them is interpreted as a vote to raise taxes, and that is career suicide for many
of our Congress people. (2) Only a universal, single payer health care system can control
health care costs. But, we are unable to agree on any health care system that does not
allow health care providers and the drug industry to make as much profit as they possibly
can, and we're about to try to repeal that system. (3) We could raise Social Security
payroll taxes to keep that system solvent. But, we've recently *reduced* those taxes and
can't seem to raise them even on high earners.
Here is a list of proposals from Johnson and Kwak:
- Taxes -- Let the Bush tax cuts expire. They are regressive, and they are a transfer of
wealth to the rich.
- Social Security -- (1) Increase the cap on earnings for Social Security tax payment.
(2) Increase the age for full retirement benefits over time. (3) Expand the Social
Security system to cover all new government employees. (4) Increase the payroll tax 1%
12.4% to 13.4%).
- Health care -- Use "comparative effectiveness research" to reduce procedures and costs,
e.g. reduce aggressive, end of life care. Fund preventative care. But, we must have
universal government-sponsored health insurance plan in order to implement cost
- Energy -- Institute a carbon tax, i.e. a tax on each ton of carbon dioxide or other
- Finance -- Our current deficit problems are the product of the finance which caused the
financial crisis of 2007-2009 and the ensuing recession. What to do: (1) Impose hard
limits on the size of financial institutions. (2) Increase capital requirements for
large financial institutions. (3) Impose a fee on large financial institutions to
compensate for the likely costs of future government rescues; scale the fee relative to
the size, riskiness, and leverage of the institution. (4) Enact a financial activities
tax. (5) Impose an added tax on high profits to discourage risky activities.
- Tax expenditures -- Reduce or eliminate them: remove tax exemptions such as home
interest exemption plus 100s more.
And the third from the last chapter ("Arguing first principles") is the one that I really
wish our political leaders would read. I know it helped me to better understand how to
think about governmental financial policy. Their discussion of the idea that government
policies, when enacted, should produce social benefits while minimizing the adverse side
effects, and their analysis of some of the ways these policies go wrong, in particular
because of loopholes in tax law, is very helpful.
Bottom line: We, actually our political leaders, must be willing to compromise on paying
for our government with some *combination* of tax increases *and* spending cuts. Since
they, and possibly we, are not willing to do so, we're stuck.
Johnson and Kwak give an excellent analysis of our current economic situation and problems
and give very intelligent, reasonable, and rational proposals for what to do to make it
better. But, the conclusion I come to while reading this book is that it's not so much
the economic system that is broken, it's the political system. We have to fix the
politics and probably most importantly, campaign finance and the corruption that it
injects into that political system before we can even try to fix the economics.
Johnson and Kwak's Blog is extremely enlightening, by the way. You can find it at:
Working from the premise stated above, they state that their primary goal in making suggestions about how to deal with the national debt is ". . . simply to show that we can achieve a sustainable level of national debt while maintaining a government that plays the crucial roles we expect from it today - protecting all of us from major risk to our welfare today and investing in a more prosperous future" (p. 186). Their underlying and second principle assumption in making suggestions as to how the debt can be best handled is ". . . our choice of government implies a choice of the kind of society we want to live in" (p. 228). To me, that is the single most important choice citizens can make because each vote implies the form of the society which we prefer. This choice is not an abstraction; it's as basic as their statement that ". . . we strongly oppose proposals that reduce deficits by shifting risk from the federal government onto individuals and families" (p. 225). If we choose candidates who reject government's role in protecting the health, safety, welfare, and environment of the private citizen, then we are voting for one type of society, one which I suggest violates the vision our founding fathers had when forming a government. If we choose candidates who affirm that ". . . it falls well within the government's responsibility to protect its citizens from extreme misery and insecurity"(p.209), then we voting for another form of society, one which affirms the essential principles of and need for the democratic form of government which was bequeathed to us. We are members of this society and it is therefore critical to each of us how we want that society to treat with us now and in the future and, conversely, how we are willing to treat our fellow man. The limited number of political parties limit our choices, but our votes are nevertheless clear choices in helping shape our society.
The authors' suggestions are cogent and intelligent. At no point do they suggest the need to reduce the national debt below an equably sustainable level; at no point do they imply that balancing the budget to achieve a gradually declining debt level is greater than the need to restore economic vitality - both goals they think would be best achieved by allowing the Bush tax cuts to expire. They acknowledge the political difficulty in achieving tax increases, no matter how necessary they may be, so they make alternative suggestions, principally how the debt would be dealt with if the Bush tax cuts, a significant cause of the deficits of recent years and the steep increases to the national debt, to continue. They also make suggestions in case those cuts are not allowed to expire. Returning to controllable debt levels are possible, even under those circumstances, just not as quickly and as easily. They stand strongly opposed to anything which increases the risk to the average citizen.
I think this one of the most intelligent discussions of the national debt and the budget that I've seen, and I highly recommend it to anyone, even those who reject the initial premise. This is not "magical thinking," It's an effort to put forth some sound suggestions for dealing with our national debt without seriously damaging our society in the process. There is the possibility that even those who at first glance might reject the premises could gain a better perspective on our national debt and what needs be done to correct the problem.
The current budget madness, in which it is a shibboleth of one side to abhor any tax increase--or even the expiration of the Bush-era cuts--in combination with the outsized, recession-caused budget deficits of the past few years, has led to a risky and even dire long-term prognosis for US fiscal health. Yet even at this point there are sensible policy steps that could bring US debt down to acceptable (e.g., 50% of GDP) levels within a couple of decades without necessitating radical change to the federal social insurance and welfare schemes. (The table on pages 222-223 helpfully summarizes these suggestions.) The troubling thing is that, while everyone recognizes, more or less, the contours of the necessary budget reforms, the poisoned politics surrounding budgets and debts means that the sensible path is not necessary the likely one.
I recommend this volume to anyone with an interest in politics or history or who would like to become more informed on the current policy debates surrounding national debt and budget deficits.
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