Bill White is a former three-term mayor of Houston who lost the Texas gubernatorial
election to Rick Perry in 2010. The book jacket identifies him as a fiscally conservative
politician and a Democrat by party. His educational background includes an
undergraduate degree in economics from Harvard University and a law degree from
the University of Texas. Since his loss to Rick Perry, he obviously has been busy
writing a detailed economic and political history of American fiscal policy with an
emphasis on deficit finance. The book is loaded with relevant history, humorous
anecdotes, and thirty-eight pages of interesting tables on debt. I found the book
informative but somewhat frustrating at the same time due to its omissions and
The book provides an interesting look at American fiscal policy through time
and gives insights into the behavior and attitudes of presidents and their appointees.
I think White is spot on in identifying the costs of the rapidly rising public debt and
why we need reforms. I think he is weakest in identifying the cause of our new fiscal
constitution and the appropriate remedies needed to correct the situation.
White identifies what he calls Americas unwritten fiscal constitution that for
most of U.S. history received widespread support from all major political parties.
It consisted of four generally accepted reasons for deficits: borrowing to preservethe union, borrowing to expand and connect the nations borders, borrowing to
wage war, and borrowing during severe downturns. He identifies four pillars that
reinforced the unwritten fiscal constitution: clear accounting, pay-as-you-go
budget planning, the establishment of trust funds financed entirely with dedicated
revenues, and explicit congressional approval of debt for specific amounts and purposes.
After reviewing history that shows how the pillars supported the unwritten fiscal
constitution, White argues that the nature of fiscal budgeting changed after 2000.
Never before had the government waged a prolonged war without raising taxes,
financed a vast new entitlement program entirely with debt, substituted federal debt
for payroll contributions supporting Social Security, and had members of both parties
claiming that balancing the budget in normal economic conditions would damage the
nations long-term economic growth (p. x).
Oddly, the book doesnt spend any time defining the public debt. I know of at
least three different measures for measuring the public debt, and one of them includes
unfunded liabilities. This is the nine-hundred-pound gorilla in the room and is the
result of pay-as-you-go budgeting, one of the pillars of the unwritten constitution.
I would argue that the unwritten fiscal constitution started to unravel in 1970.
Every ten years after 1970, the ratio of public debt to gross domestic product (GDP)
increased (using the gross public-debt measure). I do not think it is a coincidence that
President Richard Nixon declared that he was a Keynesian around 1970 and that
public debt relative to income started its secular climb then. Fiscal policy in 2000
and beyond was merely the logical consequence of Keynesian ideas that had deepened
their roots some thirty years earlier.
White relates many interesting historical events that have relevance for today.
I will share a few and let interested readers discover others on their own. The real
estate bubble that brought the U.S. economy into the Great Recession wasnt anything
new. Real estate bubbles that burst in the nineteenth century played roles in a
number of U.S. downturns, and they are identified in the book. These bubbleinduced
recessions did not produce substantial and permanently higher ratios of
public debt to GDP.
A cut in whiskey taxes after the Civil War gives a nice example of the Laffer
curve. Although taxes were cut 75 percent, tax revenues surged.
Democrat Grover Cleveland was the veto president. He read each bill and
vetoed hundreds of spending bills. He opposed the use of tax dollars to relieve
individual suffering, saying that though the people support the government, the
government should not support the people (qtd. on p. 123). Budget surpluses
under Cleveland led him to propose a tax cut in 1887. Opponents of cutting taxes
won the day. Economists might ask their students why there would be opposition to a
tax cut. The answer: because these taxes were tariffs. Tariffs were the primary source
of tax revenues in the nineteenth century. Industries that benefited from the tariffs
were politically powerful and were able to block the tariff reductions. Consumers,
of course, were the losers.
One of my favorite stories is about William McKinley when he served as chair of
the House Ways and Means Committee in 1890. He allegedly privately guaranteed
the debts of a tin plate manufacturer and saw to it that there was a high tariff on
imported tin plate. Despite McKinleys efforts to subsidize the manufacturer with
high tariff protection, the tin plate manufacturer went bankrupt, and McKinley had
to be bailed out by wealthy industrialists (p. 132).
Franklin D. Roosevelt, a former insurance executive, favored a Social Security
program modeled after an insurance annuity. FDR was against early payouts to
pensioners who did not pay in. Republican senator Arthur Vandenberg, a former
newspaper publisher, wanted a pay-as-you-go system that allowed payouts to persons
who contributed nearly nothing into the Social Security Trust Fund. Vandenberg
won out and today the unfunded liabilities of the pay-as-you-go Social Security and
Medicare programs are around $50 trillion. This shortfall will require massive tax
increases or massive cuts in benefits down the road. From this standpoint, it is hard
to understand Whites fondness for pay-as-you-go budgeting.
In another interesting episode, Roosevelt, angry with the Supreme Court for
vetoing some of his New Deal legislation, sought to expand the size of the Supreme
Court by adding pro-administration judges (p. 198). In parallel, Richard Nixon
nearly forty years later spread rumors that he wanted to increase the size of the Federal
Reserve Bank Board of Governors to get more supporters on the board. Both FDR
and Nixon won out. The Court under FDR became less aggressive in restraining
New Deal legislation, and Federal Reserve chair Arthur Burns caved in to Nixons
wishes to expand the money supply.
Worrying about financing World War II, Roosevelt proposed to his advisers
in 1942 that individuals earning more than $25,000 and families earning more
than $50,000 face marginal tax rates of 100 percent. Fortunately for the country,
Roosevelt was talked out of what would have been a disastrous test of the Laffer curve.
Not unexpectedly, White concludes that much of the debt problem is Republican.
Under Nixons watch, the federal government consolidated the Social Security
Trust Fund with the administrative or federal funds budget in 1969. Muddled and
opaque accounting for the Social Security and Medicare trust funds would eventually
create an illusion of surplus that facilitated the collapse of the American Fiscal
Tradition (p. 197).
George W. Bush receives his due share of the blame for getting the deficitspending
party going full blast. Meanwhile, Democrats get away relatively unscathed.
We do hear about Clinton and his talented wife, Hillary (p. 317). Fortunately
for President Clintons legacy, Hillarycare wasnt adopted during his presidency.
Obamacare and wasted public expenditures on such things as Cash for Clunkers
and uneconomic subsidies for companies offering alternative energy sources, such as
Solyndra, go unnoticed in contrast to McKinleys tin plate fiasco.
The worst aspects of the book, in my opinion, are the solutions to the problem.
White, like most politicians, fails to recognize that tax loopholes, formally called taxexpenditures, are nothing more than hidden subsidy programs. His defense of tax
loopholes is pathetic (p. 408). If we want a transparent tax system, put line items into
the budget for these subsidies. Collect taxes without the loopholes and then send
subsidy checks out equal to the loophole benefits. Well see how long these subsidy
programs last when people see how large they are and who gets them.
Worse yet is Whites idea for the Federal Reserve Banks playing a constructive
role in the future. The monetization of some amount of debt by the Federal
Reserve might play a role in a realistic and durable plan to balance the budget.
Monetized debt reduces the net cost of debt service (p. 410). This is a policy
recommendation befitting Zimbabwe. The Fed already monetizes debt every year
and in so doing grows the monetary base and the money supply, ideally at a rate to
achieve price stability. To do more of the same to help out budget deficits is a scenario
for an inflationary disaster.
All in all, I found the book to be a worthwhile read, especially the parts dealing
with the political and economic history of fiscal policy. However, I conclude, differently
from the author, that Americas unwritten fiscal constitution collapsed precisely
because it was unwritten. In my opinion, a carefully written fiscal constitutional
amendment would be the solution.