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DAVE DAVIES, HOST:

This is FRESH AIR. I'm Dave Davies, in for Terry Gross. During the Revolutionary War, American soldiers suffered from poor food and a shortage of boots, uniforms and blankets because the Continental Congress couldn't come up with the money to pay for them.

Our guest today, economist Simon Johnson, says many of the struggles the young republic faced reflect a debate that's all too familiar to Americans today: when and whether a nation should borrow and how it should manage its national debt.

In his new book, Simon notes that in the early years of the republic, there was a sharp debate between some who felt the ability to borrow and repay debt was an essential tool of government, and others who believed in cutting taxes, limiting government and eliminating debt.

Johnson's book reviews the history of the national debt in America, the reasons for its growth in recent years and strategies for getting it under control. Johnson says, ultimately either the voting public will ensure the national debt is brought down to manageable levels, or bond investors will do it for us with the kind of calamitous impacts that Greece and Ireland have suffered.

Simon Johnson is the Ronald A. Kurtz professor of entrepreneurship at MIT's business school, and a senior fellow at the Peterson Institute for International Economics. He was previously chief economist at the International Monetary Fund and is now a member of the Congressional Budget Office's panel of economic advisors. His co-author, James Kwak, is an associate professor at the University of Connecticut Law School. Their book is called "White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You."

Well, Simon Johnson, welcome back to FRESH AIR. You know, it's fascinating in your book to see the parallels between the current debate over the national debt and the political forces at work today and some of those in the earliest days of the republic. Let's just start with - what was the country's fiscal condition when George Washington was inaugurated as our first president?

SIMON JOHNSON: The U.S. was in very bad shape of the beginning of the republic. In fact, it was essentially bankrupt. It was in default on its debt. There wasn't a stable, robust source of revenue. And a big achievement of Washington's first administration, and specifically Alexander Hamilton, first secretary of the Treasury, was to establish a revenue base to support the federal government going forward. And also to restructure existing debts which were left over from - mostly from the War of Independence - restructure those into something much more sustainable.

So putting the American republic on a firm fiscal footing was the first and huge achievement of George Washington's administration.

DAVIES: All right, so the American republic is formed, it struggles throughout the Revolutionary War with paying its soldiers, with buying supplies, blankets, you know, ammunition, the rest. And then the new republic faces this tremendous war debt, and the 13 states also had debts. And the new treasury secretary, Alexander Hamilton, you write that he managed to sort this out. What exactly did he do?

JOHNSON: Well, Hamilton had a couple of really big, important ideas on this front. He was drawing on the British experience. He was also drawing on his very profound, difficult experience as a key aide to General Washington during the War of Independence. They had enormous frustrations with not being able to properly supply the army with anything.

And so what Hamilton wanted first and foremost was a revenue source. And the Constitutional Convention that met in Philadelphia was absolutely about establishing, in part, the ability of the federal government to raise its own revenue and not rely on the states to make some sort of voluntary or quasi-voluntary contributions.

So first and foremost, get the revenue. They did it a lot through customs, excise tax on imports, a little bit on internal tariffs, which became more controversial. But in addition to establishing the revenue, Hamilton said: We need to consolidate the debt. We need to have an assumption of the state debt on a one-off basis and never do it again. We need to change the terms on which we've borrowed, a voluntary debt swap is what you would call it now, and we need to make sure the debt that we have outstanding can be brought down by the revenue that we're going to have in hand.

And he pulled it off in a period of the first couple of years. It was an amazing and absolutely lasting achievement.

DAVIES: All right, so we had major debts, but we had reliable tax revenues, which could reassure borrowers that they would get repaid. And you write that this raised the very same kind of conflicts and issues that we're now facing today because there are people who see their country going into debt and panic. Talk a bit about that early debate.

You had Alexander Hamilton on one side and Jefferson and Madison on the other. How did they differ on these issues of debt and taxes?

JOHNSON: They differed, at the beginning of the American republic, very much like people differ today. There was a strong force, led most consistently by Jefferson, but Madison was absolutely in it, as well, saying: Well, perhaps we've given too much power to the federal government. We shouldn't be allowing it to raise taxes. We shouldn't tax the imports, for example, in particular because the South was importing a lot of manufactured goods, relative to what the North did. So they felt this was unfair within their allocation of burden in the federal union.

And Hamilton said: Look, we need to have this kind of revenue in order to have a viable central government. The central government was much smaller then compared to what it is today, but Jefferson and Madison initially were adamant that it was way too big. So arguments about the size of government, arguments about the debt of central government, arguments about how to fund what kind of revenue you have, those arguments have been with us for more than 200 years.

DAVIES: Right, now when Jefferson becomes president, a different approach to the national debt holds favor in Washington. Tell us what happened then.

JOHNSON: Well, Jefferson's number one priority in this field was really to pay down the debt and to reduce it as much as possible, and he brought in Albert Gallatin as his secretary of the treasury. Gallatin was very smart. He had been the leader of the anti-Hamilton thinking on this issue for more than a decade.

And they really tried to cut, cut, cut, reduce taxes. Of course, all the typical ironies of American history, Jefferson made the Louisiana Purchase, he made it with debt. He borrowed heavily. It was a big increase. Gallatin made that work.

So there has always been an element of pragmatism mixed in with the ideology in American politics, and Jefferson is a fine example of that. But there was - in the early decades of the 19th century, there was a real movement away from Hamilton's system and a sense that they would actually - they wanted to eventually pay off the debt and never have the federal government borrow. That was definitely a goal of Jefferson and at some points of Gallatin.

DAVIES: Right, now how did these issues then play out in the War of 1812?

JOHNSON: Well, the War of 1812 was a fascinating combination where, at this point, Madison is president. There's a group in Congress, particularly in the House of Representatives, led by Henry Clay, that was known as the War Hawks, and this is the original use of this terminology of hawks in this context.

The hawks wanted a belligerent foreign policy. They were looking for confrontation with Britain, ultimately, and they thought you should cut tax revenues, and they didn't believe, particularly, in funding and maintaining the military.

So the country was on a contradictory course, not for the first time and not for the last time in our history, and it led to a war for which we weren't prepared, and there wasn't the revenue to back a ramping-up of the efforts. And they'd also abolished what was known as the First Bank of the United States, which was a proto-, pre-Central Bank-type structure that had been helping to manage the public debt.

So they didn't have the tax revenue, they couldn't issue debt easily, they were very aggressive relative to the British, and this confrontation, the War of 1812, did not go well.

DAVIES: Right. Well, tell - the name of your book is "White House Burning." This is a book about the national debt. Explain what happened.

JOHNSON: Well, in the context of not being well-prepared fiscally, the Americans suffered a number of big military reverses or defeats, the most spectacular of which came in the summer of 1814, when the British took over the Chesapeake Bay area and managed to invade and take, almost without opposition, the city of Washington, D.C.

And in August, 1814, on a really sad and dramatic day for the American democracy, the British burnt every single official building in Washington, including the White House. And this really represents to us, I think to anyone who pays attention, exactly what you need to avoid when you run a country, and you're trying to achieve whatever you're trying to achieve with your government, you have to fund it properly. And you have to have an ability, both to provide revenues to support that effort, and, when necessary in a moment of a crisis, you need to be able to issue debt in a responsible and well-managed manner.

DAVIES: Practically speaking, what did the inability to borrow and finance the war effort mean for the Army, for the Navy?

JOHNSON: It meant we couldn't fight. We didn't have the resources, the military forces already in place, and we couldn't ramp-up. And if you contrast the War of 1812 with the various wars that came later - the Civil War, World War I, World War II - in all of those instances, what really characterized the use of American military power was we were slow to start, but we really got going rapidly when the decision was made or when the decision was forced upon us.

And the lesson taken from the War of 1812 was, by all means manage the debt carefully, keep it under control, limit it as a percent of the economy, but stand by to have it ready to ramp-up as part of how you deal with external military crises.

So the lesson of 1812 was very painful, but it was learned across the political spectrum, and the Hamilton system, the ideas that Alexander Hamilton had really fought to establish and struggled against Jefferson and Madison and Gallatin, those ideas actually became the consensus after the War of 1812.

DAVIES: We're speaking with economist Simon Johnson. His new book about the national debt with co-author James Kwak is called "White House Burning." We'll talk more after a short break. This is FRESH AIR.

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DAVIES: If you're just joining us, we're speaking with economist Simon Johnson. He's written a book with co-author James Kwak about the national debt. It's called "White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You."

The national debt has been an increasingly visible issue in the politics of the United States for the last 30 years. Talk about how we finance the federal deficit. We hear that the government issues bonds, right, and borrows from private sources and has to repay them with tax revenues, but we also hear that the government prints money.

I mean, it doesn't - maybe not literally currency but creates new accounts, I guess with computer keystrokes in the Federal Reserve. Explain how we actually finance our national deficits.

JOHNSON: Well, when we run a deficit, when the government spends more than it takes in, the federal government issues debt. The treasury issues obligations. You can look it up on the treasury's webpage. They'll tell you to the penny every day how much debt they have outstanding. It's a little over $10.8 trillion right now.

About half of that is held by Americans, American residents. About half of that is held by foreigners. So we've sold a lot of obligations, a lot of debt owed by the state and an obligation of American taxpayers in the future, we've sold a lot of that to foreigners.

The process of creating money, the process of managing how much money is out there, is run by the Federal Reserve. It is separate from what the treasury does. But there's always a concern that if nobody else would buy the treasury debt, then the central bank would need to buy it. If it bought a little bit, and it issued new money to do that, that would not necessarily be destabilizing.

But if you get into a process where you are financing deficits primarily or exclusively by printing money, that is extremely destabilizing. That causes directly a lot of inflation. That was actually what the Americans did in the War of Independence, and that was a big part of the problems of public finance then.

It's also what the South did during the Civil War, it had a bad hyper-inflation. It's not what the North did in the Civil War. The North had stronger public finances, used more debt, less money printing, and that was a big economic advantage in that conflict.

DAVIES: All right, so that's not the normal way of financing our federal deficits. Typically, we issue bonds, which amount to real borrowing of real assets from folks, which we must repay with future tax revenues.

JOHNSON: That's right. You are promising to repay. You are offering to pay interest. Right now, we pay relatively low interest, but that varies over time. The maturity, average maturity of the U.S. debt is about four years. Every four years, this is on average, we have some short-term debt, we have some longer-term debt, but you think of yourself as issuing new debt to pay off the old debt, but you have to stay current on those payments. You have to be able to manage the interest obligations that are due.

DAVIES: And you said the current national debt is around 10.8 trillion. I thought I'd heard over 14 trillion. Do I have that wrong?

JOHNSON: The total amount of debt outstanding is closer to 15 trillion, but a large chunk of that is held by the Social Security and Medicare trust funds. So it's an intra-governmental debt. That's basically an accounting device. And the number that you should look at to consider the true debt of the U.S. government, and therefore of the taxpayer, is what they call the debt held by the public, which is a little over 10.8 trillion.

DAVIES: One of the things that you hear about the debt is that when we are borrowing, we are passing a burden onto our children and our grandchildren. That's not just bad policy, but morally wrong. What about that argument?

JOHNSON: Well, you are certainly creating - when you borrow, you are creating a future obligation. You are saying that you will service that debt, you will pay the principal, you will pay the interest. But remember the economy is growing, and income is rising, and the way that debt has been brought down relative to the size of the economy in the past in the United States, more than 200 years of track record on this, is a lot through growth.

So it is true that the - there's a future obligation, but there's also future income from which to pay that obligation. And it's not necessarily irresponsible or dangerous in order to have government debt exist or even to have government debt increase, as long as it's for a sensible purpose. This is not an argument for crazy, out-of-control spending, or for crazy out-of-control tax cuts.

DAVIES: So if we manage the finances and the economy in a way that the - such that the economy grows, we'll have the revenue to pay it back, we really aren't burdening, necessarily, our children.

JOHNSON: That's exactly right. If this is done in a responsible manner, more than 200 years of American history and experience tells us that this will not ruin the economy, this will not ruin our children. It is completely consistent with sustained growth in an economy such as ours today.

In fact, in the world, at the moment, people like to hold U.S. treasury debt as a safe investment. Now, I don't want to overemphasize this element. It can't - people's preferences can change. But when people talk about safe asset, what you really want to hold when the world looks risky, the ultimate safe asset as far as international investors - and I'm talking about non-Americans, people who don't - people who can make up their mind, they can hold anything - the ultimate safe-haven asset for them at this moment is U.S. treasury debt.

DAVIES: Now, the other argument against the national debt is that it's a drag on the economy, because when the government borrows, it crowds out private borrowing, right. It's borrowing money that private investors might otherwise use to, you know, invest in new businesses and that that represents a drag on the economy. What about that argument? What does the experience show?

JOHNSON: Well, under some circumstances, that's correct. If the economy is running hot, everybody's fully employed, and you're looking for money to borrow, you're trying to invest, and you're competing against the government, that is not helpful. That will tend to push up interest rates.

However, if the economy is in a deep recession or a prolonged depression, and people are not clamoring for resources that they can borrow in order to invest, there is not anywhere near as much crowding-out. And that's a key idea around the debt and what happens to the economy.

Using fiscal policy to stimulate the economy year-in, year-out is a bad idea. And in fact people not just in the United States but in most other industrialized countries, have backed away from that in the last couple of decades. But when you have a massive financial crisis, when the bottom drops out of your tax revenue, the question becomes rather pointed, it was pointed in 2008, 2009.

Should you slashing spending because your revenue is going down, or should you pay people unemployment benefit, to which you are already committed, and have a bigger deficit on a temporary basis, therefore running up the debt, with a view to bringing that debt down once the economy has recovered, once you're back to more normal times?

So that is the modern application, exactly, of the Hamiltonian thinking around debt: Use it when you need to; bring it down when you can.

DAVIES: Right, and what do the data show about the relationship between periods of high national debt and the performance of the economy? Is there any clear pattern?

JOHNSON: Well, certainly there are evidence from other countries. There is evidence that if you run high debt, let's say over 90 percent of GDP, 100 percent of GDP, and you sustain debt at that level, it can have a negative impact on growth. Now, people argue a lot about those data and the exact cutoffs.

You can also argue a lot about where that cutoff is for the United States because we're such a big, strong country, because the U.S. dollar has become such a preeminent currency around the world and because people hold U.S. treasury debt as the ultimate safe asset.

So you have to make a judgment call on what is our current situation and at what point we should start to get worried in the United States, and it's a complicated call. Experts disagree about it. But where we come out is saying that letting debt to GDP go over about a 90 to 100 percent threshold is not a good idea.

You want to put debt, we think, on a trajectory where you bring it down to more like 50 percent of GDP, and at that level, the evidence suggests that you can manage the debt in a modern economy. It is not an impediment to sustain growth.

DAVIES: And to put that in plain English, we're talking about not the annual federal deficit but the total accumulated national debt should be around 50 percent of an entire - the entire annual output of the economy, the GDP, right?

JOHNSON: That's right. So this is the stock of debt. It's the amount of debt that's outstanding. And obviously the flow deficit every year is contributing to that, if you have a deficit, and what you have at the end of the year, the debt, should be, roughly speaking, and this is our take on the matter, about half of your annual GDP.

DAVIES: Yeah, that sounds like a lot of money. These are big numbers, aren't they?

JOHNSON: Well, it is, it is a lot, and look, it would be a lot - it would seem like a lot to Alexander Hamilton, too, actually. But the world has changed considerably since the 1780s and 1790s. People hold a lot more financial assets. We have money in banks. The banks are holding - we're holding government securities directly. We like them in our individual portfolios, for our money market funds. The banks also hold them.

You could drive debt down lower. You could go down to zero if you really wanted. But you have to either cut spending or raise taxes by more in order to do that, and the argument that the U.S. needs to reduce debt down to zero is - at this moment in our history is a very weak argument.

DAVIES: And what is the size of the national debt in relation to the size of the economy?

JOHNSON: So the current amount of debt we have outstanding is almost $11 trillion. The GDP of the economy is between $14 and $15 trillion. So we're around about 70 percent debt-to-GDP ratio. It is increasing, and a lot of the numbers that people use look ahead one or two years, but that's the basic debt situation now.

DAVIES: Enough to give some discomfort.

JOHNSON: Yes absolutely. We're not in the red zone. We're not in the danger zone. But we're also not in the green zone. It's not at a level - prior to the crisis, we were running closer to 40 percent, and actually on a slight downward trajectory over the medium term on the debt level. We are on an upward trajectory, without question, and we are moving to a level where we should be concerned, and we should be focused on fixing this problem.

DAVIES: Simon Johnson will be back in the second half of the show. His book with James Kwak is called "White House Burning." I'm Dave Davies, and this is FRESH AIR.

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DAVIES: This is FRESH AIR. I'm Dave Davies, in for Terry Gross.

We're speaking with economist Simon Johnson, whose new book explores the history of the national debt in America. Johnson writes that in the early days of the Republic, Alexander Hamilton established the principle that the country had to be able to borrow in hard times and needed the capacity to raise revenue to ensure bondholders they would be repaid. Johnson's book with James Kwak called "White House Burning" also explores the reasons for the recent growth in the national debt, as well as the dangers it presents and prospects for getting it under control.

Now, one of the things that you write is that when you're considering how much debt is manageable and how much is dangerous, you write that you need to have the fiscal space to manage an emergency, like the financial collapse of what - 2008. Explain what you mean.

JOHNSON: So when you have a financial crisis and the banks collapse, that will typically trigger a very deep recession. That was exactly the experience in the United States and in Europe after 2008. You get a big deficit because the revenue has dropped like a stone. You may cut spending, you may not. It doesn't matter that much. Actually, the big item for deficits and debt in all of these countries hit by the financial crisis was the loss of revenue.

Now, some countries - for example, in Europe - already had relatively high levels of debt. When you have a debt surge - and our debt surge, actually, calculated by the Congressional Budget Office, will end up as a result of that financial crisis being about 50 percent of GDP, call it $7 trillion increase in the national debt because of the severe recession. We could handle that because we started off at a relatively moderate level of debt. Other countries either had higher debt to start with, or they had a bigger shock relative to their economy, and this actually ruined them.

Ireland was ruined fiscally by its financial crisis. Very big problems in Spain because of what has happened financially. Very big problems in the United Kingdom, also. So you need to have room to maneuver. You need to have room to increase the debt in a crisis and bring it down in a responsible, gradual manner. That's the Hamilton system that was the operating principle for a long time of U.S. fiscal policy. We need to be able to do that again going forward. That's an important argument for keeping debt substantially below - in good times - below the threshold where you fear that it could be a debt crisis or interest rates would go up a lot if you had a big surge in debt, and so on.

DAVIES: And having a manageable debt in 2008, did that permit the government to intervene in the ways that it did to save the banks?

JOHNSON: Well, the saving of the banks was done with the troubled Asset Relief Program with various policies put in place by the Federal Deposit Insurance Corporation and by the Federal Reserve. A lot of that - there is a fiscal piece to that, but that's relatively small compared to all the monetary support that was provided. The banks could have been treated, I think, much more effectively, and some of the banks could have been closed down in an appropriate manner because they were failing, at the same time its fiscal policy supported the broader economy.

The big fiscal item is not the banks. The big fiscal item is the damage done by the banks to the rest of the economy. It's the entire debt-fueled bubble, the way that bursts, the way that contracts everything across the economy, the way the credit falls off the cliff, and the way that impacts tax revenue. That's...

DAVIES: Because the economy contracts, and therefore there just isn't the tax revenue.

JOHNSON: Absolutely. So, again, you look at the Congressional Budget Office's number, that number - the big swing in the deficit is very little due to the stimulus - either the stimulus that George W. Bush did in 2008 or the one that President Obama that we saw in 2009. That's only about 15 percent of the total increase in debt. Most of the increase in debt is due to the loss of revenue.

And the question is when you lose that revenue, the deficit goes up, the debt goes up. Does that then trigger a secondary panic as it did - or crisis in Ireland? People say, oh, my goodness. This debt is too much, relative to the future ability of the Irish state to pay for it and to maintain it, in which case interest rates go up further, and in the case of Ireland, right directly, they're forced into the hands of the International Monetary Fund, which is not a good place to be.

DAVIES: You've mentioned some of the difficulties that European countries have had. Could you give us a sense, if the United States does not deal with the problem of its national debt in future years what would a real crisis look like? Is there an example from another industrial economy that gives us a picture of what we might be in for?

JOHNSON: Well, we're not Greece. Let - clear about that. You're not going to have the kind of problem that countries within the eurozone have. That's particularly about the structure eurozone and the way they relate to the European Central Bank, which is quite different from the Federal Reserve.

But the problems in the United Kingdom, for example, are exactly what we could face. And in the UK, they now feel - the government feels that it needs to have a lot of austerity. They need to have both spending cuts and tax increases in very short order. It puts a lot of pressure on the economy. And one thing that certainly could happen in the U.S. is that the government - Congress and the presidency - would agree on some sort of precipitate extreme austerity program. I'm not recommending that. I don't think it's necessary or a good idea, but that's certainly one potential outcome of the political process.

DAVIES: And that would happened why? Because our debt simply wouldn't sell on international markets, would be a point where interest rates would get so high that to control them, you'd have to impose these austere measures?

JOHNSON: Yes. The most likely scenario would be that the markets turn against you, that there are Asian investors - for example, Chinese investors who have been buying a lot of Treasury bills decide they either don't want to save in dollars or they would rather spend. The European economy, the eurozone, may - I think it will recover, will restructure itself over the next five years. They'll be offering a viable, competing, alternative, safe asset to the dollar.

So all of these things will push investor preferences away from dollars. Interest rates go up. Perhaps they go up rapidly. The Federal Reserve finds itself unable to counteract that because, for example, they fear the inflationary consequences because of where the economy is. And under those circumstances, politicians decide or feel pushed into doing extreme austerity.

DAVIES: We're speaking with Simon Johnson. He's an economist who's written a book about the national debt with James Kwak. It's called "White House Burning." We'll talk more after a short break. This is FRESH AIR.

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DAVIES: If you're just joining us, we're speaking with economist Simon Johnson. He's written a new book about the history and meaning of the national debt with co-author James Kwak. It's called "White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You."

Well, it's clear from your book that you regard the deficit - as we have it and as it may grow - as a matter of real concern, and we have some serious choices to make. I want to look at just some of the broad elements of how we got to this point in the last, you know, 10, 20 years. First of all, on the revenue side, there's the power of what we could broadly call the tax revolt. It's picked up enormous momentum since the 1980s. Why has it become such a powerful force?

JOHNSON: Well, that's a great question. I think that is one of the biggest changes in American fiscal politics, and actually in the past 200 years. There was a broad-based movement represented initially by Ronald Reagan and an alliance of people who want small government with people who want to pursue other parts of a conservative agenda.

And this has really become a very effective tool within the political elite on the right of the spectrum. So Grover Norquist, for example, runs a tax pledge which candidates on the right are invited to sign up to promising not to increase taxes under any circumstances. And if you violate that pledge, then his organization and other organizations pursue you through primaries and through other means to push you out of Republican politics.

So it's become a very effective organization and a very simple rule - don't increase taxes - that has had its ups and downs in the past 30 years. But at least since 2000, when - since George W. Bush came to power, it really has dominated on the right of the political spectrum and made it much harder to make the kind of pragmatic adjustments to deficits and debts that we've had in the previous history of the United States.

DAVIES: And you make the point in the book that although these folks talk a lot about the danger of a growing national debt, that really isn't what they're after.

JOHNSON: That's right. And I think this is - we try to go through the history carefully, here. I know a lot of people will be upset when I make this point, but you have to look at the facts, that the - Ronald Reagan, for example, said he wanted to bring the deficit down and cut taxes and have bigger military spending. Well, that combination didn't work very well, and what he settled for was high military spending and lower taxes, a bigger deficit.

And then there was a bit of a mini-deficit debt crisis in the mid-1980s, to which he and other leading politicians responded with compromise and by - with tax reform and by raising tax revenue. So it can be done, even with people feeling strongly about lower government. But since that time, the idea of deficits and debts mattering, as something that you care about, becomes - has become much, much less.

So, Newt Gingrich, whose pushed consistently for these kinds of policies in his current run for the presidency, in his fiscal proposals, he is actually suggesting policies that have been scored independently by the Committee for a Responsible Federal Budget, for example. He's proposing policies that would push U.S. debt up to 140, 150 percent of GDP. So think of that as Greek levels of debt. Now that's coming from somebody who says adamantly he's a fiscal conservative. It's a very strange and dangerous combination of proposals that we now see.

DAVIES: Well, I think most of those conservatives would say, now, when you cut taxes, then the government will have to shrink, then spending will decline. And then you'll have - you know, you will have balanced budgets, or more nearly balanced budgets, and a smaller government, which is what they think is best. I mean, get the government out of the way, and the economy will boom.

JOHNSON: Yes, they do say that, and they've been saying that since the 1970s, and it hasn't happened. And when they were in power in the 2000s, when they had the presidency, the House and the Senate, that's not what they did. There were two foreign wars and there was an expansion of Medicare Part D, which is the prescription medicine coverage, which is very expensive. So if that's the plan, if that's the strategy, it's not being implemented. Instead, we have undermined the tax revenue base, and income tax as a percent of GDP has come down over the past two to three decades, at the same time as the deficits have continued and the debt went up a lot under George W. Bush.

DAVIES: Now, in the last part of the book, you offer a number of very specific suggestions for dealing with the deficit responsibly over the coming couple of decades. And folks will have to look at the book. We don't have time to get into them all here. But give us some of the most important principles that you want to follow as you take steps to get the deficit under control.

JOHNSON: Well, I would say the most important principle is reestablish the revenue base. And this, in our view, is exactly the innovation of Alexander Hamilton. It's the tough and nasty lesson learned the hardest way possible in the war of 1812. And it's an idea that was held very clearly throughout the 19th and early 20th century by the politically elite. If you want the government to do something, figure out what that thing is, figure out the best way to run it. Of course, you've got to find ways to reduce waste and eliminate corruption, and so on and so forth. But when you have the right scope of government or the scope of government you want for that time in history, you then have to back it up with revenue.

And that's the connection that has become broken. It's been broken, ironically, by the great success of the United States. No country in history has ever been able to borrow as much from its own citizens or as much from foreigners. And that's a reward for running a country well for 200 years, and also for being the last man standing, if you like, in a very difficult world financial situation - part of which, ironically, we caused.

But we should not kid ourselves. The idea that you can finance this big gap between spending and revenue indefinitely through selling bonds to the Chinese or whomever, that's an illusion. Decide what you want the government to do. We - this is not an expansive, big government view or vision in this book. We're saying keep Social Security, keep Medicare roughly where they are. Defend these basic, sensible insurance programs and fund them properly with revenue.

And then if you do that over a two-decade adjustment period, you can make relatively small changes in a number of tax rates, including on income tax, including on capital gains tax, including on fuel tax, including taxing banks that have become too big and have to much debt. Taxing things that you should be trying to discourage will be helpful, and you will bring debt GDP to a responsible, sensible, manageable level.

DAVIES: And what about the notion of trimming benefits, I mean, raising the retirement age or increasing the payroll taxes that fund, you know, Medicare and Social Security?

JOHNSON: Well, frankly and honestly, in the book, we make some proposals like that. But relative to almost all of the proposals out there, we are much more emphasizing tax revenue, raising tax rates, ending the Bush era tax cuts, putting tax rates back to where they were in the mid-1990s, actually, which is a decade when the economy showed it could do just fine. We're not saying go back to the tax rates of the 1950s or 1960s.

Tax rates back to the 1990s raise capital gains tax back up towards individual incomes tax levels, which is where they were after the tax reforms in the mid-1980s, and use that revenue properly and wisely to support Social Security and Medicare.

It's not a radical vision. It's a very moderate, modest vision, but I think it will be controversial. There are many people who don't want to believe what we say about American history and many more people perhaps who don't want to think about the hard math that lies behind making these kinds of choices.

DAVIES: You know, you've said that a reasonable merit-measured series of initiatives can bring the debt under control. But you know there's been a number of efforts in recent years including last summer when President Obama met with the House Speaker John Boehner and it looked as if there might have been, you know, a common approach to dealing with these issues and they've all fallen apart on the politics.

Do you – I don't know, do you see any signs that the politics will permit a serious approach to these problems?

JOHNSON: Well, it's all about the politics. The economics are relatively straightforward but the politics, you're right, are the key. And I think there is a window. It depends how it goes in the presidential debates. It depends what messages people construct and the voters believe, but at the end of this year, there are some very large tax cuts, the Bush era tax cuts, that are due to expire.

And if the president at that time, for example, if President Obama is reelected, if he chooses to veto the extension of those tax cuts, then they go away. And that's the only moment on the political horizon where one of the president, the House, and the Senate can say no and you get a fiscal adjustment. You get a move towards fiscal responsibility.

Any other move towards fiscal responsibility that you can imagine and you tax or various kinds of cuts to Medicare would require all three of them to agree on making the change. So the expiration of the Bush tax cuts is actually an important reason why we wrote the book and why we brought the book out now, to get into that argument and to have people thinking about how – what do you want the government to do?

If you want the government to stay involved with Social Security and Medicare and to run those programs, roughly speaking, as they are – that's the big item for government spending now – if you do, how are you going to finance that? Can we sell unlimited amounts of debt for an indefinite period at two percent interest? I don't think so. I think that's a little too risky.

We should be looking for revenue to support the sensible social insurance functions of modern American federal government. That's the proposal in the book. And when you come down to it, then look at the point how will you do that. How will you raise the revenue? Don't extend the Bush era tax cuts.

DAVIES: You know, a lot of the populist rhetoric around about the national debt these days bears enormous anger towards the Federal Reserve. Why are people so furious at the Fed?

JOHNSON: Well, there's a long tradition in the United States of disliking or worrying about the central bank. That goes back to Andrew Jackson in the 1830s. It goes back in part to Thomas Jefferson, actually, and James Madison wanting to abolish the first bank of the United States. The modern version of it is the view that the Federal Reserve has been irresponsible, that it's creating inflation in the current situation.

I think that view is somewhat exaggerated, but I completely agree with the critics from the left and from the right who say that the way the Federal Reserve has run, not just the monetary system but also the regulatory system around big banks, has been unduly favorable to those banks.

It's encouraged them to take excessive risk and if you look at the nitty-gritty of policy today, including how much equity capital those banks should have, how much buffer against future loss, buffers that protect the taxpayer, protect the economy against massive shocks, the Federal Reserve is – people at the top of the Federal Reserve are absolutely against having sufficient capital in those banks.

So the Federal Reserve, I think, deserves some of the pressure that it gets, particularly on the regulatory side of the argument.

DAVIES: Well, Simon Johnson, it's been really interesting. Thanks so much for speaking with us.

JOHNSON: Thanks very much.

DAVIES: Simon Johnson's book with James Kwak is called "White House Burning: The Founding Fathers, Our National Debt, and Why it Matters to You." Coming up, Maureen Corrigan reviews "The New Republic" from novelist Lionel Shriver. This is FRESH AIR.

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