History Lesson for the Day

Courtesy Jim in Ohio. This was pulled from an email chain that somehow no one knows how it got started or what the point was. Somehow, we all got straightened out with this below.

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The 16th Amendment (Income Tax Amendment) was ratified in Feb. 1913 and the government began to lay the tax shortly thereafter.

There have been a lot of good points here (referring to the emails from the day), but I’d like to qualify a few of them and add some complexity.

Debt is indeed healthily for growth and is an integral part of the American capitalist system. Emailer #1, the government will never pay off its debt. It doesn’t ever want to. Our system of government, under the current Constitution, was designed to specifically to maintain persistent, yet moderate levels of debt as a means to keep those who are owed debt attached (loyal) to the federal government. This mechanism was intentionally devised by Alexander Hamilton and other Federalist leaders during the late 1780’s as they lobbied delegates to state ratification conventions.

The large amounts of debt incurred by the states to fund the Revolutionary War left Hamilton with a golden opportunity to ensure the survival of the new federal government. He created a plan whereby the new federal government would assume the debt of all the states. As you might imagine Jeffersonian Republicans, suspicious of centralized power and advocates of local control and states rights, balked at this plan. As Emailer #2 can tell you, the only reason they agreed to the plan is because Jefferson brokered a deal between Hamilton and Madison in which Republicans agreed to debt assumption in exchange for a southern federal capital. This deal enabled the federal government to assume responsibility of paying back the money lent by wealthy individuals to the state governments to prosecute the War of Independence. By doing so, the federal government created a situation in which these wealthy people had a direct interest in the survival and success of the government. If the government had then turned around and completely paid off these people immediately then there would have been no reason for anyone to have a vested interest in the government. As the government spends borrowed money to stimulate growth it increasing generates the stake that Americans have in its success.

Or, more simply and to the point, paying off the national debt would be the stupidest thing that any organization that has existed since the Big Bang could possibly do. When politicians say they want to pay down the debt it is just a dog and pony show for most Americans who have no idea that persistent debt drives this whole engine and makes those of us who know what we are doing unbelievably rich.

Second, Emailer #3's point that war stimulates economic growth is excellent. Defense stocks are a good choice at the moment, esp. if we do send 20,000 more to Iraq and build up the army by 92,000. More armor and more tanks = good for business. The problem, however, is that after every single major war/conflict a recession will follow as the government scales back defense spending. Even after WWII there was about a 5 year recession until the Korean and Vietnam War jump started the economy again. I am unsure how much damage will be done once the present Iraq War is over. For example, the First Gulf War cost $67 billion and when we left our economy tanked before we entered the gigantic bull market of the 1990s. The present conflict has cost a lot more. Will be interesting to see what happens.
Posted with permission of the X-FactorFever Productions.
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My only comment is that I don't forsee any major recession if we would pull out of Iraq. As long as the country is semi-stable, businesses will hopefully find Iraq as strategic as our govt believes, and build out there. Freedom for Iraqis should mean free enterprise ultimately, but I don't want to get 100 years ahead of myself.