Poor Alexander Hamilton. First, Aaron Burr killed him in a duel. Then, the Treasury Department made him share the ten-dollar bill. And now, Senator Rand Paul is trying to undo his most important accomplishment: the creation of our national debt.
Specifically, Paul lamented that:
Now, it's not clear why something that we've been doing for 180 years is suddenly ridiculous. What might be a ridiculous, however, is praising Andrew Jackson's policies. After all, he only managed to pay off the national debt by jacking up import tariffs and selling gobs of land he'd forcibly removed Native Americans from. The result was not only a human catastrophe, but also an economic one. All it did was inflate a property bubble that promptly popped when Jackson decreed that government land had to be bought with gold or silver, and not banknotes—sending the economy into a six-year slump.
More than anything, though, it shows that we never actually have to pay back all of our debt. Why not? Well, the United States government is, as Peter Fisher put it, basically an insurance company with an army—and an immortal one at that. Investors are more than happy to roll over what we owe so long as we keep making our payments on time. What matters, then, isn't getting our debt load to zero, but getting our debt level to a manageable one. In other words, keeping our debt as a small enough share of the economy that we don't have to tax so much that we stop growth or print so much that we stoke inflation.
In fact, it's better to have a decent amount of debt than to have no debt at all. Or, as Hamilton put it, "a national debt, if not excessive, will be to us a national blessing." The simple story is that there are times we're going to have to borrow, so it's better if we can borrow a lot for a little. The only way to do that, though, is to build up a reputation for always paying what we owe, even—or, rather, especially—when that's an economy-sized amount. That lets us borrow as much as we need to fight wars, fight recessions, and build infrastructure.
But more than that, government borrowing creates safe assets for households and companies to own. That not only lets them build up capital, but also create more of it. That's because they can use Treasury bonds as collateral for loans to build new businesses or expand old ones, which, in turn, means more money and other assets for them. Indeed, Treasury bonds are the lifeblood of the financial system. Companies pledge them as collateral to banks, who then pledge the same bonds as collateral to other banks, who then, well, you get the idea. And since Treasury bonds are super-safe, big businesses basically use them as bank accounts where they can park their money and not have to worry about it. That's why in 2000, when it looked like the government was about to pay off all its debt, Clinton administration economists thought it'd be a bad idea. It'd leave the private sector with fewer places to put their money, the public sector too, and make it trickier for the Federal Reserve to carry out monetary policy since it does so now by buying and selling, you guessed it, Treasury Bonds.
If spending more than we take in really was a problem, it should have been one at some point since 1835. Presumably 180 years should have been long enough for markets to figure out something was wrong, rather than continue to lend us money for 10 years at just 2.2 percent. The fact that investors are still so sanguine about our debt shows that the government's budget is nothing like a household's. The government has the ability to print money, the ability to tax money, and the ability to roll over all the money it owes due to its never-ending lifespan. There's nothing ridiculous about it taking advantage of that. It'd be ridiculous not to—it'd hurt the economy.
Leave Alexander Hamilton alone.