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The National Debt has never been far from the forefront of our political discourse in recent years, serving as the ration d’etre for the Tea Party and similar groups, mostly conservative. It has again percolated to the media surface- on television last week, for instance, when economist Paul Krugman appeared on Morning Joe and jousted with debt doomsayer Joe Scarborough.  This, in turn, provoked rapid reaction in various online, mostly left-leaning outlets: Joseph Weisenthal, Matt Yglesias, and Mike Konczal  all took issue with Scarborough’s fear mongering. For his part, Scarborough, the conservative former Congressman hosting a popular show on the liberal MSNBC, is a self-proclaimed “small government conservative” and beats this drum relentlessly on both Morning Joe and in his own online postings. He was thus the obvious lightening rod for criticism from those with a different take on the significance of the government debt.

This media hubbub is serendipitous for me, as I have been lately contemplating and researching the issue of the National Debt. My own curiosity was aroused by a conversation some months ago with my brother. My brother is not an economist. If I recall, he never even took a basic undergraduate course in economics. Untutored though he may be in the dismal science, he raised an intriguing question about the Debt and the way it is viewed: “Why does the size of the Debt matter? It is a very small percentage of the worth of the United States.” As an individual, he added, one of the factors that figures into the amount he could borrow was his net worth. The issue, in his eyes, was the debt-to-asset ratio of the government. He put it this way: “Sixteen trillion- so what? What is the military worth?  How valuable is all the land the Federal government owns? Not to mention the natural resources controlled by the government.”

Sixteen trillion is a scary number. To the average citizen, it is no doubt obscene that our government, our representatives, have been so irresponsible. It is no surprise, then, that much of the current discussion of the national debt is infused with healthy quantities of fear. As the debt grows, dire consequences of all kinds are predicted. Off-cited research by Carmen Reinhart and Kenneth Rogoff points to a threshold of a 90% ratio of government debt-to-GDP as the point at which the debt has an adverse effect on economic growth. Other frequently mentioned impacts are increasing interest rates, leading to a higher percentage of the Federal budget having to be dedicated to interest payments; a decrease in available capitol for the private sector as the government borrows more, resulting in additional drag on economic growth; and a threat of crisis in the financial sector as confidence in the government’s ability to repay the debt wavers. The inevitable result would be tax increases and dramatic cuts in government spending, conjuring up a dystopian vision of the future America.

But the role of the debt, and of budget deficits (the two are often conflated), is a complex issue not given to facile remedies. The Debt is the accumulation of government budget deficits over time. Deficits in the Federal budget play a significant role in the economic life of the nation. If the government were to fund 100% of its spending with taxes, for example, it would mean depriving the population of money they could contribute to the economy. Depending on the cost of borrowed funds (interest rates), there is a theoretical level of deficit that is beneficial to the economy: The government, in spending the borrowed funds, contributes to the demand side of the basic economic equation. The balance between government deficit and economic growth is reflected in interest rates: At what level are deficits so large as to produce a drag on the economy by increasing the cost of all borrowing is the appropriate question.

The United States began its history as a debtor nation and, except for a very brief period in the 1830’s, we have always had a National Debt. The original debt was the result of borrowing by the rebellious colonies to finance the Revolution. Once the Articles of Confederation were replaced by the Constitution, Alexander Hamilton, the first Treasury Secretary, arranged to have the Federal government assume the debts of the states and consolidate them with the debts of the National Government; thus the National Debt was born. It is axiomatic that deficits increase with wars and recessions, circumstances in which government spending increases while tax revenues fall off.

Given the growth in population and changes in the level of economic activity, it is customary to express the government’s indebtedness as a percentage of Gross Domestic Product rather than a simple dollar amount. The high point of debt-to-GDP ratio happened at the end of World War II when the debt reached approximately 113% of GDP. It took 16 years for the debt-to-GDP ratio to return to pre-war levels. (It is presently at about 73% of GDP.)*

Now, consider the following:

When Bill Clinton left office, the Federal budget was generating a surplus. In January 2001, the Congressional Budget Office estimated the government would realize a $5.6 trillion cumulative surplus between 2002 and 2011. In reality, a $6.1 trillion cumulative deficit occurred, leading to an increase of $11.7 trillion in the Debt. Tax cuts and slower-than-expected growth reduced revenues by $6.1 trillion and spending was $5.6 trillion higher. The “legislative actions” (tax cuts and spending bills) break down like this:

1.    The Bush tax cuts

2.    The wars in Iraq and Afghanistan

3.    The Medicare Part D Prescription Drug Benefit

4.    The TARP financial bailout of the banking sector

5.    The 2009 fiscal stimulus, and

6.    The December, 2010 extension of the Bush tax cuts

It seems abundantly clear that our continuing budget problems in the last 12 years are the consequence of a combination of purposeful policy decisions and adverse economic conditions. It could be further argued that, given the deregulation of the banking sector in the 1980’s and 1990’s, that the financial cataclysm of 2008 was also a self-inflicted wound.

For self-styled fiscal conservatives, the deficit is the manifestation of all that is wrong with centralized government- inefficient, ineffective, immoral, even.  With an ideological bent towards a smaller Federal government and unremitting opposition to tax increases, they have succeeded in side-stepping economic realities and framing a political conversation that focuses on the Debt. (It is interesting to note that, for all the rhetoric about reducing government spending, what Congress and President Obama actually achieved in the recent fiscal cliff deal was to make the Bush tax cuts permanent for all but those in the highest income brackets; in effect, they added to the debt.)

So, it seems to me, that there are two basic threads to any discussion of government debt- a political and an economic. The former has manifested itself in various ideological and visceral arguments, the latter in prosaic assessment.  A reasonable person would look past the passion of the discussion, and concentrate on the analysis. Yes, a reasonable person would, but we are talking about politicians- so anticipating a reasonable approach is akin to waiting for the tooth fairy. In the current political environment, the ideologues are holding sway and the signal-to-noise ratio is very small indeed. It is difficult to determine if that bogeyman hiding under the bed is real.

I leave you with a hypothetical: What happens to the Federal budget if unemployment drops to under 5% and GDP growth hovers around 3% annually over the next decade?

*These percentages are what are known as public debt, or debt owed to the public (including other countries). Gross debt would include intragovernmental holdings , the debt held in other government accounts.