America’s national debt is Washington’s hottest button these days. With ratings agency Standard and Poor’s issuing a negative outlook on US government debt, placing an extraordinary question mark next to the AAA rating it has held for, well, forever – debt seems on course to outpace the Libyan war, the Japanese nuclear crisis, the Arab spring, a Nigerian election and even Bob Dylan’s concert in China as the issue d’jour, – outpaced only by Britain’s royal wedding.

The bizarre birther campaign, now led by Donald Trump, that argues Barack Obama was somehow an illegal immigrant smuggled in from Kenya as a child (or whatever Donald-the-Hair-Man is claiming now) was about the only thing close to overtaking the budget/deficit/debt story. Or as Barack Obama himself said on TV the other day after his office released the Hawaiian long form birth certificate, “During that entire week, the dominant news story wasn’t about these huge, monumental choices that we’re going to have make as a nation; it was about my birth certificate. And that was true on most of the news outlets represented here.”

Even so, the Washington Post, discussing national news coverage issue-by-issue during the previous week noted “The Pew Research Center found, based on 52 news sources, that the ongoing deficit debate accounted for 31% of all news coverage that week, swamping coverage of issues such as the earthquake in Japan, the economy and gasoline prices, which actually had much higher interest among the public.” At the time of their survey, birther rumours accounted for less of the total, but that was before Trump’s latest bleats and Obama’s TV riposte.

What’s going on here? Is the US about to morph into a banana republic or go on a fatal bungee jump that looks like Weimar Germany in its 1920’s death agonies?

Some older readers may remember George Bush senior’s defining moment in his re-election campaign of 1992. There was that astounding televised public forum/debate with then-candidate Bill Clinton where Bush got way, way lost in the verbal thicket of the budget deficit, the national debt, the trade deficit and the average citizen’s private debt burden. And once there he never really made it back onto the campaign trail. Well, most of us have occasional trouble with economics, but most of us aren’t auditioning to become leader of the free world. Citizens expect their leaders to at least get this kind of thing right.

So, let’s start with definitions. For example, the trade deficit is basically the difference between the value of goods and services sold abroad by a country and the value of goods and services imported from abroad. The sum total of such transactions from all nations should balance out to zero (any differences probably due to rounding, smuggling, counterfeit currency sales or the drug trade). But it is a way of gaining insights into national productivity and, of course, that eventually connect to those other deficits.

One’s own private debt burden, of course, is a function of the need or desire to buy a house, a car, a university education, trendy furniture, that European vacation – or, perhaps not quite that. One can go into debt responsibly on expectations income will eventually be able to pay off those debts and one’s assets will become more valuable. And most especially, investments in education and training have a long-term payoff in generating rising income. Think of these as the individual equivalent of national infrastructure investments in airports, canals, Maglev railway lines or national broadband networks, and thus a parallel with the importance of national debt.

Next consider the government budget deficit. This is the difference between government spending and government revenues through taxes, rents and user fees in any given fiscal year. However, it is actually a bit more complicated in the case of the US because, depending on how one measures it, spending on major programmes like Social Security and Medicare are either a part of or outside the government budget – and that is an important part of the budget, deficit and debt debates in the US. These very big tickets are not discretionary spending, but legal entitlements to any qualifying citizen (an elderly citizen who needs medical care or an old age or disability pension) and so their actual costs are not generally subject to budget limits in advance. Those payments come from separate trust funds. But they are spending and so for most purposes, they must be counted in the overall consideration of government spending.

The problem is that the demand for these entitlement payments continues to grow even as the revenue to fund them doesn’t, because of America’s rapidly aging population, the policies as to who qualifies and when, and at what level they will receive these payments. The real, but politically unpalatable challenge for the US government is that these entitlement payments – plus defence spending (perhaps 20% of the total budget) and interest on the national debt – together constitute more than 85% of all government spending.

Despite the rhetoric of the GOP/Tea Party budget cutters, therefore, cutting spending through cutting foreign aid, limiting overtime for air traffic controllers or axing federal grants to states to hire new teachers and police in financially hard-pressed cities will not save enough money to generate any consequential impact on the budget deficit. Increased revenue – or unilateral disarmament – needs to be added to the mix as well. And that is the nub of the argument between Republicans and Democrats.

The national debt, in contrast to the yearly deficit, is the total value of all government borrowing still owed since 1789, in excess of any government bonds that have been paid off and thereby retired. The US first got into this national debt business during the Revolutionary War when it borrowed heavily from European lenders – such as the French and Dutch to finance its fighting – and helping cause the French Revolution in the process as Louis XVI helped bankrupt his country through his loans to the American colonists.

Photo: Alexander Hamilton, America’s first secretary of the treasury.

After the war, the country was trying to establish a reputation as a credible international partner. Alexander Hamilton, America’s first secretary of the treasury, insisted the new American government needed to assume reasonability for the debt of the 13 rebellious colonies, as well as the loans the ramshackle Articles of Confederation government had made from friendly European nations during the war.

The basic thrust of Hamilton’s argument was that the new country would never emerge from a cloud of mistrust if it didn’t honour all the debt accrued from the Revolutionary struggle. Besides, if things were managed correctly, the country’s growth trajectory would make this debt an increasingly minor financial obligation anyway.

Ultimately, both Hamilton’s arguments won the day. By 1837, the country had essentially paid off all the outstanding public debt, maintaining an enviable credit rating in contrast to any number of other nations during the 19th and 20th centuries. By the post-World War II period, the dollar had become the de facto world currency, making it easy for the country to run on deficit spending – people, institutions and governments around the world would easily take US government-backed debt. The Japanese government has a much higher debt to GDP ratio, but a much greater share of Japanese debt is owed domestically.

As a result, unlike the US, the sustainability of Japanese debt is less dependent on the willingness of foreigners to accept the idea of the sustainability of that debt, regardless of the actual amount. Critics argue that this weight of America’s debt held abroad means it now becomes a consideration in foreign policy concerns, i.e. don’t anger the Chinese or they will sell off their holdings of American debt, or at least threaten to do so unless they get the concessions they want somewhere else.

Historically, this national debt, after the heady days of the 1830s, rose again during the Civil War as the Union chose to fight that war on borrowed money, rather than a more confiscatory tax regimen of wealth taxes or increased tariffs (the US would not have a regular income tax until just before World War I). The South’s debt was defaulted on when the Confederacy ceased to exist.

Two world wars, the Vietnam War and the invasion of Iraq have all contributed to a rising national debt, even though the Clinton administration actually succeeded in chipping away at it with several years of economic expansion and budget surplus. But, after the big spending/tax cutting days of George W Bush, those heady Clinton years were soon over. Meanwhile, that heap of dollars theoretically owed by each citizen, millionaire and toddler alike, continues to grow until that equally theoretical moment when the Chinese call in their loans.

There are clearly some negatives to having a national debt, even though there is that “positive” of being able to buy things like a new war or a military arsenal for which one doesn’t have the cash in hand. As the national debt rises, it can become harder for a country to float new bond issues or be forced to promise higher interest rates on new debt to encourage people to purchase those bonds. Alternatively, of course, if a continuing trade deficit puts downward pressure on the US exchange rate, it may also be necessary to offer higher interest rates to potential purchasers, to offset further exchange rate losses. In dire circumstances, this becomes a vicious circle.

On the other hand, downward pressure on the dollar can also make exports a better deal for foreigners, contributing to a lower trade deficit and giving the currency a kick back up. Depending on the purposes of new debt, markets may even become convinced new debt has a useful purpose – translating it into an investment in the future and guaranteeing a good return, thereby encouraging lower interest charges.

Alexander Hamilton first laid this approach out back in George Washington’s presidency and Barack Obama has now thrown in his intellectual lot with Hamilton, arguing that his proposed spending on national infrastructure is a shrewd investment in new transportation systems just as the Chinese are doing, or national broadband expansion like South Korea, and a jolt of funds available for recycling industries, energy-efficient and green manufacturing to position the country for its future rebirth. Instead of buying a closet’s worth of Gucci handbags or hosting a giant sushi party, this kind of spending should actually be seen as the national government equivalent of borrowing to pay for a Ph.D. in nanotechnology.

But, Washington being what it is, the deficit, the national debt – and now, most recently, the need for congressional action on the national debt ceiling – are all increasingly divisive political issues, especially with the added impetus of a presidential election campaign hovering on the horizon. If one listens to the speeches or reads the websites, virtually everyone in Washington is in favour of cutting the budget. None of the country’s politicians has ever been a profligate spender. Everyone, at least by his or her own pronouncements, has been a wise and prudent Scrooge.

Just a couple of weeks back, the 2011 fiscal year budget was effectively agreed to, half a year after the financial year began, with more than $38 billion in cuts from the budget that had originally been proposed by Obama. Federal contributions to the Planned Parenthood NGO that had been a major issue on the part of conservative Republicans – were effectively salvaged as part of this grand bargain, but other cuts will remain in place, largely affecting programmes high on the social conservatives’ hit-list.

Photo: U.S. House Budget Committee Chairman Rep. Paul Ryan (R-Wis), author of the Republican House budget proposal, arrives to listen to a speech delivered by President Barack Obama on U.S. fiscal and budgetary deficit policy at the George Washington University in Washington, April 13, 2011. REUTERS/Kevin Lamarque

Moreover, this bargain doesn’t have any actual budgetary bearing on the specifics of the new budget for the upcoming fiscal year starting on 1 October, although it has a huge political impact as a harbinger of future battles and cuts. As a result,the upcoming vote to raise the debt ceiling becomes the next place for the two parties to slug it out – and to fight it out within the two parties as well, as there is no unanimity within either party on precisely how best to resolve it.

But why does a debt ceiling matter? Think of it as the credit limit on the government’s credit card where the credit limit can be increased whenever you wish, as long as your whole squabbling family agrees. Because the US Congress holds the power of the purse, that body must authorise the amount of debt the government can bear at any time. Absent a rise in that ceiling, sometime in May, the government will effectively need to find some rather more dubious stratagems to allow it to generate new kinds of debt-like obligations, until the grownups agree on how much more the government can borrow this time. But doing that, at least to foreign bond purchasers, would almost certainly look like the next step to a default, precisely what Standard and Poor’s was pointing at, and just as precisely what treasury secretary Tim Geithner has been worrying about in public in an effort to chivvy Congress into a vote in favour of raising the debt ceiling.

For the greater part of American history, a vote on the debt ceiling was one of those things that just happened every once in a while. This time, however, Republicans seem determined to use this to force a promise on further budget cuts as a quid pro quo for agreeing to raise the debt ceiling. Democrats, meanwhile, hope to use that Republican insistence on budget cuts – as in Republican Congressman Paul Ryan’s alternative budget plan – as a way of forcing discussion of tax increases  or forcing the Republicans to admit they are planning to cut benefits under Social Security or Medicare. And all of this seems increasingly likely to become a major part of the US presidential campaign – something that is just matter of months away.

On the other hand, there may just be a ray of hope. As Richard Stevenson reported in The New York Times, a group of senior Republicans and Democrats is now trying to find a way out of this cul-de-sac. ‘That question is being asked quietly within both parties, each of which faces its own internal tensions about how to proceed. There are Republicans who fear that voting for the Ryan plan will put them out of step with their constituents. There are Democrats who think the tax-and-spend label is all too accurate. There are Republicans who might countenance voting for tax increases, and there are Democrats who are willing to meaningfully scale back the benefits promised by Social Security, Medicare and Medicaid.

“In the Senate, a group of Democrats and Republicans operating independently of party leaders is trying to come up with a plan that neither party would like but both would accept as necessary. But they are debating basic values; it would no doubt be much easier if the argument was just about numbers.”

With Federal Reserve chairman Ben Bernanke on Wednesday telling the country the US federal debt is the biggest threat to growth, maybe the adults will come back into the room and take charge. All other options will cause the worldwide panic. DM

• Read more:
• By what Standard is the U.S. Poor? E J Dionne’s column in The Washington Post;
• S&P lowers its outlook on U.S. debt; stocks decline in the Washington Post;
• A Rational Budget for the Pentagon in The New York Times;
• Federal Debt Limit (debt ceiling) in The New York Times;
• Amid Din, Serious Talk on Debt in The New York Times;
• The Budget Debate, Revealed in The New York Times;
• US Current Account Deficit on the Peterson Institute for International Economics website (this website links to a large, authoritative collection of more scholarly articles on deficits and debt);
• U.S. Public Debt on the Wikipedia;
• Welcome to the Bureau of the Public Debt website! On the Dept. of the Treasury website;
• US national debt – The 40 and the 90 in the Economist;
• Rival visions: Barack Obama lays out his own plans for the future. They have little in common with those offered by the Republicans in the Economist;
• Obama calls GOP Medicare, spending plan ‘radical’ on the AP;
• Geithner: ‘Congress Will Raise the Debt Ceiling’ on the ABC;
• The politics and economics of a falling dollar in the Washington Post;
• US default could be disastrous choice for economy in the AP;
• Obama abdicates on the budget in the Washington Post (column by David Stockman – Reagan’s budget chief excoriating both sides);
• Dangerous Games in the New York Times;
• The US government’s deficit, explained in GlobalPost;
• The Budget Debate, Revealed in the New York Times;
• Rethinking Their Pledge, an editorial in the New York Times;
• Bernanke Defends Fed’s Role in Running Economy in the New York Times.

Main photo: President Barack Obama talks with advisors in the Oval Office before a phone call with President Ali Bongo Ondimba of Gabon to discuss the situation in Cote d’Ivoire, April 4, 2011. (Official White House Photo by Pete Souza)