The Politics of the National Debt

Contributed by Katherine G. Karel.

The national debt of the United States government currently sits at a record $31.46 trillion. The National Debt Clock tracks the climbing debt that the U.S. continues to accumulate as they borrow money to fund stimulus bills, healthcare, social security programs, national defense, and net interest costs while keeping taxes low. The clock displays the total sum of money that the government owes to its creditors as its spending continues to exceed its federal revenue, or gross domestic product (GDP) output. While the debt seems to be growing exponentially, a debt ceiling imparted by congress is constantly in place to curtail the desire to limitlessly borrow. This debt ceiling however, continues to rise simultaneously with government borrowing as congress agreed to raise the ceiling for the 79th time since 1960 as of February 1, 2023.

How the National Debt Became Political

The national debt has long been a subject of debate and a bargaining tool used to advance political agendas. The United States has found itself in debt since its establishment as a country in 1776. Upon the conclusion of the Revolutionary War, the national debt resided at 80 million. The responsibility to rectify the national debt and stabilize the new economy fell into the hands of the Secretary of Treasury, Alexander Hamilton. Hamilton proposed a series of gradual tax implementations to pay off the growing debt, meaning the debt belonged to the American public. These tax proposals received serious scrutiny from party rivals, most notably by the Secretary of State, Thomas Jefferson, who did not want the debt to fall on the shoulders of the American citizens. Debates between America’s two political parties over not only the justifications to add to the national debt but how to pay back the debt have seldom changed. Democrats continue to advocate for government spending on Medicare/Medicaid, Social Security, stimulus relief, and infrastructure investments while raising taxes on the wealthy. In contrast, Republicans desire to cut spending on such social programs while providing tax breaks. As the two parties continue to knock heads on how government spending ought to be allocated, the question of where to place the ceiling has taken precedence in contemporary debates. Democrats are fighting to raise the ceiling to allow government funds to pay the bills previously incurred while Republicans argue that raising the limit would lead the economy into a state of panic. Therefore, they argue that the reduction of federal spending is vital to the longevity of the economy.

Who Contributes to the Deficit the Most – Democrats or Republicans?

“Elected officials are eager to be seen addressing the national debt, usually without linking it to the spending that the debt enables or to the tax increases that a balanced budget would require.”

Both Democrats and Republicans utilize the ability to add to the national debt in order to spend on their party’s objectives. As seen below, the graph to the left provides a visual of the trillions in national debt contributed by each president since Ronald Reagan. To the right, the X-axis displays United States presidents while the Y-axis shows their percent increase in the national debt while they held office.

For further data: US Debt by President: Dollar and Percentage

Reagan’s spike in the national debt (as the first president to contribute over a trillion dollars) is a result of major tax cuts as part of his infamous supply-side economics. H.W. Bush continued to add to the national debt, and despite promises made, he keenly raised taxes to halt impending inflation. While Clinton continued to add to the debt throughout his time in office, the budget he implemented resulted in a net surplus for the fiscal years 1998-2001. This is largely due to the tax revenue produced by the .com boom and a reduction in military spending as Cold War tensions eased. This surplus has not been replicated as the next four proceeding presidents contributed trillions to the debt with no surplus. The Bush administration boosted defense spending in the wake of 9/11 and the war in Iraq. To fund such military spending, he borrowed money without cutting taxes or using war bonds. Obama then inherited a faulty economy and the Great Recession went underway. In an attempt to jump-start the economy, he spent trillions on economic stimulus bills while also spending on Obama Care. All the while to appease House Republicans, he made 80% of tax cuts imposed by Bush permanent. Trump then took office and reversed the spending once again from medical care to national defense while providing more tax breaks. Another sizable contribution of his to the national debt came through three trillion dollars in pandemic relief spending. Thus far in his presidency, Biden continues to add to the debt to aid stimulus bills, now fighting to raise the ceiling to borrow more. So, what does all of this say about who contributes most to the national debt? When New York Times reporter Jim Tankersley crunched the numbers, he found Democrats contributed about 13 trillion to the national debt while Republicans contributed about 12.7 trillion. This signals that no matter what party is in office, the national debt will continue to climb. The question then becomes, why does it matter?

Why is the Debt Ceiling Used as a Political Tool?

While debates over the debt have permeated throughout American history, the worries over the debt ceiling seem to be an emerging topic of political leverage. To examine the present, it is helpful to look to the recent past. In 2011, there was a nearly identical concern placed on the debt ceiling. During this time, midterm elections had recently concluded and re-established Republican control took hold within the House of Representatives. This year also happened to be Obama’s second year in office after replacing Bush. When evaluating current concerns, it is notable to see the political continuity in the present day. Both political climates contain a House Republican majority at odds with a Democrat president in his second year in office. In addition, The Democratic president follows a Republican who implemented heavy tax breaks. Furthermore, both concerns over the debt ceiling hiked at the beginning of the first quarter. But as seen in the graphs above, if both parties are adding to the debt regardless of party—why does the ceiling frame the debate? The answer is the ceiling’s tool as political leverage.

Significance of the National Debt Ceiling in the Present

Speaker of the House, Kevin McCarthy, met with President Biden on February 1st. Upon conclusion of the meeting, President Biden signed a 2.5 trillion dollar increase to raise the debt ceiling. Despite not having Republican support, raising the ceiling is seen as vital. The alternative is that the United States defaults on its debt, therefore paving the way to mass job loss and an economic recession. As history often rhymes, concerns about the debt and the debt ceiling have occurred before as seen in 2011. The worries of an economic default imparted by a breached debt ceiling fueled stock market angst. Bloomberg economist James V. Baker reports on the economic outcome of such angst. He notes that gold, silver, and long-term U.S. Treasury Bonds all offered the highest return while stocks and the U.S. dollar fell. The S&P 500 ETF fell 11.8%, Nasdaq-100 Trust fell 9.5%, and the U.S. dollar fell 9.2% all within the span of January-August 2011. Baker foresees a similar trend in 2023, noting the undeniable similarities in political control from 2011 to the present. But, it also cannot be assumed that stock prices and the dollar fell solely due to debt ceiling concerns. Baker’s view is not universal among all economists. Nobel Prize winner Paul Krugman believes the hype over the debt ceiling while resembling attitudes of 2011, does not assure the same economic downturn as experienced in the past. He writes about the misguided nature that fueled the mass hysteria pertaining to the debt ceiling and budget deficits. He writes, “The debt scolds are trying to make a comeback. Partly that’s because, as I said, ranting about federal debt sounds serious and hard-headed. Partly it’s because deficit rants are all too often deployed in the service of an ideological agenda, a push to cut Social Security, Medicare, and Medicaid (but not, of course, giving the Internal Revenue Service the resources to crack down on tax evasion).” Debates over the debt ceiling, then seem to be more of a political tool rather than a bipartisan issue for investors.

To read further on two diverging schools of thought on the matter:

An Investor Roadmap For 2023 U.S. Debt Ceiling Crisis | Seeking Alpha

Opinion | Please Don’t Feed the Debt Scolds – The New York Times

What if There Was no Debt Ceiling?

If the debt ceiling will continue to be raised, then the debate over how to deal with debt must be reframed to address alternative solutions outside of the ceiling alone. One answer is found in a present-day extension of Keynesian economics, Modern Monetary Theory (MMT). A leading proponent of MMT, economist Stephanie Kelton, desires to redefine the national deficit as a national surplus. This is for two reasons. The first is because the debt will never be paid back. The second is that when the Fed allocates money to the government or to the nation’s banks, there is no physical printing of money, rather it is done electronically. Both of these factors ultimately challenge Margaret Thatcher’s claim and justification for deficit concern that “there is no magic money tree.” In many ways, Kelton and MMT argue that with digital dollars there is in fact a magic money tree: the federal government. Because America is in charge of its own money supply, in theory, it could never go bankrupt. The Fed’s job would then be to adjust interest rates to keep inflation in check for consumers as the government exponentially adds to the debt. By keeping attention towards regulating interest rates (a form of monetary policy) and not fiscal policy (a form of government-imposed spending and taxing), the American dollar would not devalue as Americans would not overspend. Ultimately, MMT assumes the debt will never be paid back and that the Fed leads the market, not vice-versa. However, with these claims, come many critiques.

MMT Push Back

Critics of MMT fall on both sides of the political line. Reporters for the Wall Street Journal begin their argument against MMT by noting how research has shown that an increase in fiscal spending boosts total spending only in the instance of an economic recession. In times of economic security, fiscal spending can cause its own form of inflation based on high demands for scarce resources. In this event, the increase in demand causes inflation upon a limited supply. This type of inflation can occur despite preventative measures imposed by the Fed through the use of monetary policy. With this knowledge, comes the assertion that the Fed alone cannot handle inflation if the government were to carry through limitless expansionary fiscal policy as MMT calls for. MMT then overestimates the power of the Fed over the economic sector. This is because inflation is not sedentary within the amount of liquidity in the nation’s banks. Other economists such as Paul Krugman concur that MMT is not an economically-sound theory due to its inconsistencies in explanation as well as its miscalculation of the Fed’s inflation control power. This means that having a limitless debt ceiling does not answer the question of how to deal with a growing national debt.

Major Takeaways

This report does not seek to rectify the issue of how to diminish the national debt. The reality seems to be agreed among economists, from Classical to Keynesian, that the debt will never be paid back. The debate over the debt ceiling now seems to be used (as it was in 2011) as a political bargaining chip to either halt or allow expansionary fiscal policy. Nonetheless, the ceiling continues to be raised while both Democrats and Republicans contribute to the growing deficit. The unprecedented, long-term effect of an exponentially growing national debt then produces the question: how much debt is too much? Economists have not reached a consensus on this issue beyond the fact that it is certainly a long-term issue, therefore not warranting angst in the short term.

For further reading on the National Debt: National Debt: Definition, Impact, Key Drivers, Current U.S. Debt

References

National Debt: Definition, Impact, Key Drivers, Current U.S. Debt

How Alexander Hamilton Tackled the National Debt | Sponsored | Smithsonian Magazine

Stephanie Kelton: The big myth of government deficits | TED

MMT Is Bad Economics – WSJ

An Investor Roadmap For 2023 U.S. Debt Ceiling Crisis | Seeking Alpha

The Debt Ceiling Showdown, Explained – The New York Times

What’s the National Debt by President?

US Debt by President: Dollar and Percentage

Opinion | Please Don’t Feed the Debt Scolds – The New York Times

Opinion | Does America Have Too Much Debt? – The New York Times