Sounds like its never been an issue to this extent before...
It's been an issue, but I don't think we've ever confronted this kind of possible default or calamity so close to the deadline. It's certainly been raised as an issue before. The party that's out of of power has some leverage to make complaints about what the government's doing, and perhaps even to extract some promises or changes in policy. But we're talking about very major possible changes in policy that would be needed, at least under some scenarios in order to get the debt limit passed.
Has the crisis emanated from the fact that Republicans are trying to extract much greater changes in policy than normally would be the case from a party out of power?
A lot of things are different this time around. The Republicans have a new contingent generally associated with the Tea Party, very large, particularly well-represented among members who were elected for the first time in 2010, who are taking a very strong position on this issue. Indeed, some of them have said they won't vote to raise the debt limit under any circumstances. More of them have said they'd only vote to raise the limit only in conjunction with very substantial cuts in spending and in both cases with no tax increases.
In addition we've had a very rapid increase in the national debt in the last few years. It increased fairly rapidly during the George W. Bush administration, and largely as a result of the recession, it's risen even more rapidly in the last couple of years. People are much more aware of the size of the national debt now than has been true in the past. So there's probably some very large political content to it, but the situation also reflects changes in the status of the national debt.
How great is the country's debt now in historic terms?
The debt limit actually applies to the gross federal debt, which is all the debt that the goverment has issued. But a lot of that economists generally don't count because a substantial amount of that is held, for example, by the Social Security trust funds, and that's essentially one element of government holding debt issued by another.
We usually like to focus on the debt held by the public, which is now about 10 trillion dollars. And that's about 2/3 of gross domestic product. That's not nearly as high as it was at the end of WW II, when it was close to 110%. But the main difference is that at that point, the war was over, and we knew we didn't have very large deficits in the future to add to the total debt. Now, we don’t' simply have a debt that's grown very rapidly in recent years relative to the size of the economy, we also have very large deficits projected for the immediate term and after. So the issue is not simply where we are now, but it's where we expect to be in the relatively near future if we don't take some sort of action.
How much higher is the debt now than it was during the Reagan years?
The national debt relative to GDP is higher now than it was then. It rose during the Reagan years, it rose again relative to the economy during the George W. Bush years. It fell relative to the economy starting at the end of the first George Bush administration and throughout the Clinton administration. It's been fluctuating but rising very rapidly in recent years, to a very large extent because the recession we had was much more serious than any since the Great Depression.
When we have such a serious recession, our tax revenues fall off very sharply, and we also have to engage in certain kinds of spending to try to keep the economy going. And those add quite appreciably to an annual deficit. We've been running deficits of close to 10% of GDP a year, which are unprecedented peacetime deficits for the US.
I think it's how rapidly the debt has grown in the last few years that has spooked a lot of people.