With Christmas quickly approaching, many of us find ourselves in a flurry of holiday traditions — decorating the tree, buying presents and gathering with family and friends.
Yet, with families across the country distracted by the holiday bustle, our friends in Congress are once again gearing up for a bipartisan tradition we could all do without: playing a game of chicken with the federal debt ceiling.
Indeed, the incoming 118th Congress faces a nasty problem. With the federal government approaching its debt limit of $31.4 trillion, Congress will need to increase that limit next year or risk defaulting on the federal debt. Some members of Congress, however, have indicated they won’t vote to increase the limit.
A few oppose raising it as a matter of principle. Others are willing to raise it, but only if the increase is paired with spending cuts and budget reforms. And then there are those who simply want to score political points.
Like many traditions, the debt ceiling and its accompanying policy clashes are rooted in a long, and in many cases well-intentioned, history. The first federal debt limit was introduced by the Second Liberty Bond Act of 1917 as Congress’ condition to sell bonds to finance World War I. In the years following its introduction, Congress raised the limit repeatedly.
The Treasury had great difficulty selling enough bonds to finance the war, even as it raised interest rates on each successive bond issue, so the debt limit served as a cosmetic to persuade buyers that their bond purchases would hold their value.
World War II once again put a major drain on the Treasury’s coffers as gross federal debt rose from 44.5% of gross domestic product (GDP) in 1941 to a whopping 119.1% in 1946. Although the federal government ran budget surpluses in just eight of the 35 years that followed, those years saw a dramatic decline in the gross federal debt relative to GDP as annual economic growth generally outpaced debt growth.
In recent decades, however, gross federal debt has swelled both in dollar terms and as a share of GDP. With Congress increasing the debt limit 53 times since early 1981, the gross federal debt now totals $31.3 trillion and 121.7% of GDP!
We are just now starting to feel the inevitable fiscal squeeze resulting from the accumulation of that humongous debt. Net interest on the debt totaled $399 billion last year. Not to be a Grinch, but interest costs are poised to get worse — much worse.
The Congressional Budget Office expects the federal government will spend $1.194 trillion on interest alone by 2032.
Yet, as Congress faces another showdown over ballooning debt, all we’re getting is more hot air. Part of this is a consequence of the debt ceiling itself, as the debt limit doesn’t determine Congress’ tax and spending decisions, only whether the federal government will have the authority to borrow what is needed to fulfill its financial obligations.
Debates on Capitol Hill about the debt ceiling have become, in large part, a substitute for tackling the federal government’s boundless overspending.
A real Christmas gift for Americans would be to, once and for all, address the issue head-on. It’s time to disregard the debt ceiling’s convenient illusion of fiscal responsibility and replace it with practical, enforceable fiscal rules to restrain federal spending growth.
The Swiss added one such rule, known as a “debt brake,” to their Constitution in 2003. The results have been spectacular. In short, Switzerland’s central government is allowed to grow its spending no faster than its revenue growth over the course of the business cycle. Genius!
As ING, the international bank, wrote in 2019: “The [Swiss] formula allows for a deficit during a recession, offset by surpluses during an expansion period. …the implementation of this system has resulted in a significant debt reduction, rather than just stabilisation. This is because the rule is applied asymmetrically and expenditure tends to be overestimated each year, while revenue is systematically underestimated. …every budget surplus is greeted with a self-congratulatory round of applause on the sound management of public finances.”
When it comes to the U.S. federal budget, the ghost of Christmas future looks downright terrifying. Let’s hope the Ebeneezer Scrooges in Congress discover the true spirit of fiscal responsibility.
We need honest and meaningful reform, not more bluster and games of chicken over the ineffectual debt limit. Here’s hoping for a Christmas miracle! (And soon!)
James Carter is the director of the America First Policy Institute’s Center for American Prosperity. Previously, he served as deputy undersecretary of labor under President George W. Bush and as chief minority economist on the staff of the U.S. Senate Budget Committee.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.
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