If there’s one thing we know about the looming debt limit crunch and the warnings about the dire consequences of default, it’s this: The government is not going to default.

The recurring brinksmanship over the debt limit and the partisan refusal to get Republican fingerprints on the increase don’t say much for our political class. But the U.S. Treasury isn’t full of stupid people, and they’ve been through this drill before. Back in July 2011, when the debt ceiling of $14.3 trillion was about to be reached, the Washington Post reported:

The Treasury has already decided to save enough cash to cover $29 billion in interest to bondholders, a bill that comes due Aug. 15, according to people familiar with the matter.

You can bet they’re making similar plans today. The difference is that 10 years later the debt ceiling is $28.4 trillion, just about doubled, and we’re about to bump into it again.

Back in that summer of discontent I talked to a journalist who was very concerned about the “dysfunction” in Washington. So am I. But I told her then what’s still true today: that the real problem is not the dysfunctional process that’s getting all the headlines, but the dysfunctional substance of governance. Congress and the president will work out the debt ceiling issue, probably just in the nick of time. The real dysfunction is a federal budget that doubled in 10 years, unprecedented deficits as far as the eye can see, and a national debt (more accurately, gross federal debt) yet again bursting through its statutory limit of $28.4 trillion and soaring past 120 percent of GDP, a level previously reached only during World War II.

We’ve become so used to these unfathomable levels of deficits and debt—and to the once-rare concept of trillions of dollars—that we forget how new all this debt is. In 1981, after 190 years of federal spending, the national debt was “only” $1 trillion. Now, just 40 years later, it’s more than $28 trillion. Traditionally, the national debt as a percentage of GDP rose during major wars and the Great Depression. But there’s been no major war or depression in the past 40 years; we’ve just run up another $27 trillion more in spending than the country was willing to pay for. That’s why our debt as a percentage of GDP is now higher even than during World War II. Here’s a graphic representation of the real dysfunction in Washington:

And the Congressional Budget Office tells us it’s going to get worse, much worse. See the following chart on page 2 of the CBO’s March 2021 Budget Outlook. The Obama-Trump spending pushed “debt held by the public” to levels not seen since World War II. Pandemic spending pushed the debt up to peak WWII levels. But it’s entitlement spending that will take the debt far beyond even today’s level. This is not a sustainable course. 

Where did all this debt come from? Obviously, it came from the rapid increase in federal spending over the past several administrations:

Presidents George W. Bush, Barack Obama, Donald Trump, and Joe Biden have all spent money like they had a bottomless pit of it. And the easiest way to spend government money is not to ask the taxpayers to pay for all of it. We may pay in the form of crowded-out investment and other private economic activity and thus in reduced economic growth, but no president has proposed to actually raise taxes to match his spending increases.

Republicans and Democrats alike should be able to find wasteful, extravagant, and unnecessary programs to cut back or eliminate. They can find plenty of ideas here.

The debt limit doesn’t seem to limit the debt. So what’s the point of it? Well, at least it gives the political class a periodic reminder that they are piling trillions of dollars of debt on their children. And it focuses Washington’s mind on the spending-and-debt problem for a moment. If the Republicans who helped Mr. Trump add $7.8 trillion to the national debt in just four years really want to reclaim their reputation for fiscal conservatism, they could make a practical offer: support for raising the debt limit in return for spending reform. Jeb Hensarling, who served for six years as chairman of the House Financial Services Committee, has some suggestions:

A modest effort today might include the bipartisan Trust Act, which would fast-track reforms to fiscally challenged programs like Social Security and Medicare, as well as the bipartisan Prevent Government Shutdowns Act, which would reduce brinkmanship without increasing spending.

I have another idea: tell Speaker Pelosi and Majority Leader Schumer that Republicans will vote for an increase in the debt ceiling in return for Democrats dropping the somewhere-between-$3.5 trillion-and-$5.5 trillion-dollar spending bill.

Seriously, we’ve got the highest national debt in history, at more than 120 percent of GDP. Federal spending has reached levels even fiscal doomsayers didn’t predict. The federal government has spent some $6 trillion responding to Covid. Whether or not that spending was necessary in an emergency, any budgeter knows that when you have large unanticipated expenses, you cut back somewhere else. You don’t say “if we can afford $6 trillion for Covid, of course we can afford another $6 trillion in new programs and transfer payments.”

If the brinksmanship that has once again sent the establishment into dire warnings finally results in some constraint on out‐​of‐​control spending, then it will have been well worth all the hand‐​wringing. But it’s important to be clear: the serious dysfunction in Washington is not the occasional debt ceiling kabuki, it’s a political process that produces ever more spending, deficits, and debt.

To fund spending increases, President Biden and the Democrats are proposing to raise corporate income taxes. My new op-ed in The Hill describes 10 reasons why that would be harmful to businesses, workers, and the economy.

Here are the 10 reasons briefly:

1. Our federal-state corporate tax rate is already higher than the global average.
2. Higher taxes would undermine investment in factories, machinery, and other productive assets.
3. Innovation would slow as businesses cut research spending and investment in advanced technologies.
4. Wage growth would slow as reduced investment would undermine productivity.
5. Higher taxes on corporate foreign earnings would harm domestic workers and operations.
6. Since corporate taxes ultimately land on individuals, it is more transparent to collect taxes directly from individuals so they perceive the full cost of government.
7. When tax rates rise, corporations avoid and evade taxes more.
8. The Democratic plan would increase tax complexity and unfairness by adding dozens of special-interest breaks.
9. The plan would damage to the economy, yet may not even benefit the government in the long run.
10. It is unlikely that the higher spending funded by the tax increase would benefit society more than the private spending it displaced.

President Biden’s jobs plan touts “investment” 96 times, “research” 20 times, and “innovation” 17 times. But since corporations do the bulk of those activities in this nation, a corporate tax increase would undermine the president’s own objectives.

House Democrats are moving ahead with a huge bill to raise taxes on businesses and individuals, increase welfare handouts, and micromanage numerous industries. It is a complex proposal that would increase taxes $2.1 trillion over 10 years with 66 provisions and would distribute tax breaks and spending with another 79 provisions.

The following table is my summary of the bill based on the official estimates. The bill would raise $2.073 trillion in taxes, distribute $1.202 trillion to infrastructure, green, and safety net programs, and leave $871 billion in higher taxes to be used for other spending in the overall Democratic agenda. Of the $1.202 trillion, 43 percent is tax cuts and 57 percent is spending through refundable tax credits.

Here is a brief summary of the Democratic tax plan:

• Subtitle F, Infrastructure. The main provisions are subsidies for infrastructure bonds, building rehabilitation, and the low-income housing tax credit (LIHTC). The LIHTC is an awful, fraud-ridden program that mainly benefits developers. That the tax bill would expand it by $29 billion illustrates the absence of evidence-based policymaking in Washington.
• Subtitle G, Green Energy. The main provisions are subsidies for electric utilities, biofuels, energy efficiency, and electric vehicles. The subsidies are mainly in the form of tax credits, which are nearly always complex and difficult to administer.
• Subtitle H, Safety Net. The main provisions would expand the child tax credit (CTC), the earned income tax credit (EITC), and the child and dependent care tax credit (CDCTC). The official score shows that three-quarters of CTC and EITC benefits are spending, not tax cuts.
• Subtitle I, Tax Increases. The $2.1 trillion in tax hikes include raising the corporate tax rate ($540 billion), raising taxes on business foreign operations ($424 billion), and raising income and capital gains taxes on individuals and small businesses ($1 trillion).

The Democratic tax plan would seize $2.1 trillion from the private economy and use it to micromanage industries and buy votes with handouts to favored interests. The actions of seizing, micromanaging, and handing out benefits would each distort the economy and reduce overall national income.

There would be other costs of the plan. The 145 provisions and the follow-on regulations would generate large administrative and compliance costs, which would only benefit high-paid lawyers and accountants. Another cost would be diverting the energies of the nation’s business leaders and entrepreneurs from making better products to dealing with all the new rules.

Below is a JCT table showing projected taxes by income level under present law and under the Democratic proposal in 2023. I circled the overall effective tax rates, meaning total federal income, payroll, and excise taxes as a percent of income. Under present law, the average tax rate at the top is 30 percent, which compares to 0–10 percent for groups at the bottom. If the tax plan passed, the average tax rate at the top would rise to 37 percent, while tax rates at the bottom would fall, going negative for some groups as CTC and EITC expansion wiped out all federal taxes for many additional households.

After midnight on July 31st, the federal government reached the $28.5 trillion debt limit, which is the amount of money Congress allows the Treasury Department to borrow to keep the government running. Since then, Treasury has relied on bookkeeping gimmicks—known in bureaucratese as “extraordinary measures”—to shuffle existing funds and thereby keep the government fiscally afloat. These extraordinary measures, however, are a stopgap. Treasury Secretary Janet Yellen yesterday estimated that incoming receipts will be insufficient to pay daily obligations sometime “during the month of October.”

In two ways, this news is scary.

First, the debt, per se, is disconcerting, as it amounts to almost $231,000 for every household in America. In prior posts, my colleague Chris Edwards has explained why we should all be concerned about the ballooning balance on our country’s credit card.

Second, the federal government would roil financial markets if it started defaulting on its obligations. Jamie Dimon, the CEO of JP Morgan, testified that this would engender a “cascading catastrophe of unbelievable proportions.” Moody’s warned of a “fiscal Armageddon.”

If the debt limit news is scary, then Congress’s response has been downright terrifying.

Ten days after exceeding the debt limit, the Senate passed the Infrastructure Improvement and Jobs Act, including $500 billion of new spending on roads, broadband, and the electric grid. Because this spending isn’t fully offset by new revenues, the bill would add a quarter trillion dollars to the deficit, according to the Congressional Budget Office. Nineteen Republicans joined all 50 Democratic Senators in supporting the legislation. Then they all went on their annual August recess.

Thus, the Senate reacted to the debt limit emergency by adding more to the national debt and then leaving for vacation. Isn’t that irresponsible? Mind you, we’re talking about the upper chamber of Congress, where common sense is much more likely to prevail than in the House of Representatives.

Behind the scenes, you’d think that Senate Majority Leader Charles Schumer is sweating the debt ceiling, right? After all, there’s a “fiscal Armageddon” looming next month. But raising the limit (or controlling spending) isn’t now the Senate’s priority–far from it. Instead, Schumer’s office is leading an all-hands-on-deck effort to move $3.5 trillion in new spending, including up to $1.75 trillion in deficit spending, on top of the $500 billion in new spending (and $250 billion in deficit spending) in the Infrastructure Investment and Jobs Act. Incredibly, the $3.5 trillion number reflects a compromise with progressive lawmakers, led by Sen. Bernie Sanders, who pushed for at least $6 trillion (and up to $10 trillion) in new spending.

For its part, the House of Representatives is along for the ride. Before departing on the chamber’s own August recess, Speaker Nancy Pelosi scheduled a late-September vote on the Infrastructure Investment and Jobs Act. At present, House staffers, like their counterparts in the Senate, have been working nonstop on legislation to spend another $3.5 trillion.

You might be thinking, “where does the debt limit factor into all this new spending?” As a political football, of course!

For progressives now ascendant in Congress, it’s an article of faith that deficits don’t matter and that the debt ceiling is a dangerous distraction. Nevertheless, congressional Democrats last month passed up opportunities to unilaterally raise the limit. Instead, House and Senate leadership wants to provide political cover for moderate Democrats by forcing a bipartisan vote. To this end, Speaker Pelosi and Senate Majority Leader Schumer are employing a brinksmanship strategy. They say they won’t act without Republican support.

But Republican leaders want nothing to do with such a vote, preferring for Democrats to “own” the deficit. And if GOP leadership were coming at this issue in earnest, with an eye to controlling federal spending, then they could be applauded. Alas, they’re not. As I observed above, 19 Republican Senators just voted for $250 billion of new deficit spending on infrastructure, after the federal government had exceeded the debt ceiling. More broadly, the GOP was fine with hiking the debt limit when Trump occupied the Oval Office—even before the pandemic.

The upshot is that both parties come to this game of chicken from a cynical and unserious place.

Where is this headed? I don’t think brinksmanship could work for Pelosi and Schumer. Given that Democrats hold majorities in the House and Senate, they can’t blame Republicans for inaction.

Reportedly, Pelosi and Schumer are mulling multiple other options. One pathway is for Democrats to attach the debt ceiling hike to a bill that Republicans would suffer politically for opposing, such as emergency funding for vitims of Hurricane/​Tropical Storm Ida.

Another approach involves a Rube Goldberg decision-making mechanism meant to obfuscate accountability, whereby responsibility for raising the debt ceiling would get watered down between the executive and legislative branches of government. Here’s how this scheme would work, according to Roll Call:

The procedure would give the White House the ability to waive the federal borrowing cap unilaterally, but give Congress a veto if lawmakers could muster the votes to block it. Even then the president would have the option of vetoing the resolution of disapproval, and it would take two-thirds of both chambers to override a veto.

This last measure seems most likely, if only because it best facilitates an escape from political accountability. Such is our contemporary Congress. 

Democratic leaders in Congress are moving ahead with a $1 trillion infrastructure bill and a $3.5 trillion reconciliation bill to expand entitlement programs. Both bills are fiscally reckless and fund activities that are the proper responsibility of the states and private sector.

Many politicians seem to think there are no downsides to expanding the federal budget. But that is not the case. I discuss 10 reasons why both spending bills are misguided in a new National Review op-ed.

Some Republican members and conservative commentators favor the infrastructure bill but not the entitlement bill. But the flaws in both are the same. Expanding federal spending and regulatory power over state, local, and private activities makes no practical sense. If Ohio needs more highways, then the Ohio legislature should fund them. If Kentucky needs more public transportation, then local governments in the state should handle it. If Louisiana needs a hydrogen hub, then businesses in the state should invest in it.

The federal government does a lousy job of managing its vast array of current programs, and more spending would further overload federal policymakers. Expanding federal spending and control would undermine the democratic choices of state and local governments for no good reason.

Further discussion of federalism is here and infrastructure is here.

Starting now on public television stations and YouTube: Cato senior fellow Johan Norberg presents his latest public television documentary, Corporate Welfare: Where’s the Outrage? The documentary features personal stories of the effects of tax exemptions, subsidies, government regulations, and bailouts – all commonly used to help big business. Norberg delves into America’s system of farm subsidies, Tax Increment Financing (TIF), Big Oil subsidies, government policies, and tax breaks for big business, and offers a perspective of the 2008 financial crash from the viewpoint of a banker caught in the middle. The program takes viewers across America to talk with individuals whose lives and livelihood have been directly affected by the outrages of corporate welfare.

Check your local PBS listings or look for your city here.

Or watch it on YouTube.

Federal government debt rose from $3.3 trillion in 2001, to $10.1 trillion in 2011, to $23.0 trillion in 2021. Under current law, the CBO expects debt to rise to $35.8 trillion by 2031. If Congress passes the spending increases in the Democratic budget resolution, debt will rise to $40.1 trillion by 2031, according to CRFB. This is “debt held by the public,” meaning federal borrowing from domestic and foreign creditors.

The chart scales the debt to the number of U.S. households. Debt per household under the Democratic plan would rise from $179,082 in 2021 to $288,047 by 2031. That debt is not like mortgage debt where households have a hard asset to match what they owe. Rather, it is the government going on a consumption spending spree and putting $288,047 on each household’s credit card. That is because just 5 percent of federal spending is for hard assets such as highways and fighter jets. By ballooning the debt today, politicians are imposing large and rising burdens on households tomorrow.

Here are further observations:

• Federal debt today is 103 percent of GDP and would rise to 119 percent by 2031 under the Democratic spending plan. That level of debt is higher than the 31 percent reached in the Civil War, 33 percent reached in World War I, and 106 percent reached in World War II. Today we are not at war, and politicians show no interest in paying down the debt as they did after past wars.
• Bill Clinton was the last president to balance the budget, but the chronic red ink began in the 1930s with the rise of Keynesian economics and the invention of auto-pilot entitlement programs. Deficit spending has been supercharged in recent years by the rise in global capital markets, which makes vast borrowing much easier. From 1791 to 1930, federal politicians balanced the budget 68 percent of the years, but since 1931 they have balanced it only 13 percent of the years.
• America’s combined federal and state government debt in 2021 at 141 percent of GDP is far higher than the OECD average of 100 percent of GDP, and much higher than debt levels in Australia, Denmark, Ireland, Israel, Germany, Korea, the Netherlands, New Zealand, and Sweden.
• Rising debt may trigger an economic crisis with soaring interest rates and falling output. Greece’s debt crisis a decade ago created long-lasting damage, and the country’s real income per capita is still down one-quarter from its pre-crisis level. America’s government debt today is about the same size relative to GDP as was Greece’s before its debt crisis.
• With the Democratic spending plan, federal interest costs will top $1 trillion a year by 2031. But that assumes the CBO baseline projection of interest rates rising only to 1.9 percent on short-term federal debt and 3.2 percent on long-term debt. I think that is a rosy scenario. The risk is on the upside. If interest rates rise more than projected, it will have a huge budget impact because the debt is so large.

More on the history and costs of debt here.

Data Notes. The OECD debt measure is general government gross financial liabilities. OECD publishes the weighted average, but I calculated the simple average across countries. The number of U.S. households is here, and I estimated the 2031 figure based on the recent growth rate.