By Tom Curry National affairs writer
msnbc.com
updated 7/6/2011 9:44:09 AM ET 2011-07-06T13:44:09

President Barack Obama and Republican congressional leaders are locked in a tense standoff over how much spending and debt the federal government can afford. Here’s a guide to the fight over the debt limit:

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What is the debt limit?
It is the statutory limit on the amount of federal debt.

In February 2010, Congress passed legislation to increase the debt limit to $14.29 trillion. Since 1993, Congress has voted to increase the debt limit 16 times.

Treasury Secretary Tim Geithner has warned Congress that if it doesn’t vote to increase the debt ceiling before the government reaches its borrowing limit on Aug. 2, it would trigger a default by the United States.

A default “would have catastrophic economic consequences that would last for decades,” Geithner said, by spurring ruinously high interest rates and threatening “the dollar’s dominant role in the international financial system.”

First Thoughts: Six things we've learned in the debt talks

Why are congressional Republicans refusing to raise the debt ceiling?
Republicans argue that federal spending — which is now nearly 25 percent of GDP —  must finally be brought under control. The only way to force Obama to agree to spending cuts is to refuse to raise the debt limit, they argue.

Obama said Monday that he agrees with Republicans that trillions of dollars of spending cuts are needed over the next decade, but he also wants to get rid of certain tax breaks that cause the government to lose revenue. At a Tuesday press briefing, he invited congressional leaders to continue negotiations at the White House.

Video: Sen. DeMint: Biden talks just burning up the clock (on this page)

Negotiators for the Obama administration and Congress have discussed about $2.4 trillion in spending cuts over the next ten years — about a 5 percent cut in total projected spending.

“I believe the Republican strategy will eventually result in some increase in the debt limit with very limited tax increases, but none of those tax increases will be in marginal (income tax) rates,” said Bill Hoagland, former top staffer on the Senate Budget Committee under Sen. Pete Domenici, R-N.M.

How would financial markets react if Congress failed to pay interest or principal on Treasury bonds?
No one can be certain, but John Chambers, chairman of the sovereign rating committee for  Standard & Poor’s said last week that his company would lower its AAA ranking on federal debt to D, the lowest rating on its scale if the government "doesn’t pay its debt on time."

But he said S&P believes the Congress will raise debt ceiling before Aug. 2.

Could the government avoid a debt crisis by continuing to pay interest to its creditors while reducing spending on other items and by delaying payments to contractors and vendors?
Former Senate Budget Committee staffer Stan Collender said the government does have enough revenue every month to pay its interest obligations, but not enough revenue to both pay interest and to pay for all federal programs.

The Office of Management and Budget, he said, could instruct federal agencies to not process certain payments to contractors. “To a contractor, that would sure feel like a default, but it wouldn’t be a default on a government obligation,” in other words, a default on a Treasury bond.

Some Republicans — such as Sen. Pat Toomey of Pennsylvania and Sen. Jim DeMint of South Carolina — contend that even with no debt limit increase, Geithner could avert a crisis by making payments to Treasury bond holders the highest priority.

“It is clear that the Treasury Department can prioritize debt service and still fund principal and interest payments on our debt obligations after we hit the debt limit,” Toomey said.

He added, “A partial government shutdown upon hitting the debt limit could be disruptive…. But it would be even more reckless to simply raise the debt limit without taking the tough choices to get our fiscal house in order.”

But Geithner told DeMint in a letter last week that “this ‘prioritization’ proposal advocates a radical and deeply irresponsible departure” from commitments made by presidents of both parties. He accused Republicans of “attempting to coerce the Treasury to renege on existing legal commitments.”

How long has there been a statutory limit on federal debt?
The limit on federal debt began in 1917, when Congress passed a law to help finance America’s part in World War I. Prior to that time, Congress had to approve each issuance of federal debt. The 1917 law gave the Treasury more authority to decide on the schedule of debt offerings but kept the overall debt level under the control of Congress.

It is not clear the debt limit has any restraining effect on federal spending.

The nonpartisan Government Accountability Office (GAO) has said, “While debates surrounding the debt limit may raise awareness about the federal government's current debt trajectory and may also provide Congress with an opportunity to debate the fiscal policy decisions driving it, this debate generally occurs after the tax and spending decisions which affect debt levels have been enacted into law.”

Can Geithner stave off the point at which debt limit is reached?
Yes, as other Treasury secretaries have done, he can use extraordinary measures such as suspending reinvestment of Treasury bonds in the federal employees’ retirement plan, as a way of buying time. But he has said Aug. 2 is the day on which all measures will be exhausted.

Could Obama simply ignore the debt ceiling law and order the Treasury to keep issuing bonds after Aug. 2?
That scenario is now being debated.

The GAO said in a report last February that “If debt is at the limit and the extraordinary actions are exhausted, Treasury may not issue debt without further action from Congress and could be forced to delay payments until sufficient funds become available.”

But some Democrats have floated the idea that Section 4 of the Fourteenth Amendment to the Constitution, adopted after the Civil War, would allow Obama to disregard the debt limit and to keep selling Treasury bonds to finance government operations.

That section says, “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

Collender said that this theory, if true, would deprive Republicans of leverage over Obama in the budget negotiations.

“I think it’s the ultimate Plan B for the administration,” he said. In effect, Collender said, it would allow Obama and his team to say, “We’ll negotiate as far as we can but at some point we’ll say ‘no’ and we’ve got this other thing in our back pocket: the ability to use the Fourteenth Amendment” to continue to issue debt.

“It’s almost a perfect solution for the Republicans as well — because they don’t have to agree to any tax increases. They can blame the president for borrowing. And no one has to take a vote on this,” he said.

But the idea is novel and untested.

“I have worked on the budget for 35 years and until three weeks ago I had never heard of this,” Collender said.

And James Ely, a legal historian at Vanderbilt University Law School, said “it’s preposterous and incredibly far-fetched” to see the public debt clause in the Fourteenth Amendment as a warrant for a president to keep issuing bonds despite the debt limit.

How large is the national debt?
At the end of 2010, gross federal debt totaled $13.5 trillion. That compares to a gross domestic product — the most common measure of national income — in 2010 of about $14.7 trillion.

At the end of fiscal year 2010, last Sept. 30, debt held by the public amounted to 62 percent of gross domestic product, the highest percentage since right after World War II. Federal debt held by the public reached its modern all-time high in 1945: nearly 110 percent of GDP.

In a report last month, the CBO estimated that if current tax policy remains unchanged and if Congress does not make the cuts it promised to make in Medicare payments to doctors, publicly held debt would reach more than 100 percent of GDP by 2021 and 187 percent of GDP by 2035.

What does the debt consist of?
The larger portion of the gross debt, about $9 trillion, is in the form of Treasury securities held by the public, including by pension funds and other investors in the United States and in foreign countries.

The smaller part of the gross debt is the $4.5 trillion in Treasury bonds held by government accounts such as the Social Security and Medicare trust funds, which are required to invest any excess revenue they collect in Federal bonds. 

Has the government ever defaulted on the debt?
According to Ely, the federal government’s refusal in 1933 to pay government bonds in gold, as it had promised to do, was “a kind of default or a partial default.”

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Video: Sen. DeMint: Biden talks just burning up the clock

  1. Closed captioning of: Sen. DeMint: Biden talks just burning up the clock

    >> joining us now republican senator from south carolina , senator jim demint . senator demint is out now with a new book, "the great american awakening" two years that changed washington and me. we'll talk about the book in just a moment. i can't wait to hear about it. but what's going to happen? what side will walk away from this meeting in the white house tomorrow with no resolution, and neither side giving in on their comfort zone a little bit as the president put it.

    >> i don't think we'll have any resolution. we've known this for six months. there has not been one debate on the senate or house floor on how to fix it. i know how things work and the president put biden in charge of a task force to burn up the clock because they believe it's all about creating a crisis and then we have to do something urgently and we won't do what needs to be done. the president said we need a balanced approach. what we need is to agree that the states should decide should we have a balanced budget . if we don't stop spending more than we're bringing in none of the rest of this makes any difference.

    >> aren't we at a point in time in our history in this country we're actually literally everything must be done. everything must be done to accomplish what you, a republican, would want which is a balanced budget , a reduction in the deficit. why then wouldn't it mean maybe stepping out of your comfort zone in terms of your philosophy, in terms of revenue enhancers. certainly the white house and democrats have done that.

    >> they put taxes back on the table so they can give something up. for the last five years we had record levels of revenue. next year we projected the highest revenue levels in history. we don't have a revenue problem. revenues have gone up in the last eight years. but spending has gone up 60%. we've seen in history you can raise rates all you want and you might get a little bump in revenue but long term it will stay the same. the only way to get more revenue is to get the economy going again. more tacks work in the opposite direction. republicans want revenues but we just understand history as an increasing taxes on job producers is not going to give us more revenues.

    >> closing loopholes and other issues?

    >> what about that, closing loopholes or taking away subsidies from a company like exxonmobil that made $11 billion in the first quarter.

    >> we created a whole set of business deductions that all companies take. republicans including myself have introduced legislation for years that would just lower traits, eliminate all the loopholes and you can do that for personal taxes and business taxes. but democrats have never supported a flat rate with no loopholes because they want their loopholes they just want to pick on big oil and raising taxes on big oil is just going raise gas prices at a time they are already high. they will pass along taxes. i guess the bottom line to all of this is you can do everything they are talking about as far as tax increases, the revenue they are projecting from that is so small it doesn't even put a dent in what we need to do. so what we need to do before we argue about taxes and cuts is agree let's let the states decide do we feed to have a balanced budget . six, eight, ten years out we can have a balanced budget .

    >> whatever you want to call it, we have this crisis, due date coming up in august, passing a constitutional amendment that takes years.

    >> all we have to do is pass it and send to it the states.

    >> doesn't it take years to play out?

    >> it would take years but part of what we've asked to do is let's have some short term use, caps on spending over the next ten years that will guide us towards a balanced budget and by that time we'll find out if the states ratify it.

    >> isn't it another way of kicking the can down the term.

    >> the we've got a pledge and a commitment to the country right now to cut this year, to cap spending on the years going out and to let the states decide whether or not to balance the budget. that would take effect probably six or eight years out. but the cuts we're asking for right now are not draconian. the caps would turn this down towards a balanced budget . then we can argue about revenue increases, we can argue about the cut. i think republicans are willing to look at the cuts at the pentagon, look at waste. we don't have any problems with putting everything on the table but we've got to agree that we need to stop spending more than we're bringing in.

    >> can a mormon win the south carolina primary ?

    >> here we go. here we go.

    >> i think so. i endorse mitt romney the last time.

    >> are your going to endorse him this time.

    >> the religion is not an issue. but i think what americans are looking for right now is someone with principle but with courage. that's why you see some of these governors like chris christie or scott walk near spirg the country because they are willing to tell the truth and do what's necessary to save their states. americans need a president right now that's going to tell them the truth and to make those hard decisions to save our country.

    >> you think mitt romney would do that if he were president of the united states ?

    >> he could. i'm keeping an open mine. i'm not endorsing anyone right now because i want to know what they do on the debt limit. just about everybody signed our commitment to america . to me that's where the action is.

    >> did governor romney sign that?

    >> yes. he our did.

    >> when you say they signed the commitment to america , the implication in some people's minds the republicans have a commitment to america and the democrats don't?

    >> well, i have not seen any commitment from the democrats to cut spending. we saw this c.r. debate of a couple of months ago. we ended up with almost no cuts. the president proposed 10 trillion in additional debt over his budget cycle of 10 years. they are not serious about cutting spending.

    >> did you ever hagel with an auto dealer over the price avenue car.

    >> every time. i love it. it's sport.

    >> why don't you do the same sport in the senate?

    >> we do. we can debate what to cut, how much to cut, when to cut it. we can't argue about whether or not we have to balance our budget. because we're going bankrupt our country if we keep spending.

    >> if the alternative to -- the alternative to raising taxes is the country goes into a default and they say, look, it's going into a default unless you guys give us something. would you then resist any increase in revenues?

    >> first of all we won't default. we may have to cut government programs. but we'll pay our debt as they come due. over 70% of our total expenses come in from tax revenue . if we never raised the debt ceiling we have to go back to 2003 spending levels. we'll pay our debt. it's irresponsible for secretary geithner to suggest we won't. it will be disruptive. i'm not pretending it wouldn't. you would have to begin to cut things that we don't want to cut.

    >> have you seen this argument where under the 14th amendment the president has got an obligation to see the debts are paid. if you don't raise the debt ceiling he can go ahead and agent on his executive authority and do it.

    >> he needs to pay the debts. that's something we've tried to pass in the senate is a full faith and credit bill.

    >> suppose you don't pass it.

    >> if we don't pass it we still have to pay our debts. we don't have to keep spending money on the stimulus program and all these other things. but the debt should be the priority because as the constitution says we're obligated to pay it and the president must pay it.

    >> you used the word irresponsible to describe secretary geithner and you just used several times the word priority. do you think it was irresponsible for those people in the senate and the house to vote to go to war with iraq without a trigger mechanism, to pun intended, to pay for that war, reducing taxes, going war? do you think that's irresponsible?

    >> i have to agree we needed to have a contingency on how to pay for that. we have to do that with everything. there were decisions i made ten years ago that are different now. i voted for things ten years ago that we can't on forward today. i'm a recovering earmarker. we're 14 trillion in debt. we're at a different place in time and the priority has got to be to keep our country from going into bankruptcy. this idea and the president agreed last december we have to take tax increases off the table in a down economy. he agreed. the only reason they are bringing it back now is so they can appear to be compromising.

    >> you think in the end they will say okay we can't get tax revenue let's go with the budget cuts and debt ceiling.

    >> what they will say is okay we'll give up the tax increase but you give up these cuts and give us an increase in the debt limit with nominal use and everybody should be happy. it's not about what we want or what the president wants it's really about national snifl now and that's why what the great american awakening is about. people are understanding this debt will kill our country and when they got active it changed things inside of congress and that's what i was writing about because i want to recruit more people, if they get active we can change the way congress works.

    >> you also write in the book, senator, talking about the tea party , first of all, how isolated you said you felt before the tea party movement. i imagine you're eating alone in the senate cafeteria. very sad. but also you make the argument that the tea party is not a republican movement .

    >> yeah.

    >> you say it's an american movement. most people associate the tea party with republicans .

    >> not at all. they don't like republicans , democrats . they are mostly just a combination of really a diverse group of americans , republicans , democrats , independents, a lot of people who have never been involved in politics before. they want less from government. they are conservative. what unites them is this idea of stopping this reckless spending and in debt. so you may have some social conservativis conservatives and democrats .

    >> it's mostly republicans ?

    >> i think the republican is probably the only place they have to go right now stars elections. but if republicans fail to keep their promises i think you're going to see third parties all around this country because people will not put up with wobbly knees again here in washington .

    >> senator, if it's not protesting about barack obama , the tea party movement why didn't we hear more from them during the george bush administration.

    >> the republicans have been booed and were voted out of office last time because of supporting t.a.r.p. and other spending programs and my senator conservative fund that i started people gave, every time we endorsed somebody like pat toomey versus arlen specter they gave to pat toomey . same with rubio against charlie crist . so, we're fighting for, i guess, some new foundations in the republican party or a return to them, but what i want people to know is if they get engaged they can change washington . we did. it was isolating for me but when i went out across the country people said keep fighting.

    >> senator mark rubio wrote the forward to the book. senator demint thank you very much.

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