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A way out of a debt standoff?

A guide to the impending decision by Congress on whether to increase the limit on federal borrowing.
Image: Mid-term elctions in the United States
Sen. Pat Toomey, R-Pa., has proposed that federal debt payments be made to creditors, even if Congress doesn't raise the debt limit. Justin Lane / EPA file

Republicans in Congress seem headed for a collision with President Obama on whether and how to raise the federal government's debt limit. Here's a guide to the debate:

What is the debt limit?
It is the legal limit on the ability of the federal government to borrow money. The current limit is $14.294 trillion, which was set by Congress early last year.

What purpose does the debt limit serve?
According to St. John's University law professor Anita Krishnakumar, who did a study of the debt limit for the Harvard Journal on Legislation, it serves as a check on the executive branch and provides accountability for congressional decisions to increase borrowing.

“Without the debt limit, all control over debt issuance would shift to the Treasury Secretary… leaving the President effectively in command of government borrowing,” she said. Such a transfer of power might be unconstitutional, she argued.

When did the debt limit begin?
Congress passed a law in 1917 to regulate the issuance of federal debt securities. Prior to 1917, Congress had to give its approval for each individual debt issue. With the massive borrowing necessitated by America’s entry into World War I, that case-by-case approach was no longer feasible. So now every year, or every couple of years, Congress has to vote on setting a new ceiling on the amount of debt that the Treasury can issue.

When will the debt limit be reached?
According to Treasury Secretary Tim Geithner, the debt limit “will be reached as early as March 31, 2011, and most likely sometime between that date and May 16, 2011.” The exact date depends on the performance of the economy and government revenues.

Geithner said that even if Congress were immediately to enact significant cuts in spending “the need to increase the debt limit would be delayed by no more than two weeks.” 

How high is the amount of federal debt, compared to previous times in U.S. history?
Very high. By last October, debt held by the public was equal to 62 percent of gross domestic product (GDP), the highest percentage since shortly after World War II, according to the Congressional Budget Office. But about one-third of federal debt is held in the government’s own accounts, such as in the Social Security fund and the civil service retirement accounts. If you measure all debt – held by the public and held by the government itself – federal debt is now equal to nearly 90 percent of GDP, up from 57 percent of GDP in 2000.

Has Congress ever voted to not raise the debt limit?

If Congress has always approved debt limit increases in the past, and if it seems likely to do so again this year, how is the vote anything more than merely a pro forma exercise?
"I think the vote is much more than a pro forma one. I think it is a painful, or at least embarrassing one, for both the president and for fiscally responsible members of Congress," said Krishnakumar.

Some Republican House freshmen, such as Rep. Austin Scott, R-Ga., won their seats last year partly by attacking their Democratic opponent for voting to increase the debt limit. For Republicans such as Scott, a vote this year to increase the debt ceiling might be perilous.

The last time the Congress voted to increase the debt limit, what was the vote tally?
The vote in the House on Jan. 28, 2010 was 233 to 187, with no Republicans voting for the increase. Fifteen Democrats also voted “no.”

The vote in the Senate was 60 to 39 with Democrats voting for the increase and Republicans voting against it.

All House Republicans voted against last year’s debt limit increase, so will it be awkward for them to reverse themselves this year and vote to increase the limit?

But House Majority Leader Eric Cantor is framing the vote as an opportunity for Republicans “to impose the kind of spending cuts that we were sent here to do… as well as to affect the real reform in terms of the spending and budget process…. We are simply not going to accept an increase in the debt limit without serious cuts and reforms. If our votes are needed, which I assume the president thinks they are, there will be action to ensure the people that elected us that Washington's spending binge is over.”

When a reporter asked Cantor whether he was saying that Republicans will vote against raising the debt ceiling, he answered, “I didn't say that. I'm not going to opine one way or the other. All I said was, this is a serious vote and there are serious consequences on both sides of the vote.” What Republicans must do, Cantor said, is enact spending cuts and genuine budget reform.

If Congress did reject a bill to raise the debt limit, what would happen?
Opinions differ on the effects of Congress rejecting an increase in the debt limit.

The ratings agency Standard & Poor’s said in a report this week that if Congress refused to raise the limit or delayed “too long” in doing so, “it would eventually require dramatic measures to avoid default: either an immediate, and likely disruptive, reduction in government expenditures, or a sudden increase in taxes or other government revenue....”

S&P said, “Default by the U.S. Treasury could cause significant and long-lasting financial and economic disruption.” But it added, “We don't believe there is a significant chance of this occurring, as implied by our 'AAA' U.S. sovereign credit rating and its stable outlook.”

Geithner gave a more alarming view in his Jan. 6 letter to congressional leaders. “Failure to raise the limit would precipitate a default by the United States,” he warned.

“Even a very short-term or limited default would have catastrophic economic consequences that would last for decades,” he said. A default would cause a sharp increase in interest rates leading to “job losses and business failures on a significant scale.” It would also “compromise America’s creditworthiness in the eyes of the world,” he said.

Are there short-term expedients the Treasury could use to buy some time?
Yes, according to Rudolph Penner, the former director of the Congressional Budget Office, in past debt limit standoffs, the secretary of the Treasury has used temporary steps such as delaying deposit of Treasury bonds into federal employees’ retirement accounts. “It wouldn’t keep the system going for more than a couple of months. Ultimately you would need an increase in the debt ceiling,” Penner said.

Would default automatically follow from not raising the debt limit?
Stan Collender, an analyst at the Qorvis consulting firm and a former congressional staffer who specializes in budget issues, wrote in his recent assessment that "reaching the debt ceiling will not automatically lead to a federal default on the nation’s existing debt. That will only stop the government from borrowing more than the current limit and force it to rely on other ways to finance its activities."

He said, "If a standoff on raising the debt ceiling lasts for a significant amount of time, the alternatives to borrowing eventually may not be enough to provide the government with the cash it needs to meet its obligations. Even at that point, however, a default wouldn’t be automatic because payments to existing bondholders could be made the priority while payments to others could be delayed for months."

In an opinion piece in Wednesday’s edition of the Wall Street Journal, Sen. Pat Toomey, R- Pa., argued that "even if Congress doesn't raise the debt ceiling, a default on our debt need not follow when our borrowings reach their limit in the next few months."

He said, "The federal government will still have far more than enough money to fully service our debt.... With roughly 10 times more income than needed to honor our debt obligations, why would we ever default?"

How does Toomey propose to avert default?
Toomey said he will offer a bill to "require the Treasury to make interest payments on our debt its first priority in the event that the debt ceiling is not raised." He said this would "ensure the continued confidence of investors at home and abroad" in Treasury securities.

In Toomey’s scenario, even if the government’s creditors were being paid, what about the other spending?
Toomey said the revenue would cover "roughly two-thirds of projected expenditures, including interest payments. Without the ability to borrow the other third, spending cuts would be sudden and severe" with some payments to vendors delayed and some programs suspended. He said, "Default would easily be avoided, but these cuts would certainly be disruptive. That's why I hope we can avoid this scenario."

But with his proposal Toomey — like Cantor in the House — hopes to prompt action to cut spending. "Congress should make increasing our debt contingent on immediate cuts in spending and effective reforms of the spending process that helped get us into this mess."

Fellow conservative Sen. Jim DeMint, R-S.C., backed Toomey's idea in an e-mail to supporters Friday, calling it "a game changer in the debt limit debate."

DeMint said, "Americans should reject the sky-is-falling-hysteria coming from President Obama and demand that Congress stop the debt and balance the budget. ... When the Senate considers the debt limit next month, Republicans must do everything they can to block an increase in the debt limit."

What could be adverse effects of Toomey’s proposal?
Penner said, “Large cuts in Medicaid and other grants to state and local government would likely cause defaults on their debt obligations. Perhaps, dramatic cuts in such programs could be avoided by not paying vendors and laying off civil servants, but….if international capital markets saw us behaving that irresponsibly, the resulting turmoil would be almost as great as caused by a default.”