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A user's guide to the debt debate

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:

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.”

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.

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.”