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The 2011 United States debt ceiling crisis concerns the ongoing debate over whether the debt ceiling of the United States should be increased and, if so, the amount of the extension. Also under discussion are: what future spending policies and/or tax code policies should be associated with the action to increase the debt ceiling[citation needed] and what structural changes for future budgeting processes if any (for example, spending caps and/or a Balanced Budget amendment) should be associated with that action[citation needed]. The situation is regarded as a crisis due to the potential for a major worsening of the economic status of the U.S in case of government default.
The debate is controversial and contentious due to the implications of not raising the debt ceiling, political ideologies, long-term debt concerns, and competing plans to address these concerns
Current situation
Federal law currently sets the debt ceiling at $14.3 trillion. According to the Treasury, the debt ceiling was reached on May 16, at which time the Treasury began extraordinary measures to temporarily finance the government (see Debt issuance suspension period and alternate methods of funding). The Treasury estimated that these measures would enable government payments to continue until August 2, 2011, after which Treasury would not be able to fulfill all U.S. obligations.
As of May 2011, approximately 40 percent of U.S. government spending relied on borrowed money. Raising the debt ceiling would allow the Federal Government to continue to borrow money to support current spending levels. If the debt ceiling is not raised, the Federal Government would have to cut spending immediately by 40 percent, affecting many daily operations of the government. The Treasury would determine what items would be paid. If the interest payments on the national debt are not made, the United States would be in default, potentially causing catastrophic economic consequences for the U.S. and the wider world as well. (Effects outside the U.S. are anticipated because the United States has a very high gross domestic product with the world's largest single national economy; because the U.S. is a major trading partner to many countries, including other major world powers who hold its debt and could demand repayment; and because spending and investment power enable the U.S. to act as a mediator and economic model.)
According to the US Treasury, "failing to increase the debt limit would... cause the government to default on its legal obligations – an unprecedented event in American history". These legal obligations include paying Social Security and Medicare benefits, military salaries, interest on the debt and many other items. If the debt ceiling is not raised, then the Treasury will prioritize the items to pay with its ongoing revenue stream. Treasury could choose to pay interest so that the U.S. does not default on its sovereign debt.
What is the debt ceiling?
If the United States Treasury does not collect enough in revenue to pay for expenditures by the Federal Government, it may be authorized by Congress to issue debt (in other words, borrow money) to pay for the federal budget deficit. Prior to 1917, the Congress had to authorize each round of borrowing directly. In 1917, in order to provide more flexibility to finance the United States' involvement in World War I, the Congress instituted the concept of "debt ceiling". Since then, Treasury can only borrow money as long as the total debt (excepting some small special classes) does not exceed a ceiling stated by law. To change the debt ceiling, Congress must enact specific legislation and the President must sign it into law.
The process of setting the debt ceiling is separate and distinct from the regular process of financing government operations, and raising the debt ceiling neither directly increases nor decreases the budget deficit. The U.S. government passes a federal budget every year. This budget details projected tax collections and outlays and, therefore, the amount of borrowing the government would have to do in that fiscal year. A vote to increase the debt ceiling is, therefore, usually seen as a formality, needed to continue spending that has already been approved previously by the Congress and the President. The Government Accountability Office explains, "the debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred." The apparent redundancy of the debt ceiling has led to suggestions that it should be abolished altogether.
The United States has had public debt since its inception. Debts incurred during the American Revolutionary War and under the Articles of Confederation led to the first yearly report on the amount of the debt ($75,463,476.52 on January 1, 1791). Every President since Harry Truman has added to the National Debt. The debt ceiling has been raised 74 times since March 1962,[16] including 18 times under Ronald Reagan, 8 times under Bill Clinton, 7 times under George W. Bush and 3 times to date under President Obama.
President Obama opposed one of those increases to the debt ceiling under George W. Bush and criticized Bush for a lack of leadership. "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. Government can't pay its own bills," Obama said before a March 16, 2006, vote on raising the debt limit. The Senate narrowly approved raising the limit along partisan lines, 52-48, with all Democrats opposed. This apparent contradiction can be explained by the fact that Democrats and Republicans disagree on how the government spends money and what the money is spent on, not on the idea itself of raising the debt ceiling.
Impact of budget deficits and long-term debt on debt ceiling debate
The growing anxiety since 2009 over the large United States federal budget deficits and mounting debt led to the contentious debate over raising the debt ceiling:
* According to the Congressional Budget Office (CBO): “At the end of 2008, that debt equaled 40 percent of the nation’s annual economic output (a little above the 40-year average of 37 percent). Since then, the figure has shot upward: By the end of [fiscal year 2011], the Congressional Budget Office (CBO) projects federal debt will reach roughly 70 percent of gross domestic product (GDP)—the highest percentage since shortly after World War II.” The sharp rise in debt after 2008 stems largely from lower tax revenues and higher federal spending (mostly in safety-net expenditure categories such as unemployment insurance and Medicaid) related to the severe recession and persistently high unemployment in 2008-11.
* In 2009, the Tea Party movement sprang out of Americans being concerned about the increased government spending.
* In early 2010, to address concerns of deficits and debt, President Obama established the Bowles-Simpson Commission to propose recommendations to balance the budget by 2015. The commission issued their report in December 2010 but the recommendations were never adopted.
* The Tea Party helped usher in a wave of new Republicans in the 2010 mid-term elections whose major planks during the campaign included cutting Federal spending and stopping any tax increases. These new Republicans and the new Republican House majority greatly affected the political debate in 2011 on raising the debt ceiling.
* In early and mid-2011, Standard & Poor's and Moody’s credit rating services issued warnings that United States could be downgraded because of the continued large deficits and increasing debt.
* According to CBO’s 2011 Long-Term Budget Outlook, without major policy changes the large budget deficits and growing debt would continue, which “would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment—which in turn would lower income growth in the United States.”
* Through 2010-2011, the European sovereign debt crisis was playing out, and there were concerns that the United States was on the same trajectory.
Debt issuance suspension period and alternate methods of funding
When the debt ceiling is reached, the U.S. Treasury can declare a debt issuance suspension period, and utilize methods other than issuing new debt to acquire funds to meet federal obligations. Several of these methods are described in detail in an Appendix attached to Secretary Geithner's April 4, 2011 letter to Congress These "extraordinary measures" include using some federal employee payroll deductions (those directed to the Civil Service Retirement and Disability Fund and to the federal employee Government Securities Investment Fund [G Fund], which is part of a 401(k)-like program known as the Thrift Savings Plan or TSP). These methods have been used in several previous episodes in which federal debt neared its statutory limit.
These methods were implemented as of May 16, 2011 (as the current debt ceiling was exceeded) when, in a letter to Congress, Secretary Geithner declared a “debt issuance suspension period”, which provides the Secretary authority to sell assets from the Civil Service Retirement and Disability trust fund and the G Fund of the TSP. According to this letter, this period could "last until August 2, 2011, when the Department of the Treasury projects that the borrowing authority of the United States will be exhausted".
Implications of not raising the debt ceiling
On August 2, without a raise in the debt ceiling, the Treasury will reach the point at which it will, in addition to being unable to further borrow money to pay its bills, be unable to gather enough funds from alternative sources to pay for all of the federal government's obligations. While the government has enough income from tax revenues and other sources to pay some governmental obligations, it would have to choose which obligations to meet and which not to meet. Choosing which appropriations to pay for does not necessarily amount to defaulting on obligations to bondholders. As an example, satisfying existing interest payments to bondholders, Medicare payments, Social Security payments, unemployment insurance and defense contractors would leave no remaining funds to pay active duty military, federal workers, taxpayers due refunds and many other obligations generally considered essential.
Failure to extend the limit may have serious repercussions. This would probably include causing panic in bond markets and damaging the economic recovery from the Great Recession. Such a crisis could throw the United States back into a recession.
Former Treasury Secretary Lawrence Summers warned of serious consequences of a default in July 2011, including: (a) higher borrowing costs for the U.S. government (as much as 1% or $150 billion/year in additional interest costs); and (b) the equivalent of bank runs on the money and other financial markets, potentially as severe as those of September 2008. Bank failures and a potential bank run, curbed by government intervention, were a major catalyst of the Global Financial Crisis that caused the Great Recession.
Nevertheless, many analysts and politicians predict that a deal will be reached before the August 2 deadline.
In response to Jim DeMint and other Republican Senators, who suggested that the current level of the debt ceiling could be maintained by prioritizing payments on the debt above other government spending, Treasury Secretary Timothy Geithner wrote a letter of reply in late June. He said that this would require "cutting roughly 40 percent of all government payments", which could only be achieved by "selectively defaulting on obligations previously approved by Congress". He argues that this would harm the reputation of the United States so severely that there is "no guarantee that investors would continue to re-invest in new Treasury securities", forcing the government to repay the principal on existing debt as it matures, which it would be unable to do under any conceivable circumstances. He concluded: "There is no alternative to enactment of a timely increase in the debt limit."
Even if the Treasury were to prioritize payments on the debt above other spending and avoid formal default on its bonds, failure to raise the debt ceiling would force the government to reduce its spending by as much as 10% of GDP overnight, leading to a corresponding fall in aggregate demand. Such a significant shock, if sustained, is thought to be able to reverse the recovery and send the country into a recession.
Deadline
According to the Treasury Department, the deadline to increase the debt ceiling is August 2, 2011, when the U.S. government would run out of cash to pay all its bills. According to Barclays Capital the Treasury may run out of cash around August 10, when $8.5 billion in Social Security payments are due. According to Wall Street analysts, the U.S. Treasury can't borrow from the capital markets after August 2, but still has enough cash to meet its obligations until August 15. Analysts also predict that the U.S. Treasury will be able to roll over the $90 billion in U.S. debt that matures on August 4 and gain additional time to avert a crisis. No one knows how the financial market and investors will react if U.S. Treasury is unable to borrow additional funds or meet its financial obligations.
Proposed resolutions
Congress is now considering whether and by how much to extend the debt ceiling (or eliminate it), and what long-term policy changes (if any) should be made concurrently. Republicans, who control the House of Representatives, have refused to raise the debt ceiling without deficit reduction, voting down a 'clean' raise in the House, with many Democrats in the House voting in protest against what they called a "political stunt" given that Republicans had the votes to ensure a clean raise would not pass. The Republicans largely believe a deficit reduction deal should be based solely on spending cuts, including cuts to entitlements, without any tax increases, to reduce or solve the long term issue of debt. President Obama and the Democrats in the US Congress want an increase in the debt ceiling to solve the short-term borrowing problem, and in exchange support a decrease in the budget deficit to be funded by a combination of spending cuts and revenue increases. Some prominent liberal economists, such as Paul Krugman, Larry Summers, and Brad DeLong, and prominent investors such as Bill Gross, go even further, and argue that not only the debt ceiling should be raised, but it should be accompanied by a short-term increase in federal spending (and, therefore, deficit), which would stimulate the economy, reduce unemployment, and ultimately reduce the deficit in medium to long term.[45][46]
Some Tea Party Caucus and other Republicans, however, (including, but not limited to, Senators Jim DeMint, Rand Paul, and Mike Lee, and Representatives Michele Bachmann, Ron Paul, and Allen West, etc.) are skeptical about raising the debt ceiling altogether (with some suggesting the consequences of default are exaggerated), arguing that the debt ceiling should not be raised and "instead the federal debt be “capped” at the current limit," "although that would oblige the government to cut spending by almost half overnight." For more, see "consequences of not raising the debt ceiling."
Jack Balkin, the Knight Professor of Constitutional Law and the First Amendment at Yale Law School, besides arguing that the President can invoke Section 4 of the 14th Amendment to solve the crisis (see next section), also suggests two other ways to solve the debt ceiling crisis: he points out that the U.S. Treasury has the power to issue platinum coins in any denomination, so it could solve the debt ceiling crisis by issuing two platinum coins in denominations of one trillion dollars each, depositing them into its account in the Federal Reserve, and writing checks on the proceeds. Another way to solve the debt ceiling crisis, Balkin suggests, would be for the Federal Government to sell the Federal Reserve an option to purchase government property for $2 trillion. The Fed would then credit the proceeds to the government's checking account. Once Congress lifts the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days.
Among others, in a report issued by the credit rating agency Moody's, analyst Steven Hess suggested that the government should consider getting rid of the limit altogether, because the difficulty inherent in reaching an agreement to raise the debt ceiling “creates a high level of uncertainty” and an increased risk of default. As reported by The Washington Post, "without a limit dependent on congressional approval, the report said, the agency would worry less about the government’s ability to meet its debt obligations."
Additionally, some argue the debt limit is unconstitutional, and suggest that the President could simply declare the debt ceiling as such to resolve the crisis. For more, see the section entitled "constitutionality of the debt ceiling" below.
Constitutionality of the debt ceiling
During the debate, some scholars and Democratic lawmakers suggested that the President could declare that the debt ceiling violates the United States Constitution and direct the Treasury to issue more debt. They point to Section 4 of the Fourteenth Amendment to the United States Constitution, passed in the context of the Civil War Reconstruction, that states that the validity of the public debt shall not be questioned:
Section. 4. 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. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.
Arguments:
* Jack Balkin, looking into the Legislative History of the Fourteenth Amendment, argues that Section 4 was adopted precisely to guard against politically-determined default. Referencing the sponsor of the provision, Senator Benjamin Wade, Balkin argues that "the central rationale for Section Four... was to remove threats of default on federal debts from partisan struggle." Whereas the debt ceiling gives Congress the power for the United States to default on its debts by requiring approval of a higher debt limit; Balkin quotes Senator Wade: "every man who has property in the public funds will feel safer when he sees that the national debt is withdrawn from the power of a Congress to repudiate it and placed under the guardianship of the Constitution than he would feel if it were left at loose ends and subject to the varying majorities which may arise in Congress." Balkan claims that this reveals "an important structural principle. The threat of defaulting on government obligations is a powerful weapon, especially in a complex, interconnected world economy. Devoted partisans can use it to disrupt government, to roil ordinary politics, to undermine policies they do not like, even to seek political revenge. Section Four was placed in the Constitution to remove this weapon from ordinary politics."
* Bruce Bartlett, a libertarian former Reagan adviser and columnist for The Fiscal Times, argues that Section 4 renders the debt ceiling unconstitutional, and that the President should disregard the debt limit.
* In July 2011, The Nation editor Katrina vanden Heuvel argued that the President could use the public debt section of the Fourteenth Amendment to force the Treasury to continue paying its debts if an agreement to raise the debt ceiling is not reached.
* Laurence Tribe, professor of Constitutional Law at Harvard Law School, has called the argument that the public debt clause can nullify the debt ceiling "false hope" and has noted that nothing in the Constitution enabled the president to "usurp legislative power" with regards to the debt. Tribe also notes that since Congress has means other than borrowing to pay the federal debt (including raising taxes, coining money, and selling federal assets), the argument that the president could seize the power to borrow could be extended to give the President the ability to seize those powers as well.
* Garrett Epps argues that the President would not be usurping Congressional power by invoking Section 4 to declare the debt ceiling unconstitutional, because the debt ceiling exceeds Congressional authority: calling it legislative "double-counting," as paraphrased in The New Republic, "because Congress already appropriated the funds in question, it is the executive branch’s duty to enact those appropriations." In other words, given Congress has appropriated money via federal programs, the Executive is obligated to enact and, therefore, fund them; the debt ceiling's limit on debt prevents the executive from carrying out those instructions given by Congress, on the constitutional authority to set appropriations, and is therefore unconstitutional. President Bill Clinton endorsed this line of argument, saying he would eliminate the debt ceiling using the 14th amendment, calling it "crazy" that Congress is allowed to first appropriate funds and then gets a second vote on whether to pay for them.
* Furthermore, Matthew Zeitlin argues that, were Section 4 invoked, members of Congress would not have standing to sue the President for allegedly usurping congressional authority, even if they were willing to do so; and those likely to have standing would be people "designed to elicit zero public sympathy: those who purchased credit default swaps which would pay off in the event of government default." Relatedly, Matthew Steinglass argues that, because it would come down to the Supreme Court, the Court would not vote in the favor of anyone who could and would sue: it would rule the debt ceiling unconstitutional. This is because, for the Court to rule to uphold the debt ceiling, it would, in effect, be voting for the United States to default, with the consequences that would entail; and, Steinglass argues, the Court would not do that.
* Michael Stern, Senior Counsel to the U.S. House of Representatives from 1996 to 2004, stated that Garrett Epps "had adopted an overly broad interpretation of the Public Debt Clause and that this interpretation, even if accepted, could not justify invalidating the debt limit" because "the President’s duty to safeguard the national debt no more enables him to assume Congress’s power of the purse than it would enable him to assume the judicial power when (in his opinion) the Supreme Court acts in an unconstitutional manner."
* Rob Natelson, former Constitutional Law Professor at University of Montana, argues that "this is not some issue in the disputed boundaries between legislative and executive power." He continues "That’s why the Constitution itself (Article I, Section 8, Clause 2) gives only Congress, not the President, the power “To borrow Money on the credit of the United States.” In another agrument, Natelson states that Bruce Bartlett "deftly omits a crucial part of the quote from the Fourteenth Amendment. It actually says, 'The validity of the public debt of the United States, AUTHORIZED BY LAW . . . shall not be questioned.' In other words, Congress has to approve the debt for it not to be questioned. And note that this language refers to existing debt, not to creating new debt. He also neglects to mention that Section 5 of the Fourteenth Amendment specifically grants to Congress, not to the President, authority to enforce the amendment.":
Section 5. The Congress shall have power to enforce, by appropriate legislation, the provisions of this article.
George Madison, General Counsel to the US Treasury, wrote on 8 July 2011 that "Secretary Geithner has never argued that the 14th Amendment to the U.S. Constitution allows the President to disregard the statutory debt limit" and that "the Constitution explicitly places the borrowing authority with Congress." He additionally affirmed that "Secretary Geithner has always viewed the debt limit as a binding legal constraint that can only be raised by Congress."
President Obama himself later stated that he would not use this method to solve the crisis.
Timeline
* February 12, 2010. The most recent increase in the debt ceiling was signed into law by President Obama, after being passed by the Democratic 111th Congress. It increased the debt ceiling by $1.9 trillion from $12.4 trillion to $14.3 trillion.
* February 18, 2010. President Obama issues an Executive Order to establish the National Commission on Fiscal Responsibility and Reform, also known as the Bowles-Simpson Commission. The mission of the Commission was to propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015. It was tasked to issue a report with a set of recommendations by December 1, 2010.
* November 2, 2010. United States midterm elections: Considered a major victory, the Republican Party gained 63 seats in the U.S. House of Representatives, recapturing the majority by 242-193 in the 112th Congress. Major planks for the House Republicans during the election campaign were cutting Federal spending and stopping any tax increases.
* December 1, 2010. The Bowles-Simpson Commission on Fiscal Responsibility and Reform issues its report but the recommendations fail to win support of at least 14 of the 18 members necessary to adopt it formally. The recommendations were never adopted by Congress nor President Obama.
* January 6, April 4 and May 2, 2011. Secretary of the Treasury Timothy Geithner sends three letters requesting an increase in the debt ceiling.
* January 28, 2011. Moody’s Investors Service says it may place a “negative” outlook on the Aaa rating of U.S. debt sooner than anticipated as the country’s budget deficit widens.
* February 14, 2011. President Obama releases his budget proposal for fiscal year 2012. Republicans criticize the budget for doing too little to rein in the burgeoning U.S. deficit. The CBO analysis released in April 2011 estimated that the budget would increase total deficits over 10 years by $2.7 trillion: from $6.7 Trillion of the March 2011 baseline to $9.4 Trillion with the proposed budget. The Senate rejects the budget proposal on May 25, 2011 (see below).
* April 14, 2011. Both the House of Representatives and the Senate voted in favor of the 2011 United States federal budget, 260-167 and 81-19 respectively. This budget projected the 2011 deficit to be $1.645 trillion, and therefore ensured that the debt ceiling would be hit during this fiscal year.
* April 15, 2011. On a party-line vote 235-193, the House of Representatives passed the Republican 2012 budget proposal aimed to reduce total spending by $5.8 trillion and reduce total deficits by $4.4 trillion over 10 years compared to the current-policy baseline. It included reform to Medicare and Medicaid entitlement programs which the Democrats criticized as an attempt to leave seniors and poor holding the bag on health care costs. The criticism resonated with the many in the public who voiced opposition to the proposed changes. The Senate rejects the budget proposal on May 25, 2011 (see below).
* April 18, 2011. Standard & Poor's Ratings Services revised its outlook on U.S. to negative due to recent and expected further deterioration in the U.S. fiscal profile, and of the ability and willingness of the U.S. to soon reverse this trend. With the negative outlook, S&P believes there is a likelihood of at least one-in-three of a downward rating adjustment within two years.
* May 16, 2011. The debt ceiling is reached. Secretary Geithner issues a debt issuance suspension period, directing the Treasury to utilize "extraordinary measures" to fund federal obligations.
* May 18, 2011. Bipartisan deficit-reduction talks among the "Gang of Six" high-profile Senators are suspended when Republican Tom Coburn drops out.
* May 24, 2011. Vice President Joe Biden and four Democratic lawmakers begin meeting with the Republican House Majority Leader Eric Cantor and the Republican Senate Minority Whip Jon Kyl, in an effort to continue the talks. Cantor says that these talks would lay the groundwork for further discussions between President Obama, Republican Speaker of the House John Boehner and other leaders of Congress.
* May 25, 2011. The Senate rejects both the Republican House budget proposal by a vote of 57-40 and the Obama budget proposal by a vote of 97-0.
* May 31, 2011. The House votes on a bill to raise the debt ceiling without any spending cuts tied to the increase. President Obama asked Congress to raise the debt ceiling in a ‘clean’ vote that included no other conditions. The bill, which would have raised the debt ceiling by $2.4 trillion, failed by a vote of 97-318. Democrats accused Republicans of playing politics by holding a vote they knew would fail.
* June 23, 2011. Biden's negotiations on the debt ceiling are cut off when both House Majority Leader Cantor and Senate Minority Whip Kyl walk out over disagreements over taxes
* July 19, 2011. The Republican Majority in the House bring the Cut, Cap and Balance Act (H.R.2560), their proposed solution to the crisis, to a vote. They pass the bill by a vote of 234-190, split closely along party lines: 229 Republicans and 5 Democrats 'for,' 181 Democrats and 9 Republicans 'against;' it is sent to the Senate for consideration. The Bill authorized that the debt ceiling be raised by $2.4 trillion AFTER a Balanced Budget Amendment was passed by Congress. Since Constitutional amendments require a two-thirds majority vote in both chambers of Congress to pass, a vote for a Balanced Budget Amendment would require more support than the Cut, Cap and Balance Act bill achieved in the House vote.
* July 22, 2011. The Senate votes along party lines to table the Cut, Cap and Balance Act; 51 Democrats voting to table it and 46 Republicans voting to bring it to debate. Senate Majority Leader Harry Reid called the Act "one of the worst pieces of legislation to ever be placed on the floor of the United States Senate." Even had it passed Congress, President Obama had promised to veto the bill.
* July 25, 2011. Republicans and Democrats outlined separate deficit-reduction proposals.
* July 25, 2011. President Obama and Speaker of the House Boehner addressed the nation separately over network television with regards to the debt ceiling.
* August 2, 2011. Date projected by the Department of the Treasury that the borrowing authority of the United States will be exhausted. [FOOTNOTE]wikipedia.org[/FOOTNOTE][/lang]
[h=1]Reference & Resources[/h]
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The 2011 United States debt ceiling crisis concerns the ongoing debate over whether the debt ceiling of the United States should be increased and, if so, the amount of the extension. Also under discussion are: what future spending policies and/or tax code policies should be associated with the action to increase the debt ceiling[citation needed] and what structural changes for future budgeting processes if any (for example, spending caps and/or a Balanced Budget amendment) should be associated with that action[citation needed]. The situation is regarded as a crisis due to the potential for a major worsening of the economic status of the U.S in case of government default.
The debate is controversial and contentious due to the implications of not raising the debt ceiling, political ideologies, long-term debt concerns, and competing plans to address these concerns
Current situation
Federal law currently sets the debt ceiling at $14.3 trillion. According to the Treasury, the debt ceiling was reached on May 16, at which time the Treasury began extraordinary measures to temporarily finance the government (see Debt issuance suspension period and alternate methods of funding). The Treasury estimated that these measures would enable government payments to continue until August 2, 2011, after which Treasury would not be able to fulfill all U.S. obligations.
As of May 2011, approximately 40 percent of U.S. government spending relied on borrowed money. Raising the debt ceiling would allow the Federal Government to continue to borrow money to support current spending levels. If the debt ceiling is not raised, the Federal Government would have to cut spending immediately by 40 percent, affecting many daily operations of the government. The Treasury would determine what items would be paid. If the interest payments on the national debt are not made, the United States would be in default, potentially causing catastrophic economic consequences for the U.S. and the wider world as well. (Effects outside the U.S. are anticipated because the United States has a very high gross domestic product with the world's largest single national economy; because the U.S. is a major trading partner to many countries, including other major world powers who hold its debt and could demand repayment; and because spending and investment power enable the U.S. to act as a mediator and economic model.)
According to the US Treasury, "failing to increase the debt limit would... cause the government to default on its legal obligations – an unprecedented event in American history". These legal obligations include paying Social Security and Medicare benefits, military salaries, interest on the debt and many other items. If the debt ceiling is not raised, then the Treasury will prioritize the items to pay with its ongoing revenue stream. Treasury could choose to pay interest so that the U.S. does not default on its sovereign debt.
What is the debt ceiling?
If the United States Treasury does not collect enough in revenue to pay for expenditures by the Federal Government, it may be authorized by Congress to issue debt (in other words, borrow money) to pay for the federal budget deficit. Prior to 1917, the Congress had to authorize each round of borrowing directly. In 1917, in order to provide more flexibility to finance the United States' involvement in World War I, the Congress instituted the concept of "debt ceiling". Since then, Treasury can only borrow money as long as the total debt (excepting some small special classes) does not exceed a ceiling stated by law. To change the debt ceiling, Congress must enact specific legislation and the President must sign it into law.
The process of setting the debt ceiling is separate and distinct from the regular process of financing government operations, and raising the debt ceiling neither directly increases nor decreases the budget deficit. The U.S. government passes a federal budget every year. This budget details projected tax collections and outlays and, therefore, the amount of borrowing the government would have to do in that fiscal year. A vote to increase the debt ceiling is, therefore, usually seen as a formality, needed to continue spending that has already been approved previously by the Congress and the President. The Government Accountability Office explains, "the debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred." The apparent redundancy of the debt ceiling has led to suggestions that it should be abolished altogether.
The United States has had public debt since its inception. Debts incurred during the American Revolutionary War and under the Articles of Confederation led to the first yearly report on the amount of the debt ($75,463,476.52 on January 1, 1791). Every President since Harry Truman has added to the National Debt. The debt ceiling has been raised 74 times since March 1962,[16] including 18 times under Ronald Reagan, 8 times under Bill Clinton, 7 times under George W. Bush and 3 times to date under President Obama.
President Obama opposed one of those increases to the debt ceiling under George W. Bush and criticized Bush for a lack of leadership. "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. Government can't pay its own bills," Obama said before a March 16, 2006, vote on raising the debt limit. The Senate narrowly approved raising the limit along partisan lines, 52-48, with all Democrats opposed. This apparent contradiction can be explained by the fact that Democrats and Republicans disagree on how the government spends money and what the money is spent on, not on the idea itself of raising the debt ceiling.
Impact of budget deficits and long-term debt on debt ceiling debate
The growing anxiety since 2009 over the large United States federal budget deficits and mounting debt led to the contentious debate over raising the debt ceiling:
* According to the Congressional Budget Office (CBO): “At the end of 2008, that debt equaled 40 percent of the nation’s annual economic output (a little above the 40-year average of 37 percent). Since then, the figure has shot upward: By the end of [fiscal year 2011], the Congressional Budget Office (CBO) projects federal debt will reach roughly 70 percent of gross domestic product (GDP)—the highest percentage since shortly after World War II.” The sharp rise in debt after 2008 stems largely from lower tax revenues and higher federal spending (mostly in safety-net expenditure categories such as unemployment insurance and Medicaid) related to the severe recession and persistently high unemployment in 2008-11.
* In 2009, the Tea Party movement sprang out of Americans being concerned about the increased government spending.
* In early 2010, to address concerns of deficits and debt, President Obama established the Bowles-Simpson Commission to propose recommendations to balance the budget by 2015. The commission issued their report in December 2010 but the recommendations were never adopted.
* The Tea Party helped usher in a wave of new Republicans in the 2010 mid-term elections whose major planks during the campaign included cutting Federal spending and stopping any tax increases. These new Republicans and the new Republican House majority greatly affected the political debate in 2011 on raising the debt ceiling.
* In early and mid-2011, Standard & Poor's and Moody’s credit rating services issued warnings that United States could be downgraded because of the continued large deficits and increasing debt.
* According to CBO’s 2011 Long-Term Budget Outlook, without major policy changes the large budget deficits and growing debt would continue, which “would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment—which in turn would lower income growth in the United States.”
* Through 2010-2011, the European sovereign debt crisis was playing out, and there were concerns that the United States was on the same trajectory.
Debt issuance suspension period and alternate methods of funding
When the debt ceiling is reached, the U.S. Treasury can declare a debt issuance suspension period, and utilize methods other than issuing new debt to acquire funds to meet federal obligations. Several of these methods are described in detail in an Appendix attached to Secretary Geithner's April 4, 2011 letter to Congress These "extraordinary measures" include using some federal employee payroll deductions (those directed to the Civil Service Retirement and Disability Fund and to the federal employee Government Securities Investment Fund [G Fund], which is part of a 401(k)-like program known as the Thrift Savings Plan or TSP). These methods have been used in several previous episodes in which federal debt neared its statutory limit.
These methods were implemented as of May 16, 2011 (as the current debt ceiling was exceeded) when, in a letter to Congress, Secretary Geithner declared a “debt issuance suspension period”, which provides the Secretary authority to sell assets from the Civil Service Retirement and Disability trust fund and the G Fund of the TSP. According to this letter, this period could "last until August 2, 2011, when the Department of the Treasury projects that the borrowing authority of the United States will be exhausted".
Implications of not raising the debt ceiling
On August 2, without a raise in the debt ceiling, the Treasury will reach the point at which it will, in addition to being unable to further borrow money to pay its bills, be unable to gather enough funds from alternative sources to pay for all of the federal government's obligations. While the government has enough income from tax revenues and other sources to pay some governmental obligations, it would have to choose which obligations to meet and which not to meet. Choosing which appropriations to pay for does not necessarily amount to defaulting on obligations to bondholders. As an example, satisfying existing interest payments to bondholders, Medicare payments, Social Security payments, unemployment insurance and defense contractors would leave no remaining funds to pay active duty military, federal workers, taxpayers due refunds and many other obligations generally considered essential.
Failure to extend the limit may have serious repercussions. This would probably include causing panic in bond markets and damaging the economic recovery from the Great Recession. Such a crisis could throw the United States back into a recession.
Former Treasury Secretary Lawrence Summers warned of serious consequences of a default in July 2011, including: (a) higher borrowing costs for the U.S. government (as much as 1% or $150 billion/year in additional interest costs); and (b) the equivalent of bank runs on the money and other financial markets, potentially as severe as those of September 2008. Bank failures and a potential bank run, curbed by government intervention, were a major catalyst of the Global Financial Crisis that caused the Great Recession.
Nevertheless, many analysts and politicians predict that a deal will be reached before the August 2 deadline.
In response to Jim DeMint and other Republican Senators, who suggested that the current level of the debt ceiling could be maintained by prioritizing payments on the debt above other government spending, Treasury Secretary Timothy Geithner wrote a letter of reply in late June. He said that this would require "cutting roughly 40 percent of all government payments", which could only be achieved by "selectively defaulting on obligations previously approved by Congress". He argues that this would harm the reputation of the United States so severely that there is "no guarantee that investors would continue to re-invest in new Treasury securities", forcing the government to repay the principal on existing debt as it matures, which it would be unable to do under any conceivable circumstances. He concluded: "There is no alternative to enactment of a timely increase in the debt limit."
Even if the Treasury were to prioritize payments on the debt above other spending and avoid formal default on its bonds, failure to raise the debt ceiling would force the government to reduce its spending by as much as 10% of GDP overnight, leading to a corresponding fall in aggregate demand. Such a significant shock, if sustained, is thought to be able to reverse the recovery and send the country into a recession.
Deadline
According to the Treasury Department, the deadline to increase the debt ceiling is August 2, 2011, when the U.S. government would run out of cash to pay all its bills. According to Barclays Capital the Treasury may run out of cash around August 10, when $8.5 billion in Social Security payments are due. According to Wall Street analysts, the U.S. Treasury can't borrow from the capital markets after August 2, but still has enough cash to meet its obligations until August 15. Analysts also predict that the U.S. Treasury will be able to roll over the $90 billion in U.S. debt that matures on August 4 and gain additional time to avert a crisis. No one knows how the financial market and investors will react if U.S. Treasury is unable to borrow additional funds or meet its financial obligations.
Proposed resolutions
Congress is now considering whether and by how much to extend the debt ceiling (or eliminate it), and what long-term policy changes (if any) should be made concurrently. Republicans, who control the House of Representatives, have refused to raise the debt ceiling without deficit reduction, voting down a 'clean' raise in the House, with many Democrats in the House voting in protest against what they called a "political stunt" given that Republicans had the votes to ensure a clean raise would not pass. The Republicans largely believe a deficit reduction deal should be based solely on spending cuts, including cuts to entitlements, without any tax increases, to reduce or solve the long term issue of debt. President Obama and the Democrats in the US Congress want an increase in the debt ceiling to solve the short-term borrowing problem, and in exchange support a decrease in the budget deficit to be funded by a combination of spending cuts and revenue increases. Some prominent liberal economists, such as Paul Krugman, Larry Summers, and Brad DeLong, and prominent investors such as Bill Gross, go even further, and argue that not only the debt ceiling should be raised, but it should be accompanied by a short-term increase in federal spending (and, therefore, deficit), which would stimulate the economy, reduce unemployment, and ultimately reduce the deficit in medium to long term.[45][46]
Some Tea Party Caucus and other Republicans, however, (including, but not limited to, Senators Jim DeMint, Rand Paul, and Mike Lee, and Representatives Michele Bachmann, Ron Paul, and Allen West, etc.) are skeptical about raising the debt ceiling altogether (with some suggesting the consequences of default are exaggerated), arguing that the debt ceiling should not be raised and "instead the federal debt be “capped” at the current limit," "although that would oblige the government to cut spending by almost half overnight." For more, see "consequences of not raising the debt ceiling."
Jack Balkin, the Knight Professor of Constitutional Law and the First Amendment at Yale Law School, besides arguing that the President can invoke Section 4 of the 14th Amendment to solve the crisis (see next section), also suggests two other ways to solve the debt ceiling crisis: he points out that the U.S. Treasury has the power to issue platinum coins in any denomination, so it could solve the debt ceiling crisis by issuing two platinum coins in denominations of one trillion dollars each, depositing them into its account in the Federal Reserve, and writing checks on the proceeds. Another way to solve the debt ceiling crisis, Balkin suggests, would be for the Federal Government to sell the Federal Reserve an option to purchase government property for $2 trillion. The Fed would then credit the proceeds to the government's checking account. Once Congress lifts the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days.
Among others, in a report issued by the credit rating agency Moody's, analyst Steven Hess suggested that the government should consider getting rid of the limit altogether, because the difficulty inherent in reaching an agreement to raise the debt ceiling “creates a high level of uncertainty” and an increased risk of default. As reported by The Washington Post, "without a limit dependent on congressional approval, the report said, the agency would worry less about the government’s ability to meet its debt obligations."
Additionally, some argue the debt limit is unconstitutional, and suggest that the President could simply declare the debt ceiling as such to resolve the crisis. For more, see the section entitled "constitutionality of the debt ceiling" below.
Constitutionality of the debt ceiling
During the debate, some scholars and Democratic lawmakers suggested that the President could declare that the debt ceiling violates the United States Constitution and direct the Treasury to issue more debt. They point to Section 4 of the Fourteenth Amendment to the United States Constitution, passed in the context of the Civil War Reconstruction, that states that the validity of the public debt shall not be questioned:
Section. 4. 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. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.
Arguments:
* Jack Balkin, looking into the Legislative History of the Fourteenth Amendment, argues that Section 4 was adopted precisely to guard against politically-determined default. Referencing the sponsor of the provision, Senator Benjamin Wade, Balkin argues that "the central rationale for Section Four... was to remove threats of default on federal debts from partisan struggle." Whereas the debt ceiling gives Congress the power for the United States to default on its debts by requiring approval of a higher debt limit; Balkin quotes Senator Wade: "every man who has property in the public funds will feel safer when he sees that the national debt is withdrawn from the power of a Congress to repudiate it and placed under the guardianship of the Constitution than he would feel if it were left at loose ends and subject to the varying majorities which may arise in Congress." Balkan claims that this reveals "an important structural principle. The threat of defaulting on government obligations is a powerful weapon, especially in a complex, interconnected world economy. Devoted partisans can use it to disrupt government, to roil ordinary politics, to undermine policies they do not like, even to seek political revenge. Section Four was placed in the Constitution to remove this weapon from ordinary politics."
* Bruce Bartlett, a libertarian former Reagan adviser and columnist for The Fiscal Times, argues that Section 4 renders the debt ceiling unconstitutional, and that the President should disregard the debt limit.
* In July 2011, The Nation editor Katrina vanden Heuvel argued that the President could use the public debt section of the Fourteenth Amendment to force the Treasury to continue paying its debts if an agreement to raise the debt ceiling is not reached.
* Laurence Tribe, professor of Constitutional Law at Harvard Law School, has called the argument that the public debt clause can nullify the debt ceiling "false hope" and has noted that nothing in the Constitution enabled the president to "usurp legislative power" with regards to the debt. Tribe also notes that since Congress has means other than borrowing to pay the federal debt (including raising taxes, coining money, and selling federal assets), the argument that the president could seize the power to borrow could be extended to give the President the ability to seize those powers as well.
* Garrett Epps argues that the President would not be usurping Congressional power by invoking Section 4 to declare the debt ceiling unconstitutional, because the debt ceiling exceeds Congressional authority: calling it legislative "double-counting," as paraphrased in The New Republic, "because Congress already appropriated the funds in question, it is the executive branch’s duty to enact those appropriations." In other words, given Congress has appropriated money via federal programs, the Executive is obligated to enact and, therefore, fund them; the debt ceiling's limit on debt prevents the executive from carrying out those instructions given by Congress, on the constitutional authority to set appropriations, and is therefore unconstitutional. President Bill Clinton endorsed this line of argument, saying he would eliminate the debt ceiling using the 14th amendment, calling it "crazy" that Congress is allowed to first appropriate funds and then gets a second vote on whether to pay for them.
* Furthermore, Matthew Zeitlin argues that, were Section 4 invoked, members of Congress would not have standing to sue the President for allegedly usurping congressional authority, even if they were willing to do so; and those likely to have standing would be people "designed to elicit zero public sympathy: those who purchased credit default swaps which would pay off in the event of government default." Relatedly, Matthew Steinglass argues that, because it would come down to the Supreme Court, the Court would not vote in the favor of anyone who could and would sue: it would rule the debt ceiling unconstitutional. This is because, for the Court to rule to uphold the debt ceiling, it would, in effect, be voting for the United States to default, with the consequences that would entail; and, Steinglass argues, the Court would not do that.
* Michael Stern, Senior Counsel to the U.S. House of Representatives from 1996 to 2004, stated that Garrett Epps "had adopted an overly broad interpretation of the Public Debt Clause and that this interpretation, even if accepted, could not justify invalidating the debt limit" because "the President’s duty to safeguard the national debt no more enables him to assume Congress’s power of the purse than it would enable him to assume the judicial power when (in his opinion) the Supreme Court acts in an unconstitutional manner."
* Rob Natelson, former Constitutional Law Professor at University of Montana, argues that "this is not some issue in the disputed boundaries between legislative and executive power." He continues "That’s why the Constitution itself (Article I, Section 8, Clause 2) gives only Congress, not the President, the power “To borrow Money on the credit of the United States.” In another agrument, Natelson states that Bruce Bartlett "deftly omits a crucial part of the quote from the Fourteenth Amendment. It actually says, 'The validity of the public debt of the United States, AUTHORIZED BY LAW . . . shall not be questioned.' In other words, Congress has to approve the debt for it not to be questioned. And note that this language refers to existing debt, not to creating new debt. He also neglects to mention that Section 5 of the Fourteenth Amendment specifically grants to Congress, not to the President, authority to enforce the amendment.":
Section 5. The Congress shall have power to enforce, by appropriate legislation, the provisions of this article.
George Madison, General Counsel to the US Treasury, wrote on 8 July 2011 that "Secretary Geithner has never argued that the 14th Amendment to the U.S. Constitution allows the President to disregard the statutory debt limit" and that "the Constitution explicitly places the borrowing authority with Congress." He additionally affirmed that "Secretary Geithner has always viewed the debt limit as a binding legal constraint that can only be raised by Congress."
President Obama himself later stated that he would not use this method to solve the crisis.
Timeline
* February 12, 2010. The most recent increase in the debt ceiling was signed into law by President Obama, after being passed by the Democratic 111th Congress. It increased the debt ceiling by $1.9 trillion from $12.4 trillion to $14.3 trillion.
* February 18, 2010. President Obama issues an Executive Order to establish the National Commission on Fiscal Responsibility and Reform, also known as the Bowles-Simpson Commission. The mission of the Commission was to propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015. It was tasked to issue a report with a set of recommendations by December 1, 2010.
* November 2, 2010. United States midterm elections: Considered a major victory, the Republican Party gained 63 seats in the U.S. House of Representatives, recapturing the majority by 242-193 in the 112th Congress. Major planks for the House Republicans during the election campaign were cutting Federal spending and stopping any tax increases.
* December 1, 2010. The Bowles-Simpson Commission on Fiscal Responsibility and Reform issues its report but the recommendations fail to win support of at least 14 of the 18 members necessary to adopt it formally. The recommendations were never adopted by Congress nor President Obama.
* January 6, April 4 and May 2, 2011. Secretary of the Treasury Timothy Geithner sends three letters requesting an increase in the debt ceiling.
* January 28, 2011. Moody’s Investors Service says it may place a “negative” outlook on the Aaa rating of U.S. debt sooner than anticipated as the country’s budget deficit widens.
* February 14, 2011. President Obama releases his budget proposal for fiscal year 2012. Republicans criticize the budget for doing too little to rein in the burgeoning U.S. deficit. The CBO analysis released in April 2011 estimated that the budget would increase total deficits over 10 years by $2.7 trillion: from $6.7 Trillion of the March 2011 baseline to $9.4 Trillion with the proposed budget. The Senate rejects the budget proposal on May 25, 2011 (see below).
* April 14, 2011. Both the House of Representatives and the Senate voted in favor of the 2011 United States federal budget, 260-167 and 81-19 respectively. This budget projected the 2011 deficit to be $1.645 trillion, and therefore ensured that the debt ceiling would be hit during this fiscal year.
* April 15, 2011. On a party-line vote 235-193, the House of Representatives passed the Republican 2012 budget proposal aimed to reduce total spending by $5.8 trillion and reduce total deficits by $4.4 trillion over 10 years compared to the current-policy baseline. It included reform to Medicare and Medicaid entitlement programs which the Democrats criticized as an attempt to leave seniors and poor holding the bag on health care costs. The criticism resonated with the many in the public who voiced opposition to the proposed changes. The Senate rejects the budget proposal on May 25, 2011 (see below).
* April 18, 2011. Standard & Poor's Ratings Services revised its outlook on U.S. to negative due to recent and expected further deterioration in the U.S. fiscal profile, and of the ability and willingness of the U.S. to soon reverse this trend. With the negative outlook, S&P believes there is a likelihood of at least one-in-three of a downward rating adjustment within two years.
* May 16, 2011. The debt ceiling is reached. Secretary Geithner issues a debt issuance suspension period, directing the Treasury to utilize "extraordinary measures" to fund federal obligations.
* May 18, 2011. Bipartisan deficit-reduction talks among the "Gang of Six" high-profile Senators are suspended when Republican Tom Coburn drops out.
* May 24, 2011. Vice President Joe Biden and four Democratic lawmakers begin meeting with the Republican House Majority Leader Eric Cantor and the Republican Senate Minority Whip Jon Kyl, in an effort to continue the talks. Cantor says that these talks would lay the groundwork for further discussions between President Obama, Republican Speaker of the House John Boehner and other leaders of Congress.
* May 25, 2011. The Senate rejects both the Republican House budget proposal by a vote of 57-40 and the Obama budget proposal by a vote of 97-0.
* May 31, 2011. The House votes on a bill to raise the debt ceiling without any spending cuts tied to the increase. President Obama asked Congress to raise the debt ceiling in a ‘clean’ vote that included no other conditions. The bill, which would have raised the debt ceiling by $2.4 trillion, failed by a vote of 97-318. Democrats accused Republicans of playing politics by holding a vote they knew would fail.
* June 23, 2011. Biden's negotiations on the debt ceiling are cut off when both House Majority Leader Cantor and Senate Minority Whip Kyl walk out over disagreements over taxes
* July 19, 2011. The Republican Majority in the House bring the Cut, Cap and Balance Act (H.R.2560), their proposed solution to the crisis, to a vote. They pass the bill by a vote of 234-190, split closely along party lines: 229 Republicans and 5 Democrats 'for,' 181 Democrats and 9 Republicans 'against;' it is sent to the Senate for consideration. The Bill authorized that the debt ceiling be raised by $2.4 trillion AFTER a Balanced Budget Amendment was passed by Congress. Since Constitutional amendments require a two-thirds majority vote in both chambers of Congress to pass, a vote for a Balanced Budget Amendment would require more support than the Cut, Cap and Balance Act bill achieved in the House vote.
* July 22, 2011. The Senate votes along party lines to table the Cut, Cap and Balance Act; 51 Democrats voting to table it and 46 Republicans voting to bring it to debate. Senate Majority Leader Harry Reid called the Act "one of the worst pieces of legislation to ever be placed on the floor of the United States Senate." Even had it passed Congress, President Obama had promised to veto the bill.
* July 25, 2011. Republicans and Democrats outlined separate deficit-reduction proposals.
* July 25, 2011. President Obama and Speaker of the House Boehner addressed the nation separately over network television with regards to the debt ceiling.
* August 2, 2011. Date projected by the Department of the Treasury that the borrowing authority of the United States will be exhausted. [FOOTNOTE]wikipedia.org[/FOOTNOTE][/lang]
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