Debt Ceiling Briefing Book

Debt ceilingBriefing

Bookletraising the roof has never been so tough

– January 25, 2013 –

WHAT’S INSIDE

IntroductIon01

III. Up Next for CoNgress: SequeSter Spending CutS and Funding the government

15

05 II. Up Next for CoNgress: the debt Ceiling

03 I. seCoNd INaUgUratIoN of presIdeNt obama

walks lIke a duck InfographIc19

talk Is cheap InfographIc27

graphic

IntroductIon

in the 2012 election, some of the most important issues on the minds of the american voters were the condition of the u.S. economy and government spending. over the past few years, government spending has lacked discipline and has contributed to our highest national debt in history. getting america’s fiscal house in order is set to be one of the defining challenges for Congress and the president. now that the new members of Congress have been sworn in and president obama is entering his second term, we think it’s a good time to take a look at what lies ahead for Washington in the coming months.

in this briefing book, we will introduce you to the 113th Congress, explain the fiscal challenges that Washington will debate, and the consequences of governing from crisis to crisis.

01

I. seCoNd INaUgUratIoN of presIdeNt obama

Welcome to Congress! For the next two months, Congress and the president will have a very busy legislative agenda. From handling “the nation’s borrowing limit, dealing with automatic spending cuts, and passing legislation to fund the government,” there is a lot of work to do.1

on Jan. 3, the 113th Congress gaveled into session. this session of Congress is scheduled to end by Jan. 3, 2015. this Congress welcomes 13 new Senators and 84 new house members.2 president obama was sworn in for his official inauguration on Jan. 20, with the public ceremony being held on Jan. 21.3

• What Is the partisan breakdown of the 113th Congress? the u.S. Senate has 53 democrats, 45 republicans and two

independents who will caucus with the democrats. the u.S. house has 233 republicans, 200 democrats, no independents and two unfilled seats.4

• Who are the New members of Congress? recently, 84 new representatives and senators were sworn in.5 these members are called “freshmen.” they’ll be the lowest-ranking members on committees and will get the least desirable office space. however, with one-third of the u.S. house having less than three years of experience, freshmen could quickly move up the ranks.6

•HowMuchWillLawmakersandthePresidentEarnThisYear?• as part of the fiscal cliff deal of January 2013, Congress

declined a pay raise. that action means rank-and-file members earn $174,000 annually. the speaker of the house

03

will earn $223,500, and the majority and minority leaders of both chambers and the Senate president pro tempore earn $193,400.7

• the president earns $400,000 per year plus a $50,000 expense allowance.8

• to put these wages in context, the median u.S. household earns just over $50,000 a year.9

Source: http://www.cnn.com/election/2012/results/race/senate; http://nationaljournal.com/congress-legacy/see-new-senators-and-house-members-of-the-113th-congress-20121106.

Women

II. Up Next for CoNgress: the debt Ceiling

on dec. 26, 2012, treasury Secretary geithner wrote to the Senate majority leader, harry reid, to notify him that the statutory debt limit would be reached by the end of the year. Secretary geithner noted that “extraordinary measures” would be taken in order to postpone the date that the u.S. would default on its legal obligations, but these actions only buys more time, and Congress would need to take action.10 the approaching debt ceiling debate is the latest of many that have occurred since the statutory debt limit was instituted, but with the current state of the u.S. economy, it merits a closer look.

TheDebtCeiling:ABriefHistorythe debt ceiling is the legal limit on borrowing by the federal government. in some form or another, Congress has always placed restrictions on the federal debt. according to the non-partisan Congressional research Service, “limitations on federal debt have helped Congress assert its constitutional powers of the purse, of taxation, and the initiation of war.”11

prior to World War i, Congress generally would specify how funds could be borrowed, such as limiting the rate of interest on a bond. over the course of time, these specific restrictions faded away. by 1939, a bill was enacted that eliminated specific restrictions and set a debt ceiling of $45 billion.12

and as recent evidence has documented, the debt ceiling hasn’t worked to control and limit Washington’s spending and debt.

• Since March 1962, lawmakers have altered the debt ceiling 76 times.

• As spending exploded over the last decade, the ceiling has been raised 11 times.

• This overspending has saddled taxpayers with a debt of more than $16 trillion, which is nearly the size of our entire economy.13

05

TheDebtCeiling:RecentActionCongress last raised the debt ceiling by $2.1 trillion on aug. 2, 2011. the total increase occurred in three steps over five months:• Aug. 2, 2011: $400 billion increase• Sep. 22, 2011: $500 billion increase• Jan. 28, 2012: $1.2 trillion increase14

Washington hit the debt ceiling again on dec. 31, 2012, and is currently using extraordinary measures to buy more time.15 although the exact date is unknown, these extraordinary measures can only last so long. according to some experts, it could run out as early as mid-February.16

HR325:“NoBudget,NoPay”on Jan. 23, 2013, the house passed the “no budget, no pay act,” which temporarily suspends the current $16.4 trillion limit on federal borrowing until may 18, 2013. the bill will allow the federal government to borrow whatever funds necessary through that date to meet financial obligations. the bill itself is designed to be an incentive for lawmakers to get serious on passing a budget resolution for the upcoming fiscal year. if Congress fails to adopt a budget by april 15, the salaries of members will be held in a separate account until a budget is adopted.17

historically, Congress has rarely adopted a budget by the april 15 deadline. the average delay for adopting a budget resolution is 37 days, and congress has not adopted a budget since fiscal year 2010. even then, it was late. the last time a budget was passed on time was fiscal year 2004.18

Isthisbillasteptowardsolvingourfiscalissues?perhaps. “no budget, no pay” suspends the debt ceiling, which buys Congress a few more months to have a worthwhile debate about how to handle our debt.19 however, the bill does not address the automatic spending cuts (the “sequester”) that are scheduled to go into effect on march 1, 2013. nor does the bill tackle the continuing resolution that is set to expire on march 27, 2013, which needs to be renewed in order to continue the funding of government agencies.20

AMERICA HAS A DEBT PROBLEM...AMERICANS DESERVE BETTER.

PRESIDENT BARACK OBAMA, 2006

FAQsontheDebtCeilingWhatisthePresidentProposing?Simply put, the president is proposing business as usual. recently, president obama said the country should “set the debt ceiling aside...and then we [should] have a vigorous debate about how we’re going to do further deficit reduction in a balanced way.”21 in other words, it appears that president obama would like to increase the debt ceiling now and talk about how to do deficit reduction later.

this is much different from his position on the debt ceiling when he was a senator. in 2006, then-Senator obama said:

increasing america’s debt weakens us domestically and internationally. leadership means that ‘’the buck stops here.’’ instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. america has a debt problem and a failure of leadership. americans deserve better.22

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TALK IS CHEAP.OVERSPENDING IS NOT.

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WillWashingtonDefaultIfitDoesNotRaisetheDebtLimit?not necessarily. Some say that, like a person with credit card debt, our gov-ernment won’t technically default on its debt so long as it can continue to pay the interest payments on that debt. last year, the nation spent $224 billion on interest.23 that same year, Washington’s $2.45 trillion in tax revenue more than covers the $224 billion in interest.24 that being said, the nonpartisan Congressional research Service has noted that “no general statutory definition of the term ‘default’ exists.”25 in other words, there is disagreement about what amounts to a default. because of this, some claim that if the government fails to make any payment—regardless if it is interest or not—it would technically be a default.26

WhatHappensIftheDebtCeilingIsn’tRaised?it’s not clear. Some say that the department of treasury has the ability to prioritize payments in a way that Washington only spends what it takes in for revenue. treasury says it doesn’t have this power. however, it should be clear that there is nothing in the law that prohibits treasury from doing so.27 regardless, the chairman of the Federal reserve recently said that not raising the debt ceiling would be “very, very costly to our economy.”28

IftheDebtCeilingIsn’tRaised,WillPaymentsforSocialSecurityStop?president obama recently stated if the debt ceiling is not raised, then Social Security checks and veterans benefits would be delayed.29 however, as was mentioned above, some believe the treasury department has the ability to prioritize payments in a way that Social Security benefits get paid.

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WhatWillHappenIfWashingtonContinuestoSpendatItsCurrentRate?no government money is free money. every dollar the government spends must be taken from the private sector through taxation, inflation, or borrowing. right now, the government is financing its overspending through borrowing and incurring a massive debt that will eventually have negative consequences.• as the national debt grows out of control, policymakers may contemplate

major tax hikes and/or increasing the money supply to pay our debt with less valuable money.

• tax increases hamper economic recovery and hinder prospects of future growth.

• increasing the money supply leads to higher prices and makes american families’ savings less valuable.30

DoesRaisingtheDebtCeilingPayOurBillsorPayforNewSpending?it’s best to answer this question by thinking of a vacation. it’s as though Washington has made reservations (or spending commitments), but they can be changed when they realize they can’t afford it. according to CnbC, “the money has not been spent, it has been ‘appropriated.’ appropriation is authority to spend, but not actual spending.”31

WastheUnitedStates’CreditDowngradeCausedbytheLastDebtCeilingDebate?it was caused by the prolonged debt ceiling controversy in 2011 and the near-term progress on containing the growth in public spending. on aug. 5, 2011, Standard & poor’s (S&p) ratings downgraded the credit rating of the

united States. in the announcement, S&p said:We lowered our long-term rating on the u.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed...32

I PLEDGED TO CUT THE DEFICIT IN HALF BY THE END OF MY FIRST TERM IN OFFICE.

PRESIDENT BARACK OBAMA, ECONOMIC ADDRESS, 2009

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the credit downgrade in 2011 made it clear that inaction in Washington has real consequences for our economy. according to S&p, nearly every attribute of the federal government (economic, monetary credit, external, etc.) remained broadly unchanged when the credit rating was downgraded from “aaa” to “aa+.” the deciding factor of S&p’s credit downgrade was the increasing public debt burden.33 essentially, S&p determined that partisan bickering and an inability to commit to restrain spending made the u.S. look like a less desirable investment over the long-term.

growing debt trendsas we look at the debt ceiling, it’s important to note the debt has grown rapidly over the years. deficits under recent administrations have continued to increase, growing our national debt to its current measurement of more than $16 trillion.34 here are the national debt levels on inauguration day for the most recent administrations:

• president Clinton (‘93): $4.2 trillion35 • president g.W. bush (‘01): $5.7 trillion36

• president obama (‘09): $10.6 trillion37

HowistheDebtContinuingtoGrow?We’re simply spending more than we take in. as the figure below shows, during the last fiscal year, Washington spent $1 trillion more than the government took in.

WE NOW HAVE OVER 9 TRILLION DOLLARS OF DEBT THAT WE ARE GOING TO HAVE TO PAY BACK...THAT’S IRRESPONSIBLE. IT’S UNPATRIOTIC.

PRESIDENT BARACK OBAMA, 2008

SequesterSpendingCutsTakeEffectin 2011, the president signed the budget Control act into law, which contained a series of requirements intended to ensure budget reductions over the next decade in addition to raising the debt ceiling. but as so often happens in Washington, when spending is cut by formula, as is the case with the first year of cuts laid out in the sequester, these cuts don’t tend to happen. below, we outline the original sequester spending cuts and then explain how Congress delayed these spending cuts for two months.

TheOriginalLawAimedtoControlSpendingBy:• Establishing budget caps from fiscal years 2012 through 2021

• budget caps are not cuts. the Congressional budget office (Cbo) is the nonpartisan budget scorekeeper of Congress. in order to calculate how much money bills cost, the Cbo “scores” bills against the Cbo baseline. in this instance of the debt ceiling legislation, the baseline is the projected government spending for discretionary spending over the next ten years, starting in 2012. For this type of spending, the Cbo assumes the spending will “grow each year with inflation.”38

in general, the Cbo scores legislation and its resulting budgetary impacts over a ten-year window. in the case of the debt ceiling bill, the deficit reduction occurs over a ten-year time frame, starting in 2012.39

III. Up Next for CoNgress: SequeSter Spending CutS and Funding the government

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therefore, as you examine our infographic on this topic, you can see that part of the “spending cuts” in the budget Control act are actually a result of decreasing the rate of government spending in the future—not by cutting spending today.

• Triggered spending cuts set by formula on Jan. 2, 2013

• the Super Committee, established by the budget Control act, was designed to cut spending. but it failed. Since the Super Committee didn’t act, it triggered a process called sequestration. What is sequestration? by definition, sequestration makes spending reductions to get budget levels in line with statutory spending goals.40 Since the Super Committee failed, it triggered sequester spending cuts. Cutting spending by formula is not an effective way to cut spending since formulas cannot respond to changing circumstances.41

the nonpartisan Congressional research Service estimates that the original sequester would require a total of $984 billion in spending cuts over fiscal years 2013-2021, or $109.3 billion each year. by accounting for interest savings, this amounts to $1.2 trillion in savings over 9 years.42

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TheFiscalCliffAgreementPassedIntoLawinJanuary2013DelayedtheSequesterSpendingCuts:• the sequester spending cuts were one component of the “fiscal cliff”

scenario that Congress was facing at the end of 2012.43

• the sequester spending cuts, combined with an expiration of several tax provisions, was expected to cause significant problems and potentially drive the u.S. economy into another recession.44

• in order to avert this, Congress passed the american taxpayer relief act of 2012, also known as the fiscal cliff agreement, which postponed the date of the sequester until march 1, 2013.45

TheSequesterSpendingCutsWereNotOffsetwithSpendingCutsWhen Washington last raised the debt ceiling in august 2011, we were promised at least $1.2 trillion in cuts over 10 years. What’s happened? although these sequester spending cuts were supposed to go into effect on Jan. 2, 2012, Congress hasn’t made them. they put them off for two months.46

• to “pay for” the $22 billion in spending cuts that would have occurred over two months if Washington allowed the sequester to take effect on Jan. 2, 2013, Washington created new spending caps and tweaked the tax code to raise more revenue. it did not cut spending at all. Worse yet, it “paid for” these two months of spending cuts over a 10-year time frame. in other words, while it will stop the spending cuts for two months, it will not recover the amount that would have been cut for 10 years. here are the specifics on how the two month block on the sequester was paid for:

• lowers the spending caps for fiscal years 2013 and 2014 ($4 billion for 2013 and $8 billion for 2014). this saves $10 billion.47 as we mentioned earlier, budget caps are not spending cuts. as shown in the infographic on page 19, the fiscal cliff agreement slightly lowers the spending caps. (note, the spending caps reflected in the infographic only take into account the caps established by the budget Control act.)

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• allows more conversions from traditional investment retirement accounts (ira) to the generally tax-free roth ira. by doing so, it “would bring in revenue, as it requires tax payments up front.”48 over the next 10 years, it raises $12 billion in new revenue.49

2004 2005

2006 2007

2008 2009

2010 2011

2012 2013

passed didn’t pass

didn’t passlate

latelate

late

didn’t pass

didn’t pass

didn’t pass

PASTBUDGETS

TalkisCheapat a recent press conference, president obama said, “the difference between this year and 2011 is the fact that we’ve already made $1.2 trillion in cuts.”50 While the president is correct that he signed a bill into law that would cut $1.2 trillion in spending over nine years,51 these cuts, which were scheduled to go into effect on Jan. 2, 2013, were halted for nearly two months.52 So, up to this point, none of these $1.2 trillion in cuts has taken effect.

UpNextforCongress:TheContinuingResolutionas the congressional leadership faces a discussion on how to find the right way to deal with the sequester spending cuts scheduled for march 1, another debate over government spending will take place.

Congress must pass 12 separate spending bills to fund the government at the start of the new fiscal year (oct. 1). if all bills are not signed into law, Congress generally passes a stopgap funding measure, also known as a continuing resolution.53 if you are keeping score this year, none of the regular 12 spending bills have been signed into law as of this date.54 because of this, the government is being funded by a continuing resolution, which lasts until march 27, 2013. this continuing resolution provides $1.047 trillion in funding on an annualized basis.55

if the conflict over government funding stalls the enactment of appropriations legislation, there is the threat of the federal government shutdown. between the end date of the expiring continuing resolution and the enactment of the new law, federal agencies could experience a “funding gap,” during which non-emergency personnel who receive funding from appropriations acts will be put on temporary unpaid leave and programs that receive annually appropriated funding may also be affected.56

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StopTalking.StartDoing.during a recent press conference, president obama stated, “We’ve got to stop lurching from crisis to crisis to crisis, when there’s this clear path ahead of us that simply requires some discipline, some responsibility and some compromise.”57 it’s somewhat striking that history in Washington tends to repeat itself. in 1989, president george h.W. bush said, “government by continuing resolution, or government by crisis, will not do.”58

more than 20 years later, Washington is still governing by crisis and still funding the government by continuing resolutions. it’s time for americans to hold both parties accountable for their actions. the only thing that will reduce the national debt and get our economy back on a firm foundation is if lawmakers in Washington can agree on—and stick to—a comprehensive plan to cut government spending.

1. national Journal. Subscription only. new Congress braces for looming budget battles. January 14, 2013. http://nationaljournal.com/member/daily/new-congress-braces-for-looming-budget-battles-20130114

2. Cnn. “by the numbers: 113th Congress”. January 5, 2013. http://www.cnn.com/2013/01/03/politics/btn-113th-congress/index.html

3. uSa today. “obama’s real inauguration is on Sunday”. January 16, 2013. http://www.usatoday.com/story/news/politics/2013/01/15/obama-sunday-monday-inaugural-white-house/1836345/

4. u.S. house of representatives. office of the Clerk. accessed January 16, 2013. http://clerk.house.gov/member_info/cong.aspx

5. C-Span. “house gavels in First Session of 113th Congress”. January 3, 2013. http://www.c-span.org/events/house-gavels-in-First-Session-of-113th-Congress/10737436964/

6. national Journal. “the 113th Congress likely to be partisan, divided, and much the Same”. november 7, 2012.http://www.nationaljournal.com/congress-legacy/the-113th-congress-likely-to-be-partisan-divided-and-much-the-same-20121107

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15. u.S. department of the treasury. “Secretary geithner Sends debt limit letter to Congress”. december 26, 2012. http://www.treasury.gov/connect/blog/pages/Secretary-geithner-Sends-debt-limit-letter-to-Congress-12-26.aspx

16. bipartisan policy Center. “new bipartisan policy Center analysis Shows debt Ceiling limit Fast approaching; Could hit Ceiling as early as mid-February”. January 7, 2013. http://bipartisanpolicy.org/news/press-releases/2013/01/new-bipartisan-policy-center-analysis-shows-debt-ceiling-limit-fast-appr

17. united States government printing office. h.r. 325: no budget, no pay act. January 23, 2013. http://www.gpo.gov/fdsys/pkg/billS-113hr325ih/pdf/billS-113hr325ih.pdf

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19. business insider. house passes debt Ceiling bill. January 23, 2013. http://www.businessinsider.com/house-debt-ceiling-vote-no-budget-no-pay-2013-1

20. Cnn money. how house republicans would defuse debt ceiling. January 22, 2013. http://money.cnn.com/2013/01/22/news/economy/debt-ceiling-house-republicans/

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22. united States Senate. Congressional Senate - record (S2236). march 16, 2006. http://www.gpo.gov/fdsys/pkg/CreC-2006-03-16/pdf/CreC-2006-03-16-pt1-pgS2236.pdf

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24. u.S. department of the treasury. treasury Financial database. September 2012 .http://www.fms.treas.gov/mts/mts0912.txt

25. Congressional research Service. reaching the debt limit: background and potential effects on the government. January 4, 2013. page 15. http://www.fas.org/sgp/crs/misc/r41633.pdf

26. CnbC. “debt Ceiling battle: Why no one agrees on anything”. January 16, 2013. http://www.cnbc.com/id/100384360

27. CnbC. “debt Ceiling battle: Why no one agrees on anything”. January 16, 2013. http://www.cnbc.com/id/100384360

28. los angeles times.”bernanke urges Congress to raise the debt limit”.January 14, 2013. http://www.latimes.com/business/money/la-fi-mo-bernanke-20130114,0,4950883.story

29. the Washington post. “obama: debt ceiling fight could threaten timely payment of Social Security, veterans benefits” January 14, 2013. http://www.washingtonpost.com/business/obama-debt-ceiling-fight-could-threaten-timely-payment-of-social-security-veterans-benefits/2013/01/14/7633ad8c-5e6b-11e2-8acb-ab5cb77e95c8_story.html

30. the mercatus Center. tax gimmicks. october, 2012. pg. 36 http://mercatus.org/publication/tax-gimmicks

31. CnbC. “debt Ceiling battle: Why no one agrees on anything”. January 16, 2013. http://www.cnbc.com/id/100384360

32. Standard & poor’s. “united States of america long-term rating lowered to ‘aa+’ due to political risks, rising debt burden; outlook negative”. august 5, 2011. http://www.standardandpoors.com/ratings/articles/en/us/?assetid=1245316529563

33. Standard & poor’s. “united States of america long-term rating lowered to ‘aa+’ due to political risks, rising debt burden; outlook negative”. august 5, 2011. http://www.standardandpoors.com/ratings/articles/en/us/?assetid=1245316529563

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44. Congressional budget office. economic effects of policies Contributing to Fiscal tightening in 2013. november 2012. http://cbo.gov/sites/default/files/cbofiles/attachments/11-08-12-Fiscaltightening.pdf

45. Congressional research Service. the “Fiscal Cliff” and the american taxpayer relief act of 2012. January 4, 2013. page 8. http://www.fas.org/sgp/crs/misc/r42884.pdf

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47. office of management and budget. deficit reduction in the american taxpayer relief act of 2012 (h.r. 8). http://www.whitehouse.gov/sites/default/files/omb/communications/misc/cboscore_hr8_20130101.pdf

48. national public radio. “inside the Fiscal Cliff budget Compromise bill: tax Cuts and tax hikes”. January 01, 2013. http://www.npr.org/blogs/thetwo-way/2013/01/01/168419337/inside-the-budget-compromise-bill-tax-cuts-and-tax-hikes

49. CbS news. the art of the “fiscal cliff” deal. January 1, 2013. http://www.cbsnews.com/8301-250_162-57561474/the-art-of-the-fiscal-cliff-deal/

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56. Congressional research Service. Shutdown of the Federal government: Causes, processes, and effects. February 18, 2011. page 2. http://www.fas.org/sgp/crs/misc/rl34680.pdf

57. the White house. president obama holds a news Conference (transcript). January 14, 2013. http://www.whitehouse.gov/photos-and-video/video/2013/01/14/president-obama-holds-news-conference#transcript

58. C-Span. presidential economic address February 9, 1989. accessed January 15, 2013. http://www.c-spanvideo.org/program/6131-1

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[published January 25, 2013]