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What If Congress Doesn't Raise The Debt Ceiling?

7:55 AM, Jan 22, 2013   |    comments
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President Obama and congressional Republicans have both drawn a line in the sand over the upcoming series of budget battles, the first of which is whether Congress will raise the country's debt limit - which is expected to hit as early as Feb. 15.

The president is refusing to negotiate, imploring Congress to "do its job."

"They will not collect a ransom in exchange for not crashing the American economy," he recently said of Republicans. "The full faith and credit of the United States of America is not a bargaining chip." 

House Republicans, meanwhile, will hold a vote Wednesday that, if it eventually passes both the House and Senate, would raise the debt ceiling for about three months, giving lawmakers some time to figure out how to avoid default. However, while kicking the can down the road offers a brief respite from one fiscal hurdle, there are still two others that Congress is facing.

In addition to the debt ceiling, lawmakers also have to deal with averting $1.2 trillion in self-imposed automatic spending cuts, or sequester, that takes effect on March 1, and they'll also have to pass a bill to extend government funding, which currently expires at the end of March.

As both sides are worlds apart on all three issues, any failure to reach an agreement over three budget-related emergencies in the next few months could have dire consequences for your pocketbook.

The Debt Ceiling

The primer: Barring congressional passage of a debt ceiling increase, the $16.4 trillion debt limit is expected to be hit between mid-February and early March. It is a discretionary number set by Congress on the amount the Treasury is allowed to borrow to pay bills already incurred. (After difficult negotiations, Congress raised it in 2011 by $2 trillion.) Republicans want at least one dollar of spending cuts for every dollar the debt ceiling is lifted. Mr. Obama, however, argues that spending cuts are a separate discussion, since the debt limit has nothing to do with future spending. He recently described it this way: "You don't go out to dinner, then eat all you want and then leave without paying the check."

 

The impact: The Treasury would be able to pay only the amount that comes into the Treasury each day from tax receipts, fees and market transactions. Steve Bell with the Bipartisan Policy Center said the in the month of February, the Treasury would be expected to pay out $175 billion more worth of expenses than it takes in. That means a lot of bills - 12 percent of the Gross Domestic Product - won't be able to be paid.

In a letter to House Speaker John Boehner, Treasury Secretary Timothy Geithner outlined some specifics of things that could go unpaid. "These include payments for Social Security; Supplemental Security Income; Medicare; Medicaid; national security needs, including military salaries, military retirement, veterans' benefits, and defense contractors; income tax refunds; federal employee salaries and retirement; law enforcement and operation of the justice system; unemployment insurance; disaster relief; goods and services sold to the government under contracts with small and large businesses; and many others," he wrote.

It would be difficult to predict which receipts would be paid and which would not, Bell said, noting that the Treasury Department processes between two and three million transactions each day, all of them computer-generated. The federal agencies, Bell said, submits its invoices to the Treasury and the Treasury disburses funds upon receipt. It's a computer-generated first-come, first-serve system and not possible to prioritize which invoices should be paid.

While the country has never defaulted, economists and analysts warn of dire consequences because it means a lot of uncertainty in the marketplace and the economy as a lot of people will go unpaid. Stan Collender, who has worked for the House and Senate Budget Committees, said default would create "a lot of uncertainty" in the marketplace and cause "hardships" for Americans.

It's not just government workers who might not receive their paychecks, but those who rely on Social Security, food stamps, disability, and Medicare. Additionally, for example, a small-business contractor doing repair work on a federal building in Iowa might not receive payment for work completed. That could make it difficult for him to pay his employees who worked the construction job.

Bell said default would have dire trickle-down consequences, including "a serious recession" caused by a situation where it's "very difficult to put the yolk back in the egg."

Adding another wrinkle to the equation is that Congress and the president would be operating under two contradictory laws. The Impoundment Control Act, which was passed to ensure the president doesn't pick and chose what government agencies and programs he wants funded, requires the president and agencies to pay its obligations, but the law Congress passed in 1917 creating the debt ceiling says Treasury can't spend if it's borrowing limit has been tapped. It's a legal battle that hasn't yet happened but one completely possible if the debt ceiling is not lifted.

And because of the impact on the markets, workers with retirement plans would see the consequences as international investors are likely to loose confidence in the American financial system. Both Bell and Collender predict international investors would loose confidence in U.S. securities and sell, causing interest rates to skyrocket and markets to plummet.

"This has the potential of impacting the whole financial system," Collander said.

The Sequester

The primer: The sequester is the ten-year, $1.2 trillion spending cut that would cut defense spending by 10 percent and domestic spending by about eight percent. It was the result of an agreement between President Obama and congressional leaders and was meant to be so hard to stomach that Congress would come up with an alternate plan to reduce the deficit. So far, it hasn't. It was supposed to go into effect on January 2, but was extended for two months as a result of the so-called "fiscal cliff" deal.

The impact: Much of the opposition was voiced from the Pentagon and defense contractors who say it would disrupt operations and leave contractors uncertain about the future of its contracts. But the domestic economy would also be impacted. A Congressional Research Service report said that as many as 2.1 million jobs would be lost should the sequester be implemented. 

Additionally, states and localities would be impacted by the sequester. Education funding would be cut, as would money for community block grants, nutrition program for women and children and public housing programs. About one-third of state funding comes from the federal government and 18 percent of states' grant dollars are federally funded, according to a report released by Pew Center for the States. 

The Continuing Resolution

The primer: The continuing resolution, also known inside the Beltway as the CR, is a mechanism passed by Congress to keep money flowing, keeping the government open. Because Congress was unable to pass the dozen appropriations, or funding, bills before the new fiscal year, which began October 1, Congress passed a CR to keep the government running. It will expire March 27.

If Congress or the president uses the CR as a bargaining tool to invoke policy preferences, such as reducing spending, cutting Social Security or raising taxes, then Congress could risk a government shutdown.

Although there have been numerous close calls in recent years, the last government shutdown was during the Clinton administration in 1995 and it was the country's longest. Lasting 21 days, Mr. Clinton and Congress battled over government spending and budget priorities.

The impact: While the impacts of not raising the debt ceiling are severe, a government shutdown appears mild in comparison. It could impact hundreds of thousands of government workers and disrupt people's vacation plans, but it would largely spare broader, dire impacts on the economy - other than continue to erode the market's confidence in Washington.

To explain, during a government shutdown, all non-essential government workers are furloughed. In the 1995 shutdown, the Congressional Research Service said 284,000 workers were told not to come to work. In a previous shutdown, earlier that year, 800,000 workers were impacted. Vacations would be impacted because national parks would not open and passports would not be issued.

But with a government shutdown, any government activity that "protects life and property" must remain in operation. For instance, air traffic controllers stay on the job and federal prisons stay guarded. But, one area of contention during a government shutdown revolves around entitlement recipients. Because programs like Social Security and Medicare are part of the mandatory spending part of the budget, a government shutdown does not impact those payments. However, the thousands of government workers who issue those checks or answer the phones to help recipients change their address or sign up for the programs, could be considered nonessential, therefore delaying disbursement of checks and help with services.

Government workers who are considered essential to life and property would be expected to come to work and once the government is up and running, Congress has the ability to approve retroactive pay, which would enable government workers, including the furloughed ones, to receive pay lost due to the lapse in funding.

As Republicans and Democrats spar over spending, taxes and the debt ceiling, the economic impacts have consequences that, once again, are in the hands of Washington's politicians.

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