# News Debt limit ceiling

#### russ_watters

Mentor
Re: How much the rich are being taxed

I'm surprised by the confusion this is causing. The difference is simply that some spending is legally obligated contracts to third parties and can't be unilaterally cancelled by the government, while other spending can be unilaterally cancelled. If you can just change your mind and not spend (say you delay buying a car for a year), that's not a "default".

Expansion, with three broad categories:

1. Discretionary spending. By definition; at the government's discretion. It is passed annually in a budget and can be (and often is) changed mid-year....usually increases, but it can also be decreased. Simply with a few strokes of a pen.

2. "Mandatory" spending. This is for "entitlements". The word "mandatory" is a reference to the fact that this spending doesn't have to be approved annually, but rather is long-term programs that automatically do their thing unless changes are made. Unless changes are made. So the same legality applies to these as to discretionary spending: The government can change or cancel these programs whenever it wants.

3. Debt obligations. These are legally binding financial contracts (loans) with 3rd parties that the government can't unilaterally cancel: you can delay buying a car (#1) but you can't delay payment on a car you already own. The people who own the loan have to agree to delay the payment.

Failure to pay #3 is a "default". Failure to fulfill a financial contract. #1 and #2 are the government simply changing its own spending intentions and making different choices. They can't be a "default" because they aren't a legally binding contract to anyone but themselves.

Failure to pay #3 is a disaster. Our debt supports our currency. Failure to pay interest on the debt immediately impacts the value of our currency, similar to the way a bank failure wipes out bank account value.

Failure to pay #1 and #2 is not a disaster. They would reduce the GDP in the same way cancelling any spending reduces the GDP. There is economic "harm", but no currency collapse.

Ultimately a label is just a label, but when someone says "a default would be a disaster", the variation in impact between one interpretation and the other is vast. By the looser definition, we've already defaulted and the "disaster" is so minor that few people are even aware it happened.

#### russ_watters

Mentor
Re: How much the rich are being taxed

Sixnein,
While there certainly is a component of services already rendered;
1. That component is small. It is a portion of the "discretionary spending" budget. And regardless of the word used to describe it, it still wouln't be the same as a debt default. I'm sure you've paid a bill late before and not much happened. And I'm also sure you are aware that your "cable bill" example is not representative: most utility bills accrue and are paid month-to-month.

2. Ongoing spending items like jet fuel could be saved immediately by grounding government airplanes. Worker pay could be saved by furloughing workers. These items would have a near-immediate impact (within days or weeks) on government spending levels.

3. None of our "entitlement spending" fits that description.

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#### mheslep

Gold Member
Re: How much the rich are being taxed

....
These parties can be anything from bond holders to granny waiting on her SSI check. If the government is unable to make payments to meet its obligations, it defaults. ...throwing a torch in the middle of a bond market and hopping it doesn't catch on fire.
An over broad use of the term. Businesses commonly fire or layoff people or close down a division. So does the government for that matter. These events are not commonly referred to as "defaults" on obligations.

You go a step further when connecting the reaction of bond markets to events like closing a national park or furloughing government staff. The use of the term in that context is not just odd but misleading. The bond market concerns itself with payment of interest on bonds and inflation, now and in the future, not national parks, Medicare, or furloughs for GS14s.

#### mheslep

Gold Member
Re: How much the rich are being taxed

Let's clarify: SS is paid for by payroll taxes ...
Not any more, not in full.

Social Security’s expenditures exceeded non-interest income [i.e. payroll taxes] in 2010 and 2011, the first such occurrences since 1983, and the Trustees estimate that these expenditures will remain greater than non-interest income throughout the 75-year projection period.

#### telecomguy

Re: How much the rich are being taxed

Another good source for data is the IRS itself: http://www.irs.gov/uac/Tax-Stats-2
I'd definitely ignore anything from the news media unless they are well sourced. Lot's of misinformation out there.

#### russ_watters

Mentor
I agree with you on the Republican side.

For Obama, the situation is win-win. First, he doesn't have to care if his approval rating takes even a temporary hit because he doesn't have to run for re-election. Second, if he looks at both the recent media treatment and hindsight on Clinton, he knows that even if the Republicans succeed in decreasing government spending and the debt situation improves, he can still take credit for it!

#### BobG

Science Advisor
Homework Helper
russ_watters said:
I'm surprised by the confusion this is causing. The difference is simply that some spending is legally obligated contracts to third parties and can't be unilaterally cancelled by the government, while other spending can be unilaterally cancelled. If you can just change your mind and not spend (say you delay buying a car for a year), that's not a "default".
Quote from the other thread, which seems to have more debt ceiling discussion than the debt ceiling thread.

The key question is who can change their mind and not spend any more money.

If line item vetoes are unconstitutional, I assume it will be unconstitutional for Obama to unilaterally rewrite the budget so that we stay under the debt ceiling. The only choices for the executive branch are when to pay each bill, which to pay first, etc.

All of the spending that the Congress and President already made into law will take place unless Congress also rewrites the budget when they deny the rise in the debt ceiling (and if they were capable of agreeing on a budget, would be in this predicament?) If they simply fail to raise the debt ceiling, the current spending plan is still in place.

Shutting down a federal agency and furloughing all of the workers to save money would be a unilateral rewriting of the budget and unconstitutional. (Granted, workers may get tired of getting paid late and quit, but the executive branch can't furlough them.) Unilaterally deciding to reduce Social Security checks or cease paying unemployment benefits would be a unilateral rewriting of the budget and unconstitutional.

Every person will receive their Social Security check - eventually. Everone will receive their military pension checks - eventually. Every bond holder will be paid - eventually. Everyone will get their income tax refund check - eventually. The only control the executive branch has is over when those checks will go out - not if those checks will eventually go out.

#### russ_watters

Mentor
The key question is who can change their mind and not spend any more money.

If line item vetoes are unconstitutional, I assume it will be unconstitutional for Obama to unilaterally rewrite the budget so that we stay under the debt ceiling. The only choices for the executive branch are when to pay each bill, which to pay first, etc.

All of the spending that the Congress and President already made into law will take place unless Congress also rewrites the budget when they deny the rise in the debt ceiling (and if they were capable of agreeing on a budget, would be in this predicament?) If they simply fail to raise the debt ceiling, the current spending plan is still in place.
Obama has correctly pointed out that he's been put into a position where any or no action will violate federal law. If he stops spending, he'll violate laws that tell him to spend. If he ignores the debt ceiling, he'll violate that law. Trouble is: both (all) are laws he signed. So he's just as in it as Congress is.

Obama has shown a willingness in the past to ignore federal law (immigration, nuclear waste), so whatever he chooses, I don't think he'll be too troubled by that aspect of the decision.

#### Locrian

Re: How much the rich are being taxed

Let me try a different approach... because my current explanation is getting absolutely nowhere.
The reason it is getting nowhere is because you are using terms outside of their accepted definition. As mhslep points out, your use of the word "default" is overly broad and does not reflect how the word is used in either private or public financing. (Russ has a good overview as well)

One option at this point is to just have eveyrone else in the thread redefine "default" for you, but this would create confusion whenever the word was referenced outside of the thread.

Instead, I'm just going to correct you every time you misuse it, so other readers are aware of the discrepancy.

#### mheslep

Gold Member
The term default is being abused far beyond this forum by prominent figures, so I suppose it should not be surprising to see it done here.

Scott Simon said:
.. it will certainly be no laughing matter if the U. S. Congress refuses to raise the borrowing limit and the U. S. government defaults on its debt. ..
Economist/NYT Columnist Paul Krugman said:
...Finally, just consider the vileness of that G.O.P. threat. If we were to hit the debt ceiling, the U.S. government would end up defaulting on many of its obligations. This would have disastrous effects on financial markets, the economy, and our standing in the world.
White House (Carney) said:
...There are only two options to deal with the debt limit: Congress can pay its bills or it can fail to act and put the nation into default. When Congressional Republicans played politics with this issue last time, putting us at the edge of default, it was a blow to our economic recovery,
Fortunately some experts are responding. From John Cochrane, finance and economics professor at Chicago (who cites those examples above):

Cochrane said:
But what's Paul Krugman doing with this obvious... I'm having a hard time finding a polite word...piece of misinformation? ... Parse that carefully for Clintonian veracity. "Defaulting on its obligations" could mean not paying promised farm price supports, or delaying payments (as the State of Illinois does) to vendors, not actual default on Federal debt. So it's just a nanometer this side of factually incorrect. But you'd have to be very knowledgeable not to infer from the following sentence "disastrous effect on financial markets" that Krugman is not talking about actual "default" (a term meaning "not paying back bonds") from this more metaphorical sort of "default" (meaning breaking an implicit promise). ...
I agreed on the consequences of default. But, as much as [Krugman] dislikes Republicans and the debt ceiling, passing on the canard that hitting the ceiling implies a default on Treasury debt is just a little... here we go a search for a polite word again...misleading,

#### SixNein

Gold Member
Re: How much the rich are being taxed

I'm surprised by the confusion this is causing. The difference is simply that some spending is legally obligated contracts to third parties and can't be unilaterally cancelled by the government, while other spending can be unilaterally cancelled. If you can just change your mind and not spend (say you delay buying a car for a year), that's not a "default".

Expansion, with three broad categories:

1. Discretionary spending. By definition; at the government's discretion. It is passed annually in a budget and can be (and often is) changed mid-year....usually increases, but it can also be decreased. Simply with a few strokes of a pen.

2. "Mandatory" spending. This is for "entitlements". The word "mandatory" is a reference to the fact that this spending doesn't have to be approved annually, but rather is long-term programs that automatically do their thing unless changes are made. Unless changes are made. So the same legality applies to these as to discretionary spending: The government can change or cancel these programs whenever it wants.
The debt limit would not change any contracts or any law. In other words, the treasury is obligated to fund those things in 1 and 2; as a result, the treasury would default because it is unable to do so. Keep in mind, the treasury does NOT have the power to change any spending law or contract. It is instead obligated to fund the things congress says it has to fund.

Just because congress has the power to avoid default does not mean it will. If congress fails to raise the debt limit, we will default needlessly. The only other option is for congress to make major changes to its outflows. It would have to cut whatever the shortfall is by the due date.

#### SixNein

Gold Member
Re: How much the rich are being taxed

Sixnein,
While there certainly is a component of services already rendered;
1. That component is small. It is a portion of the "discretionary spending" budget. And regardless of the word used to describe it, it still wouln't be the same as a debt default. I'm sure you've paid a bill late before and not much happened. And I'm also sure you are aware that your "cable bill" example is not representative: most utility bills accrue and are paid month-to-month.

2. Ongoing spending items like jet fuel could be saved immediately by grounding government airplanes. Worker pay could be saved by furloughing workers. These items would have a near-immediate impact (within days or weeks) on government spending levels.

3. None of our "entitlement spending" fits that description.
But your missing the point that congress doesn't actually act to change anything, and it is the only one with the legal power to do so. The treasury is obligated to fund these things by law. It is a LEGAL OBLIGATION period. It's non-negotiable for the Treasury. The treasury does not have any power what so ever to make changes in the law to avoid default. Only congress has that power. Just because congress has the power to make the changes (like raising the debt limit) does not mean the US avoids default. Congress actually has to exercise its power to avoid it.

read:
The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.

Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.
http://www.treasury.gov/initiatives/Pages/debtlimit.aspx

bold mine.

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#### russ_watters

Mentor
Bob and I had a brief discussion of that point that you may have missed. To sum up:

Treasury has two laws to deal with here, not one. The other law is of course the debt ceiling law. So the treasury is left to choose which to violate and how. Unless you really think Geitner is an idiot, you should be able to assume none of the decisions he might make would include a bond default.

#### Jimmy Snyder

The dictionary may forgive us for our indiscretion, but I doubt the bond market will.

#### SixNein

Gold Member
Fortunately some experts are responding. From John Cochrane, finance and economics professor at Chicago (who cites those examples above):
Why not just take it from the US Treasury (who has all the financial and legal experts needed to figure things out... and this problem requires both types):
http://www.treasury.gov/initiatives/Documents/Debt Limit Myth v Fact FINAL.pdf

The problem with your cite's opinion is he's totally ignores the law. For example, what hierarchy exists that states bond holders must be given priority over statutory obligations?

From the GAO
We have previously examined challenges associated with managing cash
and debt when delays in raising the debt limit occurred, focusing on
the period from 1995 through 2010. We reported in February 2011 that
delays in raising the debt limit create debt and cash management
challenges for Treasury, and these challenges have been exacerbated in
recent years by a large growth in debt.[Footnote 3] The amount of
borrowing capacity provided by taking the extraordinary actions
available to Treasury has grown in size but has not kept pace with the
growth in Treasury's borrowing needs. This means that once debt
approaches the debt limit, Treasury may not be able to manage the
amount of debt subject to the limit for as long a period of time as it
had in the past before the debt limit must be increased. Further,
failure to raise the debt limit in a timely manner could have serious
negative consequences for the Treasury market and increase borrowing
costs.
http://www.gao.gov/assets/600/592835.txt

From the same source:
Delays in raising the debt limit can create uncertainty in the
Treasury market and lead to higher Treasury borrowing costs. GAO
estimated that delays in raising the debt limit in 2011 led to an
increase in Treasury’s borrowing costs of about $1.3 billion in fiscal year 2011. However, this does not account for the multiyear effects on increased costs for Treasury securities that will remain outstanding after fiscal year 2011. #### SixNein Gold Member Bob and I had a brief discussion of that point that you may have missed. To sum up: Treasury has two laws to deal with here, not one. The other law is of course the debt ceiling law. So the treasury is left to choose which to violate and how. Unless you really think Geitner is an idiot, you should be able to assume none of the decisions he might make would include a bond default. Actually, the treasury is probably facing a long list of legal nightmares. The central government doesn't exactly have a priority of creditors like many of the states. For example, you might look in state law and find that bond holders must come before other creditors except for maybe schools. The treasury isn't going to have such legal cover. And once those checks stop, a lot of different parties are going to be suing. Who knows how that'll even turn out. The treasury probably has all the legal and financial experts it needs to figure out its position. And it says its going to default. At any rate, we'll call all of this a not-a-default if that makes everyone happy. I would disagree because these are all legal contracts in effect when funds stop but why parse over words. But hopefully, people can see risk here and understand why this is a much different issue than a budget induced shutdown. Congress would be taking a pre-fed law back when it use to issue debt and enforce this law. It's a nightmare for the financial system any way you look at it. Last edited: #### mheslep Gold Member The US Treasury has reported the numbers for the first quarter of fiscal year 2013: three months Oct-Dec totaled a deficit of$292B, or on trend for another annual deficit over one trillion dollars ($1.17 trillion for the fiscal year ending next Sept). The interest on the debt alone for the 1st quarter FY13 was$133B.

It appeared the tax increase passed in January might improve the deficit picture a small amount, but then the Sandy disaster package of \$60B was also passed in January and proposals to offset the spending elsewhere were defeated.

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