The Debt Ceiling as Fiscal-Cliff Football

Congressional Republicans may prove willing to postpone a looming battle over an increase in the nation’s debt ceiling as part of the negotiations over the so-called fiscal cliff – at least for a little bit.

House Speaker John Boehner (R-Ohio), who met with President Obama on Monday, has offered to avoid the give-and-take over raising the debt ceiling over the space of a year if the White House, in return, supports about $1 trillion in federal spending cuts.

The president, according to reports, responded by calling for a two-year moratorium.

It’s all part of the debate over ways to best address the growing national debt. Failure to develop a mutually acceptable plan between Congress and the administration by the end of the year will force tax hikes and automatic budget cuts – an unpalatable possibility since economists warn it could lead to another recession.

The federal government currently is about $50 billion from reaching the $16.4 trillion debt limit set in 2011 after a substantial amount of partisan wrangling. The cap on the nation’s borrowing authority is expected to be reached by the last week of December. The Treasury Department maintains it can apply temporary measures to keep the government moving. But if the ceiling isn’t raised by some time in February, the U.S. could default on its obligations for the first time in history.

Obama appears determined to take steps necessary to avoid the sort of partisan showdown that enveloped the most recent debt limit debate. Treasury Secretary Tim Geithner, who has called for the elimination of the debt ceiling, offered congressional Republicans an alternative idea in late November as part of the administration’s plan for dealing with the so-called fiscal cliff.

Under that White House proposal the debt limit would no longer require a positive congressional vote. Instead, the president would inform the House and Senate that a debt-ceiling increase is pending. Congress could opt to pass on taking any action, thus permitting the hike to go into effect, or vote against it. The president could veto any negative vote.

In a presentation to the Business Roundtable in Washington on Dec. 5, Obama criticized Republican plans to use the debt limit for leverage in budget negotiations, asserting it is “a bad strategy for America. It is a bad strategy for our businesses. And it is not a game that I will play.”

“Everybody here is concerned about uncertainty,” he said. “There’s no uncertainty like the prospect that the United States of America — the largest economy that holds the world’s reserve currency — potentially defaults on its debts, that we give up the basic notion that the United States stands behind its obligations.’’

Obama promised to “break that habit” of holding the debt limit hostage and taking the nation to the brink of default “before it starts.”

But Senate Republican Leader Mitch McConnell, of Kentucky, immediately rejected the administration’s offer, maintaining that Obama is “the last person who should have limitless borrowing power” given the president’s history of addressing the debt.

“By demanding the power to raise the debt limit whenever he wants by as much as he wants he showed what he’s really after is assuming unprecedented power to spend taxpayer dollars without any limit,” McConnell said. “This isn’t about getting a handle on deficits or debt for him. It’s about spending even more than he already is. Why else would he demand the power to raise the debt limit on his own?”

Retaining the debate over the debt limit is “the only way we ever cut spending around here,” McConnell said, vowing that the president’s plan is “not going to happen.”

Business groups, like the U.S. Chamber of Commerce and the Business Roundtable, want quick action. Federal Reserve Chairman Ben Bernanke is among those urging lawmakers not to diddle. In a speech to the New York Economic Club on Nov. 20, Bernanke said Congress and the White House should refrain from contributing to the “headwinds” that are slowing the economic recovery.

“Early in the new year it will be necessary to approve an increase in the federal debt limit to avoid any possibility of a catastrophic default on the nation’s Treasury securities and other obligations,” Bernanke said. “As you will recall, the threat of default in the summer of 2011 fueled economic uncertainty and badly damaged confidence, even though an agreement ultimately was reached. A failure to reach a timely agreement this time around could impose even heavier economic and financial costs.”

The administration may be considering other routes around the debt ceiling headache. During a recent “Twitter Town Hall,” Obama didn’t rule out invoking Section 4 of the 14th Amendment to the US Constitution to resolve the issue. That provision reads: “The validity of the public debt of the United States, authorized by law, including debts incurred for the payments of pension and bounties for services in suppressing insurrection or rebellion shall not be questioned.”

Some constitutional law scholars argue the article provides the president with the authority to address the nation’s debt if Congress balks. Geithner has on occasion cited it while discussing the debt.

“I don’t think we should even get to the constitutional issue,” Obama responded during the Town Hall. “Congress has a responsibility to make sure we pay our bills. We’ve always paid them in the past. The notion that the U.S. is going to default on its debt is just irresponsible, and my expectation is that over the next week to two weeks that Congress, working with the White House, comes up with a deal that solves our deficit, solves our debt problems and makes sure that our full faith and credit is protected.”

The debt limit is the sum that the federal government is authorized to borrow to meet its obligations. Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments are part of the mix. The debt limit does not authorize new spending — it only allows the government to finance existing IOUs.

The administration and most economists maintain that failing to increase the debt limit would lead to disastrous results. It would force a government default, which has never occurred in the nation’s history. Default would create a financial crisis and likely lead to recession, threatening jobs and savings.

Congress has never refused to raise the debt limit. Since 1960, lawmakers have acted on 78 occasions to raise, temporarily extend or revise the debt limit.

That tradition nearly crashed in 2011 when majority Republicans in the House initially refused to approve the president’s request without significant spending cuts. On May 31, 2011, lawmakers in the lower chamber voted to retain the existing $14.3 trillion debt limit — $1.9 trillion less than required to avoid default.

The result was a lowering of the nation’s credit rating – rendering it more expensive to operate government – and an economic slowdown at a time when the U.S. was still recovering from the 2009 recession.

Congress and the White House finally reached a consensus that retained financial stability. Ironically, according to the Bipartisan Policy Center, a Washington think tank founded by four former Senate majority leaders – Republicans Bob Dole and Howard Baker, and Democrats Tom Daschle and George Mitchell – the delay will cost the Treasury $18.9 billion during a 10-year span because of elevated interest rates.

The Treasury has not revealed a plan of action if default occurs.