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House Passes Increase in Debt Ceiling

Obama and Congress marginally closer to a resolution

En español | Congress took an angry step sideways Friday in the effort to avoid the economic cataclysm of a national default. This sets the stage for a weekend of parliamentary maneuvering that continues to unsettle the rest of the nation, including anxious older Americans.

See also: Will Social Security checks arrive?

Capitol building upside down – Medicare and Medicaid spending along with Social Security checks are threatened in stalled debt talks.

Photo by: Michael Duva/Getty Images

Debt ceiling talks turn the U.S. Capitol upside down.

After a protracted delay for arm-twisting, House Republicans narrowly approved a package cutting future spending by $917 billion and raising the cap on federal borrowing. It also includes a Balanced Budget Amendment. Senate Democratic leaders had said they would table the House bill, scheduling a Sunday vote on their own plan, and within hours of the House vote, the Senate voted, 59 to 41, to reject the measure. That leaves Congress and President Obama marginally closer to resolving the impasse the nation faces Aug. 2 when the nation is prevented from borrowing beyond the legal $14.3 trillion cap.

While neither spending plan touches the national entitlement plans of Medicare, Medicaid and Social Security, failure to pass a plan threatens to delay distribution of the first of $49 billion in Social Security benefits due in August.

The maneuvering Friday followed days of wrangling that peaked Monday evening with dueling national addresses by House Speaker John Boehner and Obama. “The American people may have voted for divided government, but they didn’t vote for a dysfunctional government,” Obama said. But Boehner said overspending and debts have become business as usual: “I’ve got news for Washington — those days are over.”

Q. What’s the difference between the House Republican and the Senate Democratic plans?

A. Neither would include tax increases nor touch the entitlements. The House plan, which passed Friday, 218 to 210, would trim federal spending over the next decade by $917 billion. The measure includes a Balanced Budget Amendment. Finally, it would raise the debt limit by $900 billion and would last the country about six months, when another congressional vote would be needed for another debt ceiling increase.

The Senate plan being developed by Majority Leader Harry Reid, D-Nev., in consultation with Minority Leader Mitch McConnell, R-Ky., and Vice President Joe Biden, would reduce future spending by nearly $2 trillion and would extend until after the 2012 election any need for another congressional vote on the debt limit.

The major differences between the two plans are the timing, and the Senate claims savings from reduced war efforts in Iraq and Afghanistan. AARP Executive Vice President Nancy LeaMond issued a statement endorsing the Senate efforts.

Q. Why can't they just do their jobs and work it out?

A. Boehner and Obama were close to a deal, but it devolved into angry dueling news conferences on Friday night. Obama said he had been “left at the altar” by Republicans. He said any cuts to entitlements like Social Security and Medicare should at least be matched by revenue increases.

Boehner blamed Obama for moving the goal posts by demanding $400 billion more in tax hikes at the last minute. “Dealing with the White House is like dealing with a bowl of Jell-O,” Boehner said.

Q. If the debt ceiling isn't raised, could they really delay sending out Social Security checks?

A. Yes. Past government shutdowns have been over the budget, but mandatory spending like Social Security continued. This time, they are arguing over the government's ability to spend any money at all over the debt limit.

Obama has said that he can't guarantee the government will send out Social Security checks on Aug. 3. With more bills than income, the administration will have to decide which bills to pay — for instance, whether to send out Social Security checks or pay the military, pay bondholders or keep federal facilities like prisons and courts open.

The Bipartisan Policy Center, a think tank, estimates that the government will raise only 56 percent of what it needs to pay its bills next month after Aug. 2. And if it pays bondholders, that leaves enough to pay just half the other bills, said Jay Powell, visiting scholar at the center and author of its July 2011 study "Debt Limit Analysis."

"You've got a lifeboat that fits 50 and you have 100 people," Powell said. "You have to make unthinkable choices."

Next: Social Security, Medicare could be cut. >>

Q. What are the consequences of this budget bickering?

A. Any solution, or lack of a solution, will have widespread impact. If no deal is reached and the nation can't pay its bondholders after Aug. 2, the market likely will react by raising interest rates. That means higher rates for consumer credit cards and home mortgages, a drop in stock and bond values, and potentially a drag on the fragile economy.

"A failure to raise the debt ceiling would have a catastrophic effect on every citizen and probably precipitate another recession," said Thomas E. Mann, senior fellow at the Brookings Institution.

If the underlying imbalance between spending and revenue isn't solved, the debt will grow as a percentage of the nation's economy. In European countries where that already has happened, it has caused political and budget upheaval.

"We need to get serious about changing the way we spend money here in Washington," said Boehner. Restraining spending can boost the economy by making a better environment for businesses to create jobs, he said.

Social Security, Medicare and other programs could be cut under any deal.

Q. What's the schedule for sorting this out?

A. Aug. 2 is several days away, but any deal must pass the House and then the Senate. Each chamber has procedural rules that add days to the process.

Obama had pushed for a “grand bargain” — a large agreement to cut spending and increase taxes that would trim projected federal spending by up to $4 trillion over the next 10 or 12 years. But that approach is less likely now. Instead, House and Senate leaders each are pushing for different smaller deals. Each would use a two-step process in which the debt ceiling is raised along with some spending cuts, followed by another round of spending cuts later.

Q. Does it matter to older Americans whether there is a grand bargain or a mini-bargain?

A. All the deals would cut spending on federal non-security programs that need annual appropriation votes by Congress. That $1 trillion cut could hit home for seniors, said David Certner, AARP legislative policy director.

“Those are potentially deep cuts, which will affect some programs we care about — housing and food programs that seniors rely on, and other services,” Certner said.

The latest deals also likely would include defense spending cuts, though much of those reductions would have happened anyway as two expensive wars are finished up.

A major difference between the grand or smaller bargains is the impact on taxes and on Social Security and Medicare. A smaller deal is unlikely to include tax hikes, because Republican House members have steadfastly opposed the idea.

The sweeping deals would likely cut $500 billion or so from Medicare and Medicaid. And they likely would change the way Social Security cost-of-living increases are figured. Certner said the change would start at only about $40 a year in lower Social Security checks but would grow, meaning thousands of dollars less for seniors over their lifetimes.

Next: Why do we have a debt ceiling? >>

Q. Why do we have a debt ceiling anyway?

A. Most countries don't. In 1917 Congress set the first debt limit as part of the effort to finance America's participation in World War I. The law allowed the U.S. government to sell bonds (acquire debt) without asking Congress to approve every bond offer but capped the amount the government could borrow. “It's kind of like a nuclear weapon,” said Powell, a former undersecretary in President George H.W. Bush's Treasury Department. Congress should instead use its legislative power to cut spending, he said.

Q. Can't the president just borrow what he needs under the powers of the 14th Amendment?

A. Obama, who is up for reelection next year, is unlikely to take that risky political path. The 14th Amendment does say the validity of the public debt shall not be questioned.

But Mann said borrowing more by using the 14th Amendment argument is likely to upset the financial markets anyway, leading to higher interest rates. And "the Republicans would probably try to impeach him. It would darken our politics rather than resolve them,” he said.

Q. What's next?

A. Although the debt ceiling won't be reached until Aug. 2, the fallout could start earlier. Credit agencies already have begun rethinking the United States' sterling credit rating, which allows the country to borrow money at low interest rates.

"There's a lot of nervousness in those markets," Mann said, noting higher interest rates could wreak havoc. "We have come through the greatest financial crisis since the Great Depression. It's a fragile world."

Obama has threatened to veto anything that raises the debt ceiling for only a short while, saying that will not assuage the financial markets.

"Now they're just looking for something that can get passed," Certner says.

Tamara Lytle is a freelance writer in the Washington, D.C., area who has covered government and politics for more than 20 years.