(Saul Loeb / AFP/Getty Images )
Answering questions about the debt-ceiling talks and what could happen if both sides fail to reach an agreement:
What is the federal debt ceiling?
In 1917, as the U.S. entered World War I, Congress authorized the Treasury to issue long-term bonds to finance the war, but placed a limit on the amount of debt that the government could issue. That limit, known as the debt ceiling, has been raised repeatedly -- and lowered a few times -- since then. Congress often balks at raising the limit, and the confrontations are always worse when control of the government is divided between the two parties. The limit currently stands at $14.3 trillion dollars -- a ceiling that the government reached in May.
How much has the debt grown in recent years?
Economists usually measure the debt as a percentage of the overall size of the economy (the gross domestic product). The debt peaked at more than 120% of GDP at the end of World War II, then declined steadily and hit a low point of slightly more than one-third of GDP at the end of the Jimmy Carter administration. The debt then grew rapidly during the Ronald Reagan and George H.W. Bush administrations, peaked during Bill Clinton's first term at nearly 70% of GDP, and declined to less than 60% of GDP during Clinton's second term. The debt grew again to more than 80% of GDP during the George W. Bush administration and has continued to rise under President Obama to nearly 100% of GDP.
What has driven the debt upward?
In simplest terms, the government spends more than it takes in. The gap between spending and taxes is the budget deficit. To cover the deficit, the Treasury borrows money by issuing securities. When the deficit is large, the debt grows as a percentage of the economy. Several factors have driven up the size of the deficit recently. Among the largest: the costs of the Iraq and Afghanistan wars, which were financed with borrowed money; the aging of the population, which has increased the cost of programs for senior citizens; the rising cost of healthcare, which drives up the cost of Medicare and Medicaid; and the recession, which pushed down federal revenues and increased spending on economic stimulus and programs such as unemployment benefits.
What effect would repealing the Bush tax cuts have on the deficit?
The tax cuts adopted in 2001 and 2003 resulted in lower revenue, and that in turn has increased the deficit. Exactly how much of a decline is attributable to the tax cuts is a matter of debate because a change in tax rates affects the economy, and that in turn affects revenues. The matter has been further complicated by the effects of the recession, which drove revenues down further. The Bush-era tax cuts are scheduled to expire at the end of 2012. Republicans would like to keep all the lower rates in effect; President Obama would like to see higher rates for upper-income taxpayers. If all the changes adopted in 2001 and 2003 were allowed to expire -- something that neither party is advocating -- the long-term deficit would decline by $1.9 trillion over 10 years, according to estimates by the Congressional Budget Office.
When will the debt exceed the limit?
Treasury officials have estimated they will need additional borrowing ability by Aug. 2, although some experts in government finance think the actual date will be a few days later.
What happens then?
If Congress has not raised the ceiling, the Treasury cannot borrow more money. Because tax collections are less than the government's obligations, the government would not legally be able to pay all its bills.
What about just paying the highest-priority bills?
In August, the government is expected to collect about $172 billion in revenue and will face about $307 billion in bills, according to an analysis by the Bipartisan Policy Center, a Washington think tank. So, in theory, the government would have the money to pay a little more than 55% of its bills during the month. But which bills to pay? Interest on existing debt comes to just under $30 billion, Social Security checks are $50 billion, Medicare is another $50 billion, payments to military contractors for weapons, fuel and other costs comes to $32 billion and salaries for active-duty military personnel come to about $3 billion. Add in unemployment benefits ($13 billion for the month), and the government would already have run out of money without paying a single civilian employee or running any of its domestic programs, including courts, disaster relief, national parks, veterans benefits or welfare programs.
Would picking and choosing among programs be legal?
No one really knows. It would certainly be challenged.
Administration officials have warned of economic chaos. What's the basis for those fears?