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The debt limit was originally crafted to make life easier for Congress. Before World War I, Congress literally had to cast a vote every time Treasury borrowed money to make purchases authorized by Congress (such as tanks). In 1917, Congress decided to do away with the cumbersome procedure and simply gave blanket approval for most types of borrowing. [Probably so there would not be a record of them voting to spend more of our money on pork]

In this case, Congress has already authorized the expenditures for fiscal year 2011. In many cases, the products, so to speak, have already been purchased, and now the bills are coming due. If the United States government does not pay for these items.

In other words, the money has been spent, but an arbitrary ceiling has been set for how much can be paid.

As the Government Accountability Office puts it:

“The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred.

Source

Sarah Palin and the debt limit debate

By Glenn Kessler

(BRIAN SNYDER/REUTERS) “There are departments that can be revamped and some bills that can wait. And, again, it's our president's job, as the leader of the executive branch, to prioritize and administer those dollars that Congress has allocated. And our president obviously isn't capable of doing that, because he has no plan that he can even put forward to say here are my priorities.”

--Former Alaska Gov. Sarah Palin (R)

Potential presidential candidate Sarah Palin popped up on the Sean Hannity Show on Wednesday night, making a series of somewhat contradictory statements about the battle over the national debt ceiling.

“If I were in Congress, I would not vote to incur more debt,” she asserted. But she also said, “We cannot default.” But then she also said: “We cannot afford to retreat right now.”

Eventually, she got around to making the point above, saying the president simply has to prioritize what bills he is going to pay, “revamp” some departments and so forth. She made it sound all so very easy.

As we have written, there is substantial debate over what the Obama administration can or cannot do once the putative Aug. 2 deadline is reached, especially regarding the disbursement of Social Security checks. The most impressive analysis thus far was published by The Bipartisan Policy Center, a report written Jay Powell, a former top Treasury official in the George H.W. Bush administration. He makes it clear this would be uncharted and very difficult territory.

But Palin’s statement also suggests she has a fundamental misunderstanding of the debt limit, which we will explore.

The Facts

The debt limit was originally crafted to make life easier for Congress. Before World War I, Congress literally had to cast a vote every time Treasury borrowed money to make purchases authorized by Congress (such as tanks). In 1917, Congress decided to do away with the cumbersome procedure and simply gave blanket approval for most types of borrowing. To keep a check on the executive branch, Congress established a limit.

But this is not the same as a credit card limit, a frequently used analogy. A credit card limit prevents someone from making more purchases. You may want to buy that $1,000 refrigerator but if you only have $500 left on your credit card, tough luck—unless you round up some cash.

In this case, Congress has already authorized the expenditures for fiscal year 2011. In many cases, the products, so to speak, have already been purchased, and now the bills are coming due. If the United States government does not pay for these items (which includes interest on the national debt), then it goes in default.

We have had trouble coming up with a real-life equivalent, but here’s stab at it. Suppose the son of a millionaire was told he could spend $100,000 in a year, and not only that, but he was told exactly how he needed to spend the money. (That’s the fiscal year appropriations bills passed by Congress.). At the same time, the parent told the son the bills would not be paid after a certain date unless he got additional permission to pay them. (That’s the debt limit.)

In other words, the money has been spent, but an arbitrary ceiling has been set for how much can be paid. If it doesn’t make much sense, it is not supposed to. But it is the exact opposite of a credit card limit or any such similar analogy.

As the Government Accountability Office puts it in its useful primer on government debt:

“The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred. While debates surrounding the debt limit may raise awareness about the federal government's current debt trajectory and may also provide Congress with an opportunity to debate the fiscal policy decisions driving that trajectory, the ability to have an immediate effect on debt levels is limited.”

Palin further confuses matters when she says, “it's our president's job, as the leader of the executive branch, to prioritize and administer those dollars that Congress has allocated.” Under the Constitution, the executive branch cannot spend money that has not been appropriated by Congress. But with the debt ceiling, Congress has allocated no more dollars for payments, even though it has appropriated the money to be spent.

Palin also said, “there are departments that can be revamped and some bills that can wait.” Actually, it takes time—and the approval of Congress—to “revamp” departments. As for delaying some bills, we guess she means that the United States has to stiff a few creditors. The technical term for that is “default.”

Much as politicians like to compare the government’s budget to the family budget, this is going too far. In tough economic times, some families do indeed delay paying some bills in order to make payments deemed more important, such as the mortgage. Eventually that can harm the family’s credit rating, which the current impasse threatens to do to the prized AAA rating now held by the United States.

The Pinocchio Test

We concede that American politicians have a long history of playing politics with the debt rating. Given his current rhetoric, President Obama, in particular, should feel ashamed at his posturing on the debt limit in 2006, when he voted not to raise the debt limit. (He since has said such “a political vote” was a mistake.)

As then Sen. Obama put it, in words that seem to echo Palin’s language today: “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills.”

(An aside: Obama also noted “it took 42 Presidents 224 years to run up only $1 trillion of foreign-held debt. This [Bush] administration did more than that in just five years.” The debt has risen under Obama by nearly $4 trillion in less than three years. Oops.)

But past rhetoric by other politicians, even the president, is no excuse for continuing to mischaracterize the debt limit. Palin either has a fundamental misunderstanding of the issue or she purposely is being misleading.

Three Pinocchios