Debt ceiling crises have been a recurring issue in the United States, characterized by the failure of Congress to pass a budget on time or concerns about raising the federal debt ceiling, potentially leading to a default on the national debt. These dual crises can intertwine, as seen in instances where a federal budget was not adopted on time, accompanied by threats to refuse an increase in the debt ceiling. Having witnessed the wrangling within Congress during these crises as the deputy director of the Congressional Budget Office and the executive director of the National Governors Association, I can attest to the political and economic turmoil they generate.
Since 1976, the United States has experienced 22 government shutdowns due to the absence of a federal budget, which have proven disruptive to the economy and employment. However, the consequences of failing to raise the debt ceiling are far more severe, potentially leading to catastrophic outcomes that could destabilize the international financial system, devastate the global gross domestic product, and result in widespread unemployment.
Fortunately, the United States has never defaulted on its debt. The debt ceiling has been raised 78 times since 1917, currently standing at a staggering $31.4 trillion. Let’s delve into three notable debt-limit crises that not only had significant economic repercussions but also shaped the political landscape.
1995: A GOP Revolution and Misstep
Debt-limit crises often follow elections that bring about a significant shift in congressional control. In the 1994 midterm election, the Republicans gained substantial influence, flipping both the Senate and the House with a Republican revolution. This empowered figures like Bob Dole, the new majority leader in the Senate, and Newt Gingrich, the speaker of the House. The Republican lawmakers aimed to pass a balanced budget under their “Contract with America.” However, their proposed budget, which entailed cuts to domestic programs, was vetoed by President Bill Clinton. Consequently, a five-day shutdown of the federal government ensued.
Gingrich, in a bold move, threatened to withhold the increase of the debt limit. The House leader’s actions, as reported by The Washington Post, were described as a historic threat to take the government into default unless Clinton accepted their demands for a balanced budget. With Clinton responding to the GOP’s budget offer with a second veto, a prolonged government shutdown lasting 21 days occurred. Ultimately, the Republicans passed a budget presented by Clinton and raised the debt ceiling.
This standoff had its unique aspects. Dole’s presidential ambitions made him less inclined to continue negotiations, and Gingrich’s comments about being snubbed by the president on Air Force One received significant media attention, linking the shutdown to the perceived snub. Polls revealed that the Republicans were increasingly blamed for the shutdown, with a 1995 ABC poll indicating that 46% of respondents held the Republicans responsible compared to 27% who blamed the Democrats.
2011: Budget Reforms and Financial Chaos
Similar to 1995, the 2011 debt-limit crisis occurred after an election and a major power shift on Capitol Hill. In the 2010 election, the Republicans gained a majority in the House and significantly increased their Senate seats. Demanding a deficit reduction package in exchange for raising the debt ceiling, the House pushed President Barack Obama to the negotiating table.
As the deadline for raising the debt limit approached, both domestic and international financial markets became increasingly chaotic. The S&P 500 experienced a significant decline of 17%, while bond rates surged. On August 5, 2011, Standard and Poor’s downgraded the long-term U.S. government debt rating, which could lead to higher interest rates on that debt.
Only two days before the U.S. government would have run out of funds, Congress and Obama reached an agreement that became the Budget Control Act of 2011. This legislation reduced spending by $917 billion over the following decade and authorized raising the debt ceiling to $2.1 trillion. It also included budget reforms, concessions made by Obama and the Democrats, such as the establishment of a joint select committee to propose deficit reduction measures and automatic budget cuts in the event of inaction.
2013: Stalemate and Concessions
In January 2013, the United States hit the debt ceiling established in 2011, prompting the Treasury Department to take extraordinary measures to continue funding essential expenditures. These measures included deferring payments to federal worker retirement funds and borrowing from trust funds like Social Security. The Treasury informed Congress that these extraordinary measures would be exhausted by mid-October, rendering the U.S. unable to borrow further funds to meet its obligations.
Simultaneously, the Republican-controlled House demanded budget cuts and policy changes. They insisted that President Obama eliminate funding for his Affordable Care Act, a key legislative achievement. The government faced yet another shutdown, lasting 16 days. As public support for the Republican stance dwindled, the GOP ultimately capitulated, passing a budget without significant cuts and raising the debt ceiling in a last-minute vote.
The Future of the Debt Ceiling Crisis
Predicting the resolution of the potential 2023 debt ceiling crisis is challenging, as each crisis is unique and depends on the leaders involved and public sentiment. However, historical examples offer insights into the risks faced by both parties and their leaders. The 1995 crisis did not favor the Republicans and may have even contributed to Clinton’s reelection. In 2011, the Republicans achieved substantial budget reductions and reforms. Nonetheless, lack of public support in 2013 led them to concede.
The unfolding 2023 crisis shares similarities with 1995 and 2011, stemming from an election that altered the House majority. However, the slim four-seat majority held by Republicans exposes their leadership to significant risks. If the standoff persists and financial markets react as in previous crises, the stakes for both parties and their leaders, including President Joe Biden and Speaker of the House Kevin McCarthy, will intensify. The outcome could potentially impact Biden’s reelection prospects and McCarthy’s hold on power.
In conclusion, the United States has witnessed several debt ceiling crises throughout its history, each with its own political and economic ramifications. Understanding past events, such as the GOP revolution in 1995 and the budget reforms of 2011, provides valuable insights into the risks and potential outcomes of the current 2023 crisis. As the nation approaches a critical juncture in early June, the impact of this standoff on politics, the economy, and the future of key leaders remains uncertain.
By: Emil Rasmussen
