Debt ceiling 2023: What we can learn from past showdowns like the one in 2011

If the 2023 debt ceiling standoff feels familiar, that’s because it is.

This Wednesday, President Joe Biden and Speaker of the House of Representatives Kevin McCarthy will meet to resolve the conflict that lawmakers also faced in 2011. In that year, like this one, the Republican Party just won the House while the Democrats held the Senate and the White House. Then, as now, the GOP is pushing for an increase in the debt ceiling unless it gets the spending cuts it demands.

The meeting between Biden and McCarthy is poised to set the stage for what could be another tense stalemate with catastrophic implications for the nation’s economy. At the end of January, the US had “hit” the debt ceiling, or the amount it can borrow, and the Treasury Department used what it called “extraordinary measures” to cover the country’s bills. The effort is expected to take the U.S. until early June, when it could pose a real debt risk. If the US defaults, the economic crisis will include higher interest rates, millions of job losses, and an impact on the country’s GDP.

In 2011, Republicans’ refusal to reverse spending cuts almost led the US to deliberately cross the brink for the first time, almost entirely contributing to the country’s credit rating being downgraded by Standard & Poor’s. During that time, the market crashed, interest rates rose, and the cost of the nation’s debt rose by $1.3 billion. The same scenario could play out again, potentially in a more chaotic way.

“There was a lot of deja vu,” said David Kamin, an economic adviser to the Obama administration who played a key role in the 2011 discussions.

In general, the standoff shows that meeting the deadline – even if the US defaults – could have serious consequences for the economy. In addition, there are contradictory lessons for Republicans and Democrats that can inform how to approach the issue this time around and lead them to see the risks differently.

“Obama learned a lesson: Don’t negotiate. And Vice President Biden is in the middle of those negotiations,” said Jason Furman, an economist who participated in the 2011 discussions on behalf of the White House. “And he had no desire to jump again, because he saw what he was like, and nothing good came out of him.”

Republicans, however, viewed the results they made in 2011 as an important victory, although many of them were later canceled.

“I think one of the takeaways was that this running game worked, you know, we were able to actually achieve something and use this moment for influence,” said Brendan Buck, staff for House Speaker John Boehner in 2011. “The question is whether you can continue play the same play over and over and still get results.

Lawmakers are seeing the impact of last-minute debt ceiling negotiations on the economy

In 2011, the US came within 72 hours of actually defaulting on debt, just narrowly averting.

“On Friday before the deadline, I’m not sure we’re going to make it,” said Rohit Kumar, Sen’s chief policy adviser. Mitch McConnell, who participated in the negotiations in 2011.

That year, after negotiations between the White House and House Republicans imploded, congressional leaders helped craft a deal that passed both chambers. In the end, lawmakers approved this law – which met the demands of both parties – on the day the Treasury Department believed that all “extraordinary measures” would be exhausted.

The legislation, known as the Budget Control Act of 2011, initially increased the debt ceiling by $900 billion and guaranteed an equal amount in long-term savings in defense and non-defense spending. It also set up a super committee of lawmakers tasked with finding the number of additional spending cuts by the end of November, or automatic spending cuts will be triggered across the board.

But when the bill passed, some of the economic damage was done. As the US nears default, the stock market has fallen and borrowing costs have risen for the government. Higher borrowing costs mean governments have to pay more on loans and have fewer resources for public investments like infrastructure. In addition, partly due to brinksmanship, credit rating agency S&P downgraded the country’s credit rating for the first time in US history, signaling to potential buyers that taking on US debt is not as safe as it once was, and a global downturn. confidence in the country’s economy.

The results in 2011 revealed that even approaching the standard is dangerous and has a problematic impact on the economy, experts said. “This is a man-made crisis that is adding additional costs to taxpayers, that could lead to market volatility, and that’s unsustainable,” said David Vandivier, a former Treasury Department official.

“Repeat it doesn’t make sense,” stressed Furman.

However, these warnings may be overlooked. While the Democrats insist that the debt ceiling – which includes the debt that the US government has incurred – should be separated from the negotiations on the budget and spending, the Republicans say that they are eager to use this opportunity to secure savings, even if possible. risk that appears in 2011.

Did the Democrats learn

This year, Biden has made it clear that he is not interested in negotiating with Republicans on the debt limit, an approach he reportedly had a negative experience with in 2011, according to experts who were there.

“I will not allow anyone to use the full faith and credit of the United States as a bargaining chip,” Biden said in a recent speech.

Democrats have generally taken this approach since 2011 because they felt burned that year. Weeks of negotiations with House Republicans finally collapsed after the Obama administration offered spending cuts in exchange for higher taxes on wealthy individuals and corporations. The administration has insisted that it is making concessions on spending entitlements that Republicans have asked for, but the GOP is not interested in a deal with more taxes. By the time negotiations collapsed, the U.S. was close to default.

“The negotiations not only failed, but proved so disruptive to the financial markets, and so scarred, that Obama and his team came out of the ordeal never to be repeated,” wrote Ron Brownstein in the Atlantic.

Since then, Democrats have demanded a clean increase to the debt ceiling that does not include trade-offs. He said negotiations on spending could happen separately, but should not be tied to the debt ceiling.

In 2013, for example, the Obama administration refused to negotiate with House Republicans who demanded cuts to the Affordable Care Act in exchange for spending bills and raising the debt ceiling. That position led the Republicans to approve a clean increase, which they did several times after that.

“The important thing from 2011 is that you can’t negotiate with the hostage-takers. That’s the end of the story,” said Jim Manley, a former Sen. staffer. Harry Reid.

Did the Republicans learn

Despite the economic fallout caused, and the fact that many of the rules that were negotiated were canceled, the Republicans note that the 2011 standoff led to some wins, and the chance to force a conversation about fiscal issues that many members ran on. These results mainly offer certain party members to repeat.

“Some Republicans look back on 2011 and see it as a successful use of the debt limit to extract the largest spending cut in decades,” said Brian Riedl, former economic policy staffer Sen. Rob Portman.

In the end, Republicans said they were getting spending cuts, and doing so without raising new taxes. In total, the agreement contains $2.1 trillion in cuts to be made over 10 years, which is comparable to the increase in debt.

However, some of those cuts failed to materialize, as lawmakers began passing bills that raised certain spending limits. Kumar noted that one of the big lessons is that it’s better to focus on spending cuts that can be secured in the short term than long-term ones that the incoming Congress can dismantle.

And like the 2011 battle over savings, it’s also about Republicans confronting Democratic administrations over spending. Many Republicans in the House at the time have been elected as part of the 2010 Tea Party wave, and saw fiscal responsibility as one of the main issues they brought to Congress to focus on, forcing them to dig in even more. Conservatives can again use the debt ceiling war to make a point about their commitment to “responsible” spending this year, although they did not put up the same opposition when the increases were made in the Republican administration.

“I think that the Republicans, in some cases, this is the only time, every year or two, we even talk about fiscal policy and spending, and the burden of the large and large debt,” Shai Akabas, an economic policy expert at the Policy Center Bipartisan, he said.

There are differences and similarities with 2011

Although there are notable similarities between 2011 and 2023, there are also key differences that could make this year’s debt ceiling worse and more risky than ever.

“Politics in the House is tougher than ever,” Buck said. “So you can’t have the same level of confidence that they won’t let something bad happen.”

Relative to 2011, House Republicans have an even narrower margin this term, giving more extreme members of the conference outsize sway on how they approach bills and issues like the debt ceiling. If McCarthy pursues a clean debt ceiling hike or a compromise measure that displeases conservatives, for example, he could face a challenge for speaker. Fear of such a challenge may have led McCarthy to pursue a more broad-based strategy on the membership’s demands, an approach that would have met with Democratic opposition.

“I have to say, the situation for nothing good out of this now, other than the increase in the debt limit, is even less favorable than they were in 2011,” said Furman, about what Democrats can get out of the negotiations.

Political experts told Vox that, just like in 2011, the resolution will include concessions that allow Republicans to at least claim they got it. something.

“We may have something more modest, but the Republicans can sell it back to the voters because they won something in the war. Everyone needs to save face,” said Riedl. At this point, it is not clear what they can do because the Republicans have not make certain demands.

In 2011, House Republicans had a broad requirement to match every dollar of debt ceiling increases with matching cuts. This year, McCarthy has said he wants to cut spending outside of Medicare and Social Security, but hasn’t specified what those cuts will include. Wednesday’s meeting, after all, is just the first of many discussions that will set the tone for this fight.