Debt Limit Déjà Vu? What Can We Learn from the Close Calls of 2011 and 2023?
Laura Blessing | June 7, 2023
Normally, we remember what we were doing when great triumphs or tragedies take place on the world stage. Fiscal policy is not typically on that list of events. And yet, I remember clearly what I was doing in the lead up to Treasury’s “X date” in 2011. I was in grad school, and I had a comprehensive exam to take… the day AFTER a potential default under the debt ceiling. I felt more confident about doing well in my minor field than I did about the state of congressional negotiations.
In the interim, we’ve seen the election of 2010 and the events immediately following it, including the debt ceiling fight and its aftermath, significantly shape our politics. The debt ceiling episode of 2011has appropriately gained attention if not notoriety for its unusual peril, though its effects are much more far reaching.
As the ink dries on the latest legislation averting default, its worth considering what these two close calls have in common, though the full effects of 2023 remain to be seen.
Political Divisions and Fiscal Hawks:
The 2011 and 2023 debt limit talks contained similar elements that made both riskier and contributed to negotiations going down to the wire. In both cases divided government under a Democratic president created an environment where political actors had to work across the aisle in a hyper-partisan space where each was pushing their own narrative of where to assign fiscal blame. Both years saw major factions within the House Republican Majority that pushed back against dealmakers after making election promises to do so. These empowered fiscal hawks were willing to go farther than previous partisan party politics. Both episodes also followed periods of greater federal spending—and attention on that spending—in the wake of emergencies: the Great Recession and the Pandemic.
It’s important to recognize 2011 as the year the debt ceiling became not just partisan but perilous. It’s also important to recognize that both parties (to different degrees, at different times) have engaged in partisan opposition over the debt ceiling—since 1953. There have been few time periods (aside from portions of the 1920s and 1930s where it did not need to be raised) that this wasn’t sand in the gears of governance. This is not to say previous effects of debt ceiling stand-offs weren’t worrisome: some were (1957 is an early problematic episode), and beyond causing economic problems, some have also created bargains that affected governance (our first foray into sequestration, in 1985, came out of a debt ceiling fight). But 2011 marks the first time there was genuine uncertainty over whether a law could be passed in time to avert default on the full faith and credit of the United States.
In 2011, of course, the Great Recession coupled with the advent of trillion-dollar deficits coincided with a series of serious pronouncements: the Simpson-Bowles Commission, a concerned CBO report, and the two largest rating agencies’ warning to downgrade US credit if deficits weren’t controlled. The 2010 midterm elections delivered a House Republican Majority in a wave election, with a new breed of organized anti-establishment fiscal hawks in the Tea Party, including members who promised to vote against raising the debt limit. They held a show vote against a clean raise to prove they had the votes to do precisely that, and refused to raise taxes as part of any deal, as negotiations came down to the wire.
If you’re feeling a sense of déjà vu after reading that paragraph, you’re on to something. 2023 also dawned with a first-term Democratic president and historically large deficits, now in response to the global Covid-19 pandemic. While House Republicans did not win a wave election they did regain a House majority in which the anti-establishment feelings of 2010’s Tea Party had been institutionalized into the House Freedom Caucus. Once insurgents, they now had seats at the table. The choreographed initial steps of the debt ceiling dance began, now as then, with a warning from Treasury to Congress to raise the limit early and without incident, followed by partisan framing of where to assign blame for our growing debt.
To be sure, these aren’t identical episodes, though the biggest risk factors have much in common. In 2011 President Obama and Speaker Boehner genuinely hoped for a larger Grand Bargain to reduce deficits. Having seen the fruits of that attempt, President Biden insisted publicly for a long time that he wasn’t going to negotiate and wanted a clean raise. He then demanded House Republicans craft a legislative plan to warrant a White House response, after baiting Republicans during his State of the Union address to deny that they wanted to cut Social Security and Medicare (along with interest on the debt, the biggest drivers of deficits). No significant attempts to include tax raises were pushed by the White House this time, with Biden refusing to boast about the deal before it was signed and his negotiators carefully looking to give the other side rhetorical wins and not imperil a deal.
This year congressional negotiators also brought things down to the wire. A riskier aspect this time around was the unpredictable nature of Treasury’s X date itself, made so by economic factors (tax filing deadlines were extended for California in the wake of wildfires). Secretary Yellen warned negotiators early that, while the initial estimate for the X date was in July, it could be as soon as June 1. Still, negotiators were saved by a last-minute reassessment to June 5th for legislation, with the Senate voting late on June 1 and sending the bill to be signed by President Biden on June 3. In a highly unusual move, Democrats on the House Rules Committee were needed to advance the rule for the bill.
Public Knowledge and Misinformation:
Both episodes have also been bedeviled by a lack of understanding on the topic. Both times, legislators expressed doubt that a default would bring economic ill effects. These members are fiscal hawks, and have included, at different portions of negotiations, high profile members (including Speaker Boehner in 2011). Budget Committee Ranking Member Boyle, on the GAI podcast “Congress, Two Beers In”, noted that the incorrect claim – mentioned in conservative media – that breaching the debt ceiling merely created a government shutdown (it doesn’t; shutdowns have ill effects but default would be incalculably worse) was a misconception he heard repeated by Members of Congress. Reporting on responsible conservative economic experts’ efforts to dispel misinformation belies the fact that such efforts were necessary to begin with. The accuracy of our public discourse bears emphasis for a few reasons. Beyond affecting the conversations that policymakers have and the solutions they consider, it has the potential to alter the calculus of what gettable votes exist in Congress.
What the Deals Included
There are some common themes to the legislation that averted default at the eleventh hour for both years, insofar as a tremendous amount of brinksmanship resulted in fairly modest results. This is mainly due to the fact that Congress could take the debt reduction promises of sequestration and undo them with subsequent legislation. The details of 2011 and 2023 vary, of course, but the most salient comparison is that the proposed savings via sequestration’s automated cuts were (while mostly unrealized) more ambitious in scope and duration in the aftermath of 2011 than 2023.
Of course, there are results of both episodes above and beyond the legislation that was passed. Coming down to the razor’s edge of default in 2011 prompted a credit downgrade by Standard and Poor’s (which itself triggered a brief but significant downturn in the stock market) and a host of other economic ill effects: GAO released a 2012 study identifying that the episode had cost taxpayers $1.3 billion in borrowing costs; additionally, the confidence of a variety of financial actors (lenders to the mortgage industry, consumers, and more) had diminished. Some of these indicators are more serious than others, but perhaps the most important but difficult to measure is faith in the US economy and economic actors, which includes lawmakers. The US enjoys major advantages, including its position as the world’s reserve currency, that are not worth imperiling for the opportunity to claim credit for a tough negotiating job against the opposition party or for extremely modest policy changes.
Lessons for the Future
There will be other times where a Democratic president faces off against a Congress that has at least one chamber with a fractured Republican majority and a concern about deficits, even if that concern isn’t as pronounced as being prompted by the likes of the Great Recession or the Covid-19 pandemic. President Biden has learned some lessons about what such negotiations look like, and the national press have covered the economic consequences of default for a lay audience in far more detail—but otherwise, a variety of political actors are retracing their steps on the dance floor, with the same level of peril for the world economy. Eliminating the debt ceiling or blunting it (for example, with the McConnell Rule) should be a priority—for lawmakers, for those engaging in a wider conversation about economic policy, and for voters. Otherwise, those who remember Treasury’s X date many years later won’t just be nerdy graduate students writing a dissertation on fiscal policy; it’ll be everyone.