The role of a playbook dates back 12 years in the fight over raising the debt ceiling. A presidential race was heating up, Republicans were threatening to go to the brink demanding budget cuts, and the economy was struggling to recover from a jolt the last time the United States came this close to default.
Despite specific differences, the summer of 2011 and the present day resemble one another.
Despite all the uncertainty surrounding the issue, there has not been the kind of broad market fear that could drive Congress to act quickly.
According to Guy LeBas, chief fixed income strategist at financial firm Janney Montgomery Scott, “2023 feels like 2011 was less scary than 2023.” As the author puts it, “There were a lot of unknowns at the time because we had decades of raising the debt ceiling without a lot of fanfare.”
This time, he said, “While I see the perceived headline benefits of aggressively slashing spending, I genuinely don’t think they want their constituents to suffer as hard economically as they will” if the government stops making some of its payments.
The lesson from a decade ago, he continued, is to settle things “five days sooner than you think you should.”
Kumar, however, speculated that the opposite was true, saying, “You can get to within 72 hours of the X date and still stick the landing.”The present debate over increasing the government’s borrowing ceiling is heavily influenced by the lessons learned from that experience.
Perhaps some of those teachings were flawed: Despite avoiding the primary causes of the deficit, such as Social Security and Medicare, Republican lawmakers were buoyed by their success in cutting expenditure. Even though Vice President Joe Biden was instrumental in the negotiations 12 years ago, he swore not to negotiate this time, only to reverse course with negotiations nearing their end.
While the Obama administration’s episode resulted in the first-ever downgrade of U.S. debt, it did provide Treasury and Federal Reserve officials with an opportunity to consider new ways to limit the damage that would be done if the government were to fail to continue operating past the “X date,” when it would be unable to pay all of its bills.
Even if a deal to prevent a potential calamity doesn’t materialize until the very last second, it still serves as a beacon of hope for Wall Street.
“Both times, there has been some legitimate and appropriate debate about what the government should and should not do,” said Doug Elmendorf, the head of the Congressional Budget Office at the time. As the author puts it, “but that substantive debate just gets lost in the rush to get something done in this short timetable.”
The argument from a decade ago has had an impact on the current talks in the following ways:
A “valuable hostage,” as the expression goes.
Democrats have been fuming about what happened since 2011, pinning the slow economic growth of the rest of Barack Obama’s presidency on budget cuts. Meanwhile, Republicans discovered that they could successfully use the debt ceiling as leverage to reduce expenditure.
Sen. Mitch McConnell, then and now the minority leader, told the Washington Post, “What we did learn is this — it’s a hostage that’s worth ransoming.” And it helps Congress zero down on an important task.
That’s still the common understanding of what the GOP, boosted by an inflow of tea party conservatives, actually accomplished. Sen. Mike Lee (R-Utah) told POLITICO earlier this year, “The most salient example is probably 2011” when discussing using the debt limit as a bargaining chip for cuts. “As a result, some major changes were made.”
The prospect of shorter-term automatic cuts, known as sequestration, was triggered even if the 2011 compromise did not result in a long-term agreement to decrease the debt. That restrained spending in Obama’s final years in office but didn’t permanently change the federal government’s spending priorities: Under Trump and Biden, the deficit exploded once more.
There will probably be less fuss surrounding any final agreement this time.
According to Elmendorf, there is less enthusiasm for reducing government expenditure now than a decade ago. “Today, Democrats are less willing to propose cuts in spending, and the Republican Party is less willing to propose cuts in Social Security and Medicare.”
Still, that could make a deal more straightforward in the long run, according to Rohit Kumar, who in 2011 served as the deputy chief of staff to McConnell. That’s because it implies the two sides can achieve an agreement without making major changes to the budget. He mentioned that in 2011 Republicans attempted the considerably more difficult political task of demanding expenditure cuts in exchange for every dollar added to the debt ceiling.
(For his part, Biden claims that he is now discussing a budget and not the debt ceiling.)