The last time the U.S. came this close to a default, a presidential election was heating up, Republicans were threatening to go to the brink seeking budget cuts, and the economy was struggling to emerge from a shock.
If the comparison between the summer of 2011 and today isn’t perfect, the parallels are striking and the lessons learned from that episode are deeply shaping the current fight over raising the government's borrowing limit.
Some of those lessons might have been the wrong ones: GOP lawmakers were emboldened by their success in slashing spending — even though then, as now, they avoided the main drivers of the debt like Social Security and Medicare. And President Joe Biden, who was heavily involved in the talks 12 years ago as vice president, vowed this time not to negotiate — then pivoted with little time left to strike a deal.
But that episode during the Obama administration — which culminated in the first downgrade of U.S. debt in history — also gave policymakers at the Treasury Department and Federal Reserve a chance to consider new ways to contain the fallout of any failure to go past the “X date,” when the government would be unable to pay all its bills.
From Wall Street’s perspective, it also provides a beacon of hope that a deal to avert a potential disaster will ultimately result, even if it comes at the last moment.
“Both times there has been some legitimate and appropriate debate about what the government should and should not do,” said Doug Elmendorf, who served as head of the Congressional Budget Office at the time. “But that substantive debate just gets lost in the rush to get something done in this short timetable.”
Here are some ways that debate a dozen years ago is influencing the negotiations today:
'A hostage that's worth ransoming'
In the years since 2011, Democrats have fumed over how things went down, blaming budget cuts for sluggish growth throughout the rest of Barack Obama's presidency. Republicans, meanwhile, found that using the debt ceiling as leverage to curtail spending can work.
“What we did learn is this — it’s a hostage that’s worth ransoming,” Sen. Mitch McConnell, the minority leader both then and now, told the Washington Post at the time. “And it focuses the Congress on something that must be done.”
That’s still the prevailing takeaway for what was achieved by the GOP, then energized by an influx of tea party conservatives. “The most salient example is probably 2011,” Sen. Mike Lee (R-Utah) told POLITICO earlier this year, about using the debt limit as a bargaining chip for cuts. “Some significant reforms were adopted as a result.”
Even so, the 2011 deal didn’t result in a long-term agreement to reduce the debt triggering the threat of shorter-term automatic cuts known as sequestration. That constrained spending for the latter years of Obama's administration, but it failed to permanently shift the direction of federal spending: Deficits ballooned again under Presidents Donald Trump and Biden.
Any final deal this time around is also likely to be less dramatic.
“Democrats today are less willing to propose cuts in spending, and the Republican Party is less willing to propose cuts in Social Security and Medicare, so there’s less interest in cutting government spending today than there was a dozen years ago,” Elmendorf said.
Still, that could ultimately make a deal easier, since it means the two sides can reach an agreement without making fundamental changes to the budget, said Rohit Kumar, who in 2011 served as deputy chief of staff to McConnell. He noted that Republicans in 2011 sought a reduction in spending for every dollar increase in the debt limit, which was a much taller task politically.
(Biden, for his part, argues today that he's negotiating a budget, not negotiating on the debt ceiling.)
Meanwhile, there’s now a greater understanding that spending cuts more than a couple of years out won’t hold, Kumar added.
“Spending caps beyond the next two years are not very likely to be adhered to by subsequent Congresses,” said Kumar, now a principal at PwC.
The X factor is House Speaker Kevin McCarthy, who faces an even thinner majority than his onetime predecessor, John Boehner did then.
“The politics from the Republican side are unquestionably worse,” said Ben Harris, a longtime Biden aide who recently left his job as Treasury’s chief economist. “You have a very narrow majority in the House. You’ve got a speaker whose job is on the line, and you have a substantial portion of House Republicans who seem hell-bent on default who know they’re asking for a bill that no Democratic administration can ever agree to.”
Untested backup plans fuel brinkmanship
The debt limit fights of a decade ago forced government officials to explore once-unthinkable options like prioritization — paying some bills like bond interest payments, but not others — to avoid a financial meltdown after breaching the X-date.
They also fueled intense public debate about a range of other break-the-glass options, like minting a platinum coin or invoking the Constitution’s 14th Amendment, which deals with the validity of government debt.
That’s been fodder for lawmakers on both sides of the aisle to resist compromise in 2023, despite warnings that the backup options are untested and possibly not viable.
Conservative lawmakers at the outset of the latest fight argued that payment prioritization was a potential contingency plan as they resisted a “clean” increase in federal borrowing authority.
In recent days, progressive Democrats have made the case that Biden should use the 14th Amendment to keep meeting the government's obligations, rather than cave to GOP demands for budget cuts.
Wall Street analysts have been scouring Fed meeting transcripts and other sources for clues on how far the Obama administration got with contingency planning during its debt limit fights.
House Republicans unearthed their own discoveries as part of a Financial Services Committee investigation about a decade ago. The committee's GOP leaders said in one 2014 letter that the Federal Reserve Bank of New York had prepared documents that “exhaustively” detailed how Treasury and the Fed would implement a plan to prioritize payments on Treasury bonds.
Obama-era Treasury Secretary Jack Lew confirmed in a POLITICO interview this year that officials ran an exercise to see whether the government could pull off prioritization, but he rejected it as a solution.
“As a tabletop exercise, we reached the conclusion you might be able to,” Lew said. “It’s never been tested in the real world.”
The Biden administration has largely downplayed debt-limit backup options without ruling them out. Biden as recently as Sunday floated the possibility of invoking the 14th Amendment but has also warned about potential legal challenges it would trigger.
Wall Street thinks (hopes) it’ll all work out
Though markets have been jittery, investors who finance the government’s debt are still holding out hope that a deal will be reached, with memories of 2011. The borrowing limit then was ultimately raised at the 11th hour, though the ordeal dented the government’s creditworthiness because of political dysfunction, raising borrowing costs.
Despite all the uncertainty surrounding the debate, there has not the kind of widespread market panic that could force Congress to act expediently.
“It feels like 2023 is less scary than 2011,” said Guy LeBas, chief fixed income strategist at financial firm Janney Montgomery Scott. “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 around, “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, he added.
He said the takeaway from a dozen years ago should be to reach a deal “five days sooner than you think you should.”
But Kumar suggested that policymakers might have learned the opposite: “You can get to within 72 hours of the X date and still stick the landing.”
Jennifer Scholtes contributed to this report.
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By: Victoria Guida and Zachary Warmbrodt
Title: How a 12-year-old playbook is shaping the battle over the debt limit
Sourced From: www.politico.com/news/2023/05/22/debt-limit-obama-biden-2011-00097961
Published Date: Mon, 22 May 2023 03:30:00 EST
