The United States is facing a potentially catastrophic default on its debt obligations if Congress does not raise the debt ceiling by June 1, 2023. The debt ceiling is the limit on the amount of money the federal government can borrow to pay for its spending programs and obligations, such as Social Security, Medicare, defence, and interest on the debt. The debt ceiling currently stands at $31.4 trillion, which was reached on January 19, 2023. Since then, the Treasury Department has been using temporary “extraordinary measures” to keep the government running, but these measures are expected to run out by early June. If the debt ceiling is not raised or suspended by then, the government will not be able to pay all of its bills on time, resulting in a default that could have severe consequences for the US economy and the global financial system.
This is not the first time that the US has faced a debt ceiling crisis. In fact, the debt ceiling has been a source of political controversy and conflict for decades, as lawmakers have often used it as a leverage point to advance their fiscal and ideological agendas. Here is a brief overview of some of the major debt ceiling crises in US history and how they have influenced American politics.
The 1995-1996 Shutdowns
In 1995, President Bill Clinton and the Republican-controlled Congress clashed over the federal budget and spending priorities. The Republicans, led by House Speaker Newt Gingrich, demanded significant cuts in entitlement programs and other domestic spending as a condition for raising the debt ceiling and funding the government. Clinton refused to accept these demands, arguing that they would harm the economy and the social safety net. As a result, Congress failed to pass a budget or a continuing resolution to keep the government open, leading to two partial government shutdowns that lasted a total of 28 days between November 1995 and January 1996. During this time, about 800,000 federal workers were furloughed, many public services were disrupted or suspended, and an estimated $1.4 billion was lost in economic output.
The standoff ended when Clinton and Gingrich reached a compromise that included some spending cuts but also raised taxes on wealthy Americans and increased funding for education and health care. The deal also raised the debt ceiling by $600 billion, enough to last until March 1997. The public largely blamed the Republicans for the shutdowns and their negative effects on the economy and public welfare. Clinton’s approval ratings rose while Gingrich’s popularity plummeted. The Republicans also lost seats in both chambers of Congress in the 1996 elections, while Clinton was re-elected for a second term.
The 2011 Crisis
In 2011, President Barack Obama and the Republican-controlled House of Representatives faced another standoff over the debt ceiling and the federal deficit. The Republicans, led by House Speaker John Boehner, demanded that any increase in the debt ceiling be matched by an equal amount of spending cuts over 10 years, with no tax increases. Obama initially agreed to this framework but later insisted on some revenue increases as part of a “balanced approach” to deficit reduction. The negotiations broke down several times as both sides accused each other of moving the goalposts and refusing to compromise.
The impasse lasted until August 2, 2011, when Congress passed and Obama signed into law the Budget Control Act of 2011 (BCA), which raised the debt ceiling by $2.1 trillion in exchange for $2.4 trillion in spending cuts over 10 years. The BCA also created a bipartisan “supercommittee” to find an additional $1.2 trillion in deficit reduction by November 2011, or else automatic across-the-board cuts (known as sequestration) would take effect starting in 2013. However, the supercommittee failed to reach an agreement by the deadline, triggering sequestration.
The 2011 crisis had several negative impacts on the US economy and its global reputation. The uncertainty and volatility caused by the political brinkmanship reduced consumer confidence and business investment, slowing down economic growth and job creation. The stock market also suffered losses during and after the crisis. Moreover, for the first time in history, one of the major credit rating agencies (Standard & Poor’s) downgraded the US sovereign credit rating from AAA to AA+, citing political dysfunction and lack of fiscal credibility as reasons for its decision.
The 2023 Crisis
The current debt ceiling crisis is similar to previous ones in many ways but also different in some aspects. Like before, it involves a divided government with different fiscal priorities and ideologies. The Democrats, who control both the White House and the Senate (albeit with a slim majority), want to raise or suspend the debt ceiling without preconditions, arguing that it is necessary to pay for spending that has already been authorized by previous Congresses and Presidents (including those from both parties). They also want to pursue their agenda of expanding social programs and infrastructure spending through budget reconciliation, which does not require Republican support but does require raising or suspending the debt ceiling.
The Republicans, who are in opposition but still have enough votes to block legislation in the Senate (unless filibuster rules are changed), oppose raising or suspending the debt ceiling unless it is accompanied by significant spending cuts or reforms. They also oppose most of the Democrats’ proposals for new spending and taxation, accusing them of being wasteful, excessive, and harmful to economic growth and fiscal sustainability.
Unlike previous crises, however, this one comes amid an ongoing pandemic that has severely affected public health and economic activity around the world. The US government has responded to this unprecedented challenge by enacting several stimulus packages totalling over $5 trillion since March 2020 (mostly under Trump’s administration), which have increased both spending and borrowing substantially. These measures have helped mitigate some of the negative impacts of Covid-19 on households, businesses, and state and local governments but have also added to the national debt (which now exceeds GDP) and widened budget deficits (which reached record levels in fiscal years 2020 and 2021).
Another difference is that this crisis occurs at a time when interest rates are relatively high (due to monetary policy tightening by the Federal Reserve) and inflation is rising (due to supply chain disruptions and pent-up demand). This creates a challenging trade-off between supporting economic recovery (which may require more spending) and reducing fiscal pressure (which may require less borrowing). Moreover, it increases the cost of servicing the debt and the risk of a debt spiral if investors lose confidence in the US government’s ability to repay its obligations.
The outcome of this crisis is still uncertain as both sides remain entrenched in their positions with little sign of compromise or cooperation. If no agreement is reached by June 1st (or earlier if Treasury runs out of extraordinary measures), then default becomes inevitable unless President Biden invokes emergency powers (such as invoking Section 4 of the Fourteenth Amendment) or takes unilateral action (such as minting a platinum coin) to avoid it. However, these options are legally controversial and politically risky.
A default would have disastrous consequences for both domestic and international markets as well as for millions of Americans who rely on government payments or services. It would also damage America’s credibility as a global leader and undermine its ability to project power and influence around the world.
Therefore, it is imperative that Congress acts responsibly and swiftly to raise or suspend the debt ceiling before it is too late.