A decade ago, a standoff between Democrats and Republicans over increasing America’s borrowing capacity put the country within days of default and prompted a major rating agency to downgrade its credit rating for the first time.
After the episode, the Senate’s top Republican, Mitch McConnell, described the debt limit to the Washington Post as “a hostage worth bailing out.”
A decade later, the debt limit the United States can sustain is once again the subject of fierce negotiations in Washington between Democrats, who control Congress but cannot muster enough votes to raise it unilaterally, and Republicans who refuse to vote. .
The dispute is extraordinarily important because without a raise, the US could stop paying its bills in October and would likely wreck its economy and undermine one of the pillars of the international financial system.
Lawmakers have negotiated raising the debt limit for decades. But the desire to push the world’s largest economy over the edge dates back to 2011, when Republicans set out to curb Democrats’ spending and used the cap to do so.
“Most (Republican) leaders considered that the 2011 debt ceiling standoff was ultimately successful, as they were able to force (then President Barack Obama) to sign the largest bill in the United States. A bill to cut spending in the United States,” said Brian Riddell. , who was then chief economist at Republican Senator Rob Portman, “decades without default.”
The deal they struck was aimed at cutting government spending over the years.
But it was not met: the national debt and budget deficit of the United States rose in the following years due to spending by Republican and Democratic presidents.
Others involved in the 2011 standoff warn that even without default, the dangerous situation has its own consequences.
“The ways in which it could affect our country and its economic strength are hard to gauge, but it is likely that it is already happening beneath the surface, and our credibility is eroding,” said Shai Akabas, director of economic policy at the center. Bipartisan, who worked ten years ago with current Federal Reserve Chairman Jerome Powell.
– Another year, same people –
There are few countries that have to borrow as much as the United States and, at the same time, must negotiate periodic increases in debt that they will be able to sustain.
Not only must Congress approve an increase in the debt limit to avoid a “default,” it must also approve government funding to avoid a shutdown at the end of September.
All while negotiating two huge spending bills that Democratic President Joe Biden wants to pass.
As in the standoff a decade ago, McConnell is leading Republican senators.
Today, the senator insists that raising the debt ceiling is the responsibility of the Democrats in power and that his party will not help them.
In 2011, the two sides negotiated a deal that sought to make significant reductions in the budget deficit over the next several years, but was ultimately unsuccessful.
Obama’s Republican successor, Donald Trump, signed off on tax cuts that widened the deficit and then two massive spending measures that pushed it to a record high in 2020, although they will likely prevent the economy from a worse downturn.
– A ‘ridiculous’ discount –
Biden has signed a third pandemic spending bill, and the two measures he’s taking under consideration could increase the deficit.
The most early consequence of the debt ceiling stagnation came in 2011 shortly after its decision, when S&P Global Ratings cut the country’s credit rating below its rating cap, while Moody’s Investor Services and Fitch Ratings, the other two major agencies, remained unchanged. .
“It seemed ridiculous to me” because the state had never defaulted, said Warren Payne, who at the time of the downgrade was chief economist on the House Ways and Means Committee, which is led by Republicans.
“There was no intention to allow default in 2011. And I think if you look at data from members of Congress right now, there is no intention to allow default now,” he said.
But it is not yet clear how the default will be avoided.
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