As the U.S. government comes closer to running out of money to pay its bills, the country is grappling with its fourth potentially economy-wrecking debt ceiling breach since 1995.
President Joe Biden is meeting with Congressional leaders on Sunday to try to strike a deal to lift or suspend the debt ceiling, or else the government risks defaulting on its debts as soon as June 1. The consequences would be potentially catastrophic—Moody’s Analytics forecast almost 8 million could lose their jobs if the crisis drags on for months. And although past showdowns have all ended with deals to avoid the chaos of a debt default, the different circumstances of the current confrontation could lead to a different outcome.
Republicans, who control the House of Representatives, have demanded spending cuts and increased work requirements for social benefit programs in exchange for raising the limit, while Biden has insisted the limit be raised unconditionally, preferring to reduce the federal spending deficit mainly by raising taxes on the wealthy.
In maneuvering for a bargain, both sides will draw on the experience of three previous debt ceiling crises—especially Biden, who was a senator during one and vice president during the others.
In all three, a Republican-controlled House of Representatives has used the debt limit as leverage to try to force concessions from a Democratic president—with varying degrees of success.
Until the mid-90s, and even on most occasions since, the debt limit has been dealt with without much fanfare—it’s been modified 78 times since 1960.
That changed in 1995 during President Bill Clinton’s first term in office, after Republicans took control of the House of Representatives and Senate in the midterm election. The new Republican speaker of the house, Newt Gingrich, used his leverage to try to force Clinton to sign a balanced budget, threatening to allow the U.S. to go into default for the first time in its history if he did not.
After a disruptive 21-day government shutdown, during which public opinion turned against the Republicans, Gingrich agreed to a Clinton-proposed budget as well as a debt limit increase.
History repeated itself in 2011 after Republicans took control of the House of Representatives in the midst of President Barack Obama’s first term. House Speaker John Boehner, following a similar playbook to Gingrich, demanded spending cuts in exchange for raising the debt ceiling.
Both sides stood their ground until the last moment, rattling financial markets. Stocks fell because of the uncertainty, with the S&P 500 dropping 17%. Standard & Poor's downgraded U.S. debt for the first time.
Obama and then-Vice President Biden and the Republican leaders reached a last-minute deal to cut spending over the next decade and establish a committee to find future cuts. He signed the Budget Control Act on Aug. 2, the very day the Treasury Department had warned the U.S. would exhaust its ability to pay its obligations.
The 2011 budget deal set the stage for a renewed confrontation in 2013, when Boehner again demanded Obama cut spending in exchange for lifting the debt ceiling. This time, Obama refused to negotiate. Republicans relented and lifted the debt ceiling without extracting any major concessions.
Will This Time Be Different?
While the current standoff may end like the others—with a deal—some experts see a growing danger that lawmakers will miscalculate and fail to either reach an agreement or back down. Mark Zandi, chief economist at Moody’s Analytics, put the chances of a default at a none-too-comfortable 10% in an analysis earlier this month.
Unlike in 2011, markets have yet to reflect any nervousness among traders that a deal won’t be reached. That makes it more likely that the U.S. will go into default, since lawmakers are likely to be spurred into action only by market turmoil, Zandi said.
“Even a lengthy standoff no longer has a zero probability,” he said in a commentary. “What once seemed unimaginable now seems a real threat.”