Treasury Secretary Janet Yellen’s announcement Monday that a government default could come as early as June 1 raises the stakes for quickly finding a bipartisan solution to the debt-ceiling crisis.
But debt watchers have a warning about negotiations scheduled to start next Tuesday. Both sides say they want to tackle the issue, but recent history is littered with bipartisan deals that actually made the deficit worse.
The proof comes from numbers provided by the budget hawks at the Committee for a Responsible Federal Budget (CRFB). They found that 3 of the last 4 times Washington raised the debt ceiling, the agreements were attached to larger deals that actually increased deficits.
In fact, you have to go all the way back to 2011 to find the last debt ceiling deal that resulted in concrete deficit reduction.
“I don't know if there's a magic formula for what causes a debt ceiling increase to go in a fiscally responsible versus fiscally irresponsible bill,” says Marc Goldwein, the CRFB’s policy director, in a recent interview. The key question is “are politicians in the moment concerned about the deficit or not?”
The tone this year is notably mixed compared to previous showdowns, leading to uncertainty both on the question of how this current crisis ends—and whether a final deal will actually help America begin to solve its debt problem.
The passage of a House GOP plan last week has led to some notes of optimism from business groups that there is now a path forward to avoiding the economic turmoil that would accompany default while perhaps addressing deficits.
Business Roundtable CEO Joshua Bolten recently said in a statement that he hopes for an eventual deal "that takes default off the table and begins the hard work of dealing with our deficits and debt."
A comparison to 2011
The biggest debt ceiling fight in recent history - and the last time the resulting compromise resulted in concrete deficit reduction - was all the way back in 2011 when the main players were also a Democratic president in Barack Obama and a Republican speaker in John Boehner.
Both sides began that standoff agreeing to talk and with an understanding that deficit reduction would be a high priority. Obama had even established the Bowles-Simpson Commission a year earlier intent on searching for ways to a balanced budget.
That year’s messy standoff led to the Budget Control Act of 2011 and $917 billion in deficit reduction over the following decade, according to CRFB calculations.
Republicans look to 2011 as a model for how to use the debt ceiling as leverage to stand up a Democratic president. Meanwhile, Obama officials have regularly expressed regret that they agreed to negotiate on something that they say should be inviolable: the full faith and credit of the United States.
Biden was central to those 2011 talks as Vice President and came out clearly looking for a different approach in the future. “I’d be frustrated if I was sitting there as well,” he said in August 2011 of his Democratic colleagues even as he rounded up votes for the deal that eventually passed.
While the deal may have succeeded in cutting deficits, it came with significant economic damage. The last-second deal happened after markets tanked in the summer of 2011. The brush with default also led the credit rating agency Standard & Poor's to downgrade the US credit rating for the first time in history.
Obama and Boehner faced off in a 2013 debt ceiling sequel that led to a different outcome. The White House took a harder line and the talks - while still heated - were less disruptive to the overall economy but also didn’t take a significant bite on deficits. That year’s deal led to a bicameral budget conference but without the non-negotiable spending cuts that had been a result of talks two years prior.
In the years since 2013, the debt ceiling has been raised 4 times under Presidents Obama, Trump and Biden. Three of those increases came as part of budget deals that actually increased the deficit by over $2 trillion, according to CRFB calculations.
The ‘first step’ toward compromise
This year Republicans say deficit reduction is their top priority and must be included in exchange for a debt ceiling increase. But they have also included some provisions in their debt ceiling deal - such as defunding the IRS as it aims to close the tax gap - that would likely have the effect of increasing deficits if enacted.
Republicans have also made it a priority to extend the Trump-era tax cuts - formally called the Tax Cuts and Jobs Act of 2017 - which are a key driver of the current deficits.
On the other side of the negotiating table, President Biden has often touted the deficit reduction measures in the budget proposal he released in March. But he has steadfastly refused to engage on the debt ceiling in a stance that will be severely tested during next week’s talks.
The White House sit down scheduled for May 9 appears set to include Biden and McCarthy as well as House Minority Leader Hakeem Jeffries (D-NY), Senate Majority Leader Chuck Schumer (D-NY), and Senate Minority Leader Mitch McConnell (R-KY).
Even after Yellen’s note, both sides have publicly dug in on their current positions. Goldwein nonetheless sees a potential path forward.
His group has praised McCarthy’s plan as a good “first step” towards finding a deal deficit hawks can get behind. He notes that the Congressional Budget Office has found that the GOP bill, on net, would cut deficits by $4.8 trillion over 10 years. Meanwhile, President Biden’s budget includes about $3 trillion in deficit reduction.
He says if the talks can stay on track and “we end up somewhere in the middle, I would consider that a huge victory,” he says.
Ben Werschkul is Washington correspondent for Yahoo Finance.
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