Speaker of the House Kevin McCarthy talks to reporters just after the Republican majority in the House narrowly passed a sweeping debt ceiling package as they try to push President Joe Biden into negotiations on federal spending, at the Capitol in Washington, on April 26.J. Scott Applewhite/The Associated Press
The debt-ceiling crisis of 2011 sent the stock market tumbling, damaged the American economy, and led to the first-ever downgrading of the United States credit rating.
The debt-ceiling crisis coming at us now could be worse.
Once again, the United States Congress has missed the deadline to authorize the government to take on extra debt. Once again, the Treasury Department is fiddling to keep the bills paid on a temporary basis. Treasury Secretary Janet Yellen warns that the United States could start defaulting on its debts in early June, though sometime later in June or in July is more likely.
The 2011 crisis came in the wake of the 2008-09 financial emergency and during a debt crisis in Europe. The 2023 crisis comes in the wake of a pandemic, at a time of high inflation and rising interest rates, and in the midst of tense U.S.-China relations and war in Ukraine.
Despite the obvious insanity of permitting a default, the United States in 2011 came perilously close to letting one happen.
This time, “the good news is that the chances of default are unlikely, though not zero,” said Angelo Katsoras, a geopolitical analyst at the National Bank of Canada. “But the longer you wait till the last minute, the greater the risk of market turbulence,” and a hit to growth and productivity that neither the United States nor Canada can afford.
Remember the debt ceiling crises of Donald Trump’s presidency? That’s right; there were none. These dramas occur only when a Democrat is in the White House and Republicans control at least one chamber of Congress.
In 2011, with Barack Obama president and Republicans controlling the House, the United States came within two days of a possible default, before both sides agreed to cut government spending in exchange for an extension.
The American economy paid a price. The stock market took six months to return to precrisis levels, government borrowing costs rose and the USA lost its Triple-A credit rating.
John Ibbitson: Canada needs honest talk about its defence needs, spending intentions
Gus Carlson: Canadians pay so much more in taxes than Americans – and for what?
The Democrats, including then-vice president Joe Biden, came away from the affair convinced that it had been a mistake to negotiate. As president, Mr. Biden vows he will not sign anything other than a clean bill raising the debt ceiling.
House Republican Speaker Kevin McCarthy’s caucus is split between regular conservatives and so-called MAGA Republicans who are far more loyal to former president Donald Trump than to him.
On Wednesday, after late-night negotiations, Mr. McCarthy put forward a bill to raise the debt ceiling accompanied by major cuts to spending, work requirement for welfare, and a rollback of the Biden administration’s climate program. The bill passed by the narrowest of margins Wednesday evening.
During debate, Republican Representative Tom Cole told the House “what we’re saying is let’s sit down and talk things through and here is our opening position.”
“Through backroom dealings, the Republican majority has now settled on a bill that backstabs working families,” Democratic Representative Teresa Leger Fernandez retorted. “Their bill delivers poison, not prosperity.” Many Democrats called it a “ransom note.”
The bill has zero chance of making it through the Democrat-controlled Senate. But Mr. McCarthy believes it will at least give him a position from which to negotiate.
The most likely scenario goes something like this: The Republicans will insist on Democrats accepting the spending cuts. The Biden White House will refuse. As Default Day, whenever it turns out to be, gets closer, markets will totter, alarmed corporations will demand that both sides compromise.
Very close to deadline, Republicans and Democrats will reach an agreement that scrapes through the House with the help of relatively moderate Republicans.
But though that is the most likely scenario, it is not only one. America came to brink in 2011, and that was before Mr. Trump’s presidency and the rise of the MAGA movement within the Republican party.
Americans are so deeply estranged from each other – over spending, over guns, over abortion over immigration – that compromise seems impossible. “We are in uncharted territory,” warns Mr. Katsoras.
Default – which would probably bring on an American and thus a Canadians recession, along with a general global downturn – remains possible.
The stakes are so high that the odds favour reason prevailing. But in parts of Washington, these days, reason is in short supply.