As the U.S. approaches its debt ceiling, investors and politicians alike are looking back to the 2011 debt-ceiling standoff as a reason not to panic. However, Mike Sommers, former chief of staff for then-Speaker John Boehner, cautions that this year's situation is "100% different" from the previous one. The talks in 2011 began much earlier and featured a different political environment, with a mutual agreement that deficit reduction was a top priority. In addition, President Obama and Boehner had a more congenial relationship, which made dealmaking easier.
While the current standoff and the 2011 situation are similar in that they feature a Democratic president on the eve of a re-election bid facing off against a newly ascendant House GOP majority intent on curbing what they see as his excesses, there are many differences between the two situations. For instance, the talks in 2011 began early and after Obama had established the Bowles-Simpson Commission a year earlier with a mission of finding a balanced budget. Furthermore, Obama and Boehner saw each other often in the months leading up to the deal, whereas President Biden and Speaker McCarthy have only been in the same room a handful of times in 2023.
The differences between the two situations are due to shifts in the political landscape on both sides of the aisle, with some of those shifts being the result of how the 2011 crisis played out. For Biden, who was a lead negotiator in those talks, the 2011 openness to negotiate was later seen by Democrats as a mistake, and he is now stretching some credulity by maintaining that the talks this week are actually negotiating on spending cuts more generally, not over the debt limit per se. On the other side, Republicans look to 2011 as a model for how to use the debt ceiling as leverage, but the powerful conservative wing of the GOP caucus has driven the party to demand much more this time around, giving McCarthy less room to negotiate.
The 2011 crisis eventually ended just two days before the Treasury Department had projected the U.S. would run out of cash. It led to $917 billion in deficit reduction over the following decade, but it also came with steep costs, including a credit downgrade and market turbulence. Despite the risks of a default, some lawmakers may be downplaying the situation, believing that a solution will show up at the last minute, as it did in 2011.
In conclusion, while the 2011 debt-ceiling standoff may offer some insight into the current situation, there are many differences between the two situations, and investors and politicians should be cautious not to downplay the risks of a default.
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