How US debt limit became ‘a hostage that’s worth ransoming’

WASHINGTON: A decade ago, a standoff between Democrats and Republicans over increasing the United States’ authority to borrow brought the country days away from a default and caused a major ratings agency to downgrade its credit for the first time. In the aftermath, top Senate Republican Mitch McConnell described the debt limit to The Washington Post as “a hostage that’s worth ransoming,” and a decade later, it’s in captivity once again.

The ceiling on how much debt the United States can take on is the subject of fierce negotiations in Washington between Democrats who control Congress but can’t rally enough votes to increase it unilaterally, and Republicans who refuse to vote for any increase at all. The dispute has unusually high stakes because absent an increase, the United States could default on its bills in October, likely devastating its economy and undercutting a pillar of the international financial system.

Lawmakers have bargained over increasing the debt limit for decades.

But the willingness to push the world’s largest economy to the brink dates back to 2011, when ascendant Republicans were committed to reining in spending by Democrats, and used the limit to achieve that. “Most of the (Republican) leadership sees the 2011 debt limit standoff as ultimately a success in that they were able to force (then-president Barack Obama) to sign what was the biggest spending cut bill in decades without actually having any default,” said Brian Riedl, who was then chief economist to Republican Senator Rob Portman.

The deal they cut was meant to lower the government’s spending over the course of years. It did not stick: the US national debt and budget deficit have soared in the years since due to spending by both Republican and Democratic presidents. Others involved in the 2011 standoff warn that even without a default, the brinksmanship has its own consequences.

“The ways that it could be affecting our country and its economic strength are difficult to measure, but it’s likely they’re occurring under the surface, that our credibility is being eroded,” said Shai Akabas, Director of Economic Policy at the Bipartisan Policy Center, who a decade ago worked with now-Federal Reserve Chair Jerome Powell in analyzing a default’s effects.