The 2011 debt-limit fight that produced real spending caps

For most of the summer of 2011, the American government spent its energy on a question that sounds absurd when you say it plainly: should the country pay the bills it has already run up? Cable hosts counted down to a date. Bond traders watched a calendar. Members of Congress held press conferences in hallways. And somewhere in the middle of it, a group of freshmen who had been in Washington for about six months were holding the most important vote of their careers.

I want to tell that story straight, because it is told badly from both sides. The left tells it as a hostage crisis staged by reckless extremists. Some on the right tell it as a triumph that proved Washington can be made to cut. Neither version fits the record. What fits the record is more interesting: a real fight, a real result, a real cost, and a lesson about leverage that Republicans have never fully absorbed.

The setting: the 2010 wave

In the November 2010 elections, Republicans gained more than sixty seats in the House of Representatives and took control of the chamber. The Tea Party energy of that year, covered in The Tea Party Wave of 2010 Explained from Santelli to the Statehouses, was about one thing above all: federal spending and debt. The newly elected members had run against the stimulus of 2009, the health care law of 2010, and deficits that had passed a trillion dollars a year. John Boehner of Ohio became Speaker in January 2011.

Those freshmen arrived with a mandate and a deadline. The statutory debt limit, the ceiling on how much the Treasury may borrow, which is explained in twelve questions about the national debt, answered straight, would soon be reached. The Treasury reported the government hit the limit in mid-May 2011, then used accounting maneuvers to keep paying bills. It told Congress the maneuvers would run out around August 2.

For decades, raising the limit had been routine, sometimes bundled into other bills, sometimes passed with grumbling. The new House majority decided that this time it would not be routine.

The demand: dollar for dollar

The Republican position, laid out by Speaker Boehner in a May 2011 speech in New York, was that any increase in the debt limit had to be matched by spending cuts and reforms of at least the same size, dollar for dollar. The logic was simple: if you want to borrow more, you must show how you will borrow less. The principle of attaching conditions to a must-pass measure was not new. It was the reason the debt limit had been created in the first place, to force Congress to think about the total.

Here is the argument in numbered form, the way its defenders made it.

1. The debt had grown fast, and the deficits of 2009 and 2010 were the largest in the country's history in dollar terms.
2. The debt limit is one of the only moments when Congress must vote on the total.
3. Presidents of both parties had used it as leverage. As a senator in 2006, Barack Obama had voted against raising the limit and criticized the borrowing.
4. Therefore, tying an increase to spending restraint was a legitimate use of the power of the purse.

That fourth step is the heart of it. The Constitution gives Congress the power to borrow money in Article I, Section 8. Congress is allowed to attach terms. The only question was whether this was a wise way to do it.

The opposing case at its best

Here is the strongest version of the other side. Critics said the debt limit does not authorize any new spending. The bills were already ordered by laws Congress had passed. Refusing to raise the limit was like running up a charge card and then declining to pay the statement, and the risk of default, even a brief or technical one, could raise borrowing costs and rattle markets. They said a fight over the limit threatened to punish the whole country over disagreements about future budgets. And they said that if the party that wants smaller government causes a crisis, voters would blame it.

Some Republicans worried about the same things. They did not doubt the goal. They doubted the method. Hold that thought, because the verdict depends on it.

Cut, Cap and Balance

In July the House passed the Cut, Cap and Balance Act on July 19. It would have allowed a debt limit increase only if Congress enacted immediate spending cuts, enforceable caps on future spending, and sent a balanced budget amendment to the states. Three days later, on July 22, the Senate, controlled by Democrats, voted to table it. The bill was never going to become law, because the President had said he would not sign it. But it stated the party's wish list, and it showed that the House majority was willing to put its terms on the record.

Meanwhile, the President and the Speaker spent weeks trying to reach a larger agreement, often called the grand bargain, that would have combined spending cuts, entitlement changes and new revenue. The talks reached a breaking point in July. The sticking point was revenue: the President wanted more of it, and the Speaker could not deliver it from his caucus. Here, I think, you can criticize both sides, and you can also see why a deal was so hard.

The Budget Control Act of 2011

A deal came together in the last days of July, negotiated in large part between Vice President Joe Biden and Senate Republican leader Mitch McConnell. The House passed it on August 1, the Senate on August 2, and the President signed it that same day. The Budget Control Act did four main things.

1. It set caps on discretionary spending for ten years. The law put enforceable annual limits on the spending Congress votes on every year, covering fiscal years 2012 through 2021, with initial savings of roughly $900 billion over the decade. The caps were real, in the sense that they were written in statute and carried automatic enforcement. That is why the title of this post says what it says.
2. It raised the debt limit in stages. The increase ran to about $2.1 trillion in steps through the following months, tied to the deal.
3. It created a Joint Select Committee on Deficit Reduction. Twelve members, six from each party and each chamber, were told to find at least $1.2 trillion in additional savings by late November 2011.
4. It set a trigger. If Congress did not enact the committee's savings by January 2012, automatic across-the-board cuts, called the sequester, would take effect, split roughly evenly between defense and non-defense programs. Social Security and Medicaid and some other programs were exempted, and Medicare cuts were limited.

The trigger was designed to be so unpleasant that both parties would find a better way. Republicans disliked the defense cuts; Democrats disliked the domestic ones. The theory was that mutual dislike would force a deal. It is the same theory behind the Gramm-Rudman law of 1985, which is covered in How Washington learned to budget, from the 1921 act to the 1997 deal.

The committee fails, the sequester arrives

The theory failed. On November 21, 2011, the Joint Select Committee announced that it could not reach agreement. The trigger stayed armed. Congress then delayed it with the American Taxpayer Relief Act at the start of 2013, and the sequester took effect on March 1, 2013.

So the part of the deal designed as a threat became the part that actually bit. For years afterward, discretionary spending came in under where it had been headed. Defense budgets were squeezed, and many Republicans, especially defense hawks, did not like it. Later budget agreements in 2013, 2015 and 2018 loosened the caps for some years, and the caps ran out after fiscal year 2021. Fair is fair: the caps were real, and Congress also bent them when they pinched.

Inside the party: three kinds of Republican

The fight also exposed a split inside the party, one that The Tea Party Wave of 2010 Explained from Santelli to the Statehouses helps explain and that you can trace through the whole period. There were at least three camps.

• The fiscal hawks and libertarians. For them, no deal that left entitlements alone and let the debt keep growing was good enough. Some voted against the final bill because the caps were too weak, and they were not wrong that the law did not touch the largest programs. Their instinct, that the debt is a moral problem, is the one argued in A Balanced Budget Is a Moral Argument Before It Is an Accounting One.
• The defense hawks. They had agreed to restraint in principle and then watched the sequester fall on the military in a way they had not intended. Their complaint was that the trigger was aimed at the wrong target: a threat meant to punish Democrats also punished the armed services.
• The governing wing. Leaders who had to count votes and keep the government functioning saw the deal as the best available result from a Senate and a White House they did not control. Their view was that you take the caps and keep fighting.

Each camp had a point. This is what a coalition looks like when it holds only one chamber of Congress. You cannot dictate terms. You can only extract the best trade available and decide whether you can live with it. The leaders who made that judgment made a defensible one. The members who dissented made a defensible one too.

The downgrade

On Friday, August 5, 2011, three days after the bill was signed, Standard & Poor's lowered the United States credit rating from AAA to AA+. It was the first time the country had lost the top rating from that agency. S&P said that the debt deal fell short of what it had expected, and it cited a political process that had become less stable, less effective and less predictable.

The market reaction was mixed in a way that tells you something. Stocks fell sharply the following Monday. But yields on Treasury securities fell too, as investors rushed into them as a safe haven. The world's lenders evidently still trusted the Treasury more than anything else on offer. That is a point defenders of the fight like to make, and it is true as far as it goes.

The cost was not zero, however. The Government Accountability Office later estimated that the delay in raising the limit raised Treasury's borrowing costs by a sum on the order of a billion dollars in fiscal year 2011. That is small against the size of the federal budget, and still real money that bought nothing.

The verdict: was it worth it?

Let me put the case in two columns, because that is how a fair person does it.

What the fight delivered.

• Enforceable caps in law, for the first time in years, on the part of the budget that Congress controls every year.
• A federal budget process that had treated debt-limit increases as automatic was forced to face them.
• For several years, discretionary spending fell as a share of the economy, and the annual deficit came down from its 2009 peak. Part of that came from the recovery and from the tax changes of January 2013, so I do not claim all of it for the caps.

What it cost.

• A credit downgrade, market turbulence and a loss of public confidence that hit retirement accounts and household nerves.
• A modest but real increase in borrowing costs.
• A pattern in which the fight itself became the product. The caps were later loosened, and the large programs that drive long-term borrowing, Social Security, Medicare and Medicaid, were untouched, because the law did not reach them.

On the second point I want to be blunt. The Budget Control Act capped the small part of the budget, discretionary spending, and left the big part, mandatory spending and interest, alone. That means it could not, by itself, change the debt trajectory. A conservative who wanted a durable fix needed to take on entitlements, and there was no appetite on either side to do that in 2011. The reasons why restraint so often loses are covered in Why Spending Restraint Keeps Losing in Washington, Whoever Is in Charge.

So was it worth the brinkmanship? My honest verdict is that the caps were worth having and the method was riskier than it needed to be. The result proved that a House majority can extract real constraints when it is willing to hold firm. It did not prove that the debt limit is a safe weapon. The party that wants to use it again needs to ask whether it can win without the downgrade, and whether the prize is something that lasts. A rule that can be loosened by the next budget deal is a speed bump, not a wall.

That fits with a larger conservative principle, which is that the most durable reform is the one written into permanent law and backed by public support, not the one won at the edge of a cliff. The earlier shutdown fights, told in The 1995 and 1996 Government Shutdowns in Dated Steps and the Lessons Learned, showed the same thing. Leverage works when the public understands what you want and who is responsible for the risk. It fails when the other side gets to tell the story first.

For the principle underneath all of this, see A Balanced Budget Is a Moral Argument Before It Is an Accounting One. For the divided-government wins that came with less drama, see divided government gave us welfare reform and a balanced budget. And if you want to track how your own member voted on budget bills, the /politics/votes/ page is a place to start.

The bottom line

• The House Republicans of 2011 used the debt limit to demand spending restraint, and the Budget Control Act of August 2, 2011 delivered ten years of enforceable caps on discretionary spending.
• The Joint Select Committee failed, and the sequester that followed was the part of the law that actually cut.
• Standard & Poor's downgraded the country on August 5, 2011, and the delay cost the Treasury real money, though Treasury yields fell, not rose, in the aftermath.
• The caps were worth having but did not touch Social Security, Medicare or Medicaid, and later deals loosened them. A durable fix has to reach the whole budget.
• Before cheering the next showdown, ask what you will get, who gets blamed, and what lasts. Then tell your representative what you expect.