Failure to raise the Federal debt ceiling limit could "roil the financial markets and cause severe economic problems," "cause profound damage to our country," and have “dire consequences.” So wrote the Los Angeles Times, Washington Post, and New York Times. But the year was 1995, not 2011.
Other ills predicted during that contentious debate were rising unemployment, reduced GDP growth, and soaring interest rates. That was at a time when President Clinton and Democrats were fighting off attempts by Republicans to link cutting the deficit to the increase in the debt ceiling and a continuing resolution on spending.
Then as now, there was a widespread misperception that failure to increase the debt ceiling would produce a default: "congressional Republicans are threatening to provoke the nation's first-ever default" (Washington Times). The Los Angeles Times reported: "the first real risk of a government default could occur November 15 [1995]." Even the then Chairman of the Federal Reserve, Alan Greenspan, warned that congressional Republicans should drop their efforts, declaring: "To default for the first time in the history of this nation is not something anyone should take in any tranquil manner."
So what happened back then? After shutting down the government for five days in late November, a temporary extension to the debt ceiling was passed, but the government was shut down again from December 16th, 1995 to January 6th, 1996 before President Clinton finally agreed to the cuts that the Republicans in Congress had been pushing and a long term increase in the ceiling was enacted. Yet, no default ever occurred. In retrospect, it is not surprising. Default only occurs if the government stops paying interest on the money that it owes. Not increasing the debt ceiling only means that the government is forbidden from borrowing more money and that spending is limited to the revenue the government brings in. And, with interest payments on the debt making up only a small fraction of revenue, the interest itself was relatively easy to pay.
Contrary to Democratic claims, these two shutdowns did not damage the economy. Unemployment remained constant during December 1995 and January 1996 and fell slightly in February 1996 And quarterly GDP kept chugging along, growing as faster or faster during the fourth quarter of 1995 and the first quarter of 1996 than it had over the preceding four quarters. Stock prices also continued to rise throughout the whole drama, with the Dow Jones Industrial Average rising by over 6 percent, from 4,873 on November 13th to 5,181 on January 5th.
As for interest rates, US Treasury bond rates did not go up -- to the contrary, they fell almost continually during 1995 and the beginning of 1996. This indicates that, despite the warnings by the politicians and the media, investors were not at all worried about any default by the US government. Had investors been concerned, they would have demand higher interest rates to compensate them for that risk. We would have seen interest rates spike as negotiations over increasing the debt ceiling failed and the supposed default was about to occur.
The contrast to the situation today in some European countries couldn't be sharper. Interest rates have soared as the fear of default has increased in such countries as Greece, Ireland, Italy, Portugal, and Spain.
Saying that there wasn't a risk of default then or now isn't to deny that there is a huge and growing debt problem, something that represents a real burden to our children and grandchildren. The current $14.3 trillion debt is huge, coming to $190,000 per family of four. President Obama’s February budget planned on adding another $10.3 trillion over the next decade, which would add yet another $130,000 more to such a family.
True, there were problems associated with the shutdowns in 1995-96. The main drawback was that some Federal “nonessential” employees had to miss a paycheck or two. That is certainly a non-trivial problem for those employees who did not have enough money save up. Yet, the lost paychecks were soon replaced, with those employees getting paid vacations, getting paid for not working.
But we should remember that the fiscal standoff had some long-term benefits. The budget battles during 1995-96 ended up reducing the next year's deficit to only $22 billion. And surpluses were produced over the next four years. Few thought that was possible to have surpluses before the shutdown.
On Monday night during his address to the nation, President Obama predicted that if Republicans don’t compromise more, there will be a default, both higher interest rates and unemployment, as well as a "deep economic crisis." Last Friday, at his press conference, the president warned about default: "imagine what that does to the economy when suddenly 70 million checks are put at risk."
President Obama's warnings of “Armageddon” are just scare tactics. So are Treasury Secretary Timothy Geithner claims of “catastrophic” consequences. We can only hope that the lessons of 1995-96 are remembered and that members of Congress dare to vote for fiscal restraint.
John R. Lott, Jr.is a FOXNews.com contributor. He is an economist and author of the just released revised edition of More Guns, Less Crime (University of Chicago Press, 2010).
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