Because the three week government shutdown in December 1995 grew out of bitter disagreement between a Democratic president and an energized Republican majority in the House of Representatives, many of us feel we have seen this movie before. However, we can't be sure it will end the same way-with a budget compromise and a stronger economy in the following year. I was director of the Office of Management and Budget in 1995. It was a tense, difficult situation, but far less dangerous than the one we face now.
The risk to economic growth is greater now than in 1995, because recovery from the Great Recession is still incomplete, with unemployment at 7.3 percent. By the end of 1995 the economy was well recovered from the mild recession early in the decade and the unemployment rate was 5.6 percent. A higher proportion of the population was working in 1995 and under-water mortgages were rare. The economy is far more fragile now.
Although partisan rhetoric was strident in 1995, Democrats and Republicans actually talked to each other and compromises were still expected. The budget process was creaking, but not totally broken. Congress had agreed on a budget resolution and several appropriations bills had already passed and been signed by President Clinton before the shutdown. This year the House and Senate had not even been able to discuss their widely-different budget resolutions and not a single appropriations bill has passed. The House Republicans have not been able to agree even among themselves on transportation appropriations or a farm bill. Indeed, the split within the Republicans creates huge uncertainty that was absent in 1995. However bitterly the Democrats disagreed with Speaker Gingrich, they knew that, unlike Speaker Boehner, he was in command of his troops and empowered to cut a deal.
Finally, and most importantly, breaching the debt ceiling has become a credible threat. Although the debt ceiling figured in 1995 partisan rhetoric, it was still unthinkable that politicians would force the Treasury to stop paying the government's bills or actually default on its debt. But after the near-death experience of August 2011, these threats must be taken seriously. Even coming close to default in 2011 had damaging effects on the economy. Now there is real risk that deep partisan hostility, breakdown of communications, and weak leadership could prevent agreement before the Treasury runs out of reserves in about two weeks. If that happens and the government is unable to make vital payments, such as Social Security checks, the consequences could be catastrophic, far beyond the human and economic damage from the shutdown.
For many decades the entire world has believed that the United States honored its obligations and paid its debts. Once we breach that trust, we will not get it back and the possible consequences—plunging markets, rising interest rates, massive layoffs, dropping consumer and investor confidence—could take us into unknown economic territory no one should want to explore.