Please Stop with the 1995 Debt Ceiling Crisis Comparison

One thing people (myself included) can’t help themselves from doing is looking for historical analogs to current problems.  Only this time we’ve f***ed things up so badly that there really aren’t any.

The debt ceiling “crisis” of 1995-1996 was a Lego version of this one, a scale model 1/10th the intensity.  It was a structural deficit issue that was both self-inflicted and easily remedied.  Its impact on the stock market doesn’t even show up in a monthly chart going back 20 years.

Here’s Calculated Risk (from May) on why the 1995 comp is a waste of time:

In fiscal 1995, the economy was in the middle of a strong expansion with the unemployment rate around 5.6%. There was no cyclical deficit (from a recession), just a left over structural deficit that was steadily being reduced. The deficit in fiscal 1995 was 2.2% of GDP (about 10.8% of outlays).

This year, the economy is fragile, the unemployment rate is at 9.0%, and the deficit is a combination of both a structural deficit and a cyclical deficit (from the great recession). The total deficit is now close to 9% of GDP and about 37% of outlays.

In fiscal 1995, the government could do the same “extraordinary measures” as today to delay the day of reckoning, and then eventually cut off all non-essential discretionary outlays (the “government shutdown”). That was enough to buy more time, and the government didn’t have to default on the debt, or cut Social Security or Medicare payments.

Now there is a cyclical deficit on top of an even larger structural deficit. It is impossible to just shutdown non-essential discretionary outlays – the cuts will have to go deeper. So the comparison isn’t valid.

So there are two things going on here, a cyclical deficit (which we should be able to grow out of within a few years provided we don’t do anything too stupid) and a structural deficit which is really the political question of the day.

The “crisis” is really one that is manufactured and meant to determine which ideology is going to control the heart and soul of America going forward.  The party that originally championed the Laffer model of lower-taxes-equals-higher-revenues (the ultimate have your cake and eat it too economic concept) is now concerned about deficits and spending.  Great, we’ll see if they’re concerned enough to give a cotton-picking inch on raising tax rates.  So far, it doesn’t appear that they will.

Source:

Debt Ceiling: False Comparisons to 1995 / 1996 (Calculated Risk)

 

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