Short History Of The Debt Ceiling/Government Shutdowns

 With all the political talk about the debt ceiling, we thought a short history of the debt ceiling and government shutdowns was in order.

The Second Liberty Bond Act of 1917

Prior to World War 1 every bond issued by the U.S. Treasury needed to be approved by Congress.  During World War 1 Congress approved four different Liberty Bond Acts to issue bonds (and a fifth  Victory Loan Act of 1919).  With the second Liberty Bond Act in 1917, Congress also established a $15 billion “aggregate debt limit” because it was easier than countless bills to approve individual bond offerings.  Thus was born the debt ceiling.  It has been raised (and lowered) almost 100 times since.

History of Debt Ceiling Fights

Throughout history the debt ceiling has been called unnecessary and dangerous, much as it is now.  Calls for its elimination are at least 80 years old.  A review of the stories below read like the talking points from President Obama’s press conference earlier this week.

(h/t The Big Picture):

  • The Milwaukee Journal – (March 20, 1939) Boost for Debt Limit Ditched -Roosevelt Calls on Congress, However , to Remove Curb on Issue of Bonds
    President Roosevelt informed congress Monday that there is no present necessity for legislation to increase the legal limitation of $45,000,000,000 on the toal public debt, but recommended increase of the present $30,000,000,000 limitation on outstanding government bonds. The special message transmitted a letter from Treasury Secretary Morgenthau informing thim that the current balances of the treasury indicate no immediate necessity for advancing the debt ceiling.
  • The New York Times – (March 31, 1939) PRESIDENT URGES ENDING OF LIMIT ON BONDED DEBT
    President Roosevelt told Congress today that there was no immediate need for raising the $45,000,000,000 limitation on the public debt. He asked, however, that the $30,000,000,000 “ceiling” on Treasury bond issues be removed.
  • The Portsmouth Times – (November 9, 1940) The Debt Taboo Is Lifted
    Treasury Secretary Morgenthau officially opens post-campaign business with an announcement that he is going to ask congress for a public debt limit of either 60 or 65 billion dollars. That is a matter which could not have been discussed conveniently in advance of Election Day, but must be discussed now. Like the skeleton in the closet it can’t be kept hidden forever.
  • The New York Times (February 15, 1941) $65,000,000,000 Debt Limit Voted; Senate Critics Deny It Is Enough
    The Senate approved today, with slight changes, the House bill to raise the national debt limit to $65,000,000,000, a ceiling which, according to Administration spokesmen, will suffice until June 30, 1942, at least.
  • The Pittsburgh Post-Gazette – (May 10, 1944) Boosting the Debt Ceiling
    With the national debt already standing at approximately 187 billion and slated to reach the 240 billion mark next March, this business of raising the limit by successive jumps instead of taking it off altogether is little more than a psychological gesture. By holding that flexible limit over the Administration’s head, perhaps some congressmen feel that they will exert pressure on some officials to hold down expenditures. But since those officials know as well as the congressmen that the debt limit is going up and up until the war is won, maybe this economy gesture is intended only for public consumption.


In rare instances the debt ceiling was even cut:
  • The St. Petersburg Times – (April 24, 1946) Senators Favor Debt Limit Cut
    The first step to cut back the limit of what the federal government might owe, from its historic high of $ 300,000,000,000 was taken yesterday by the senate finance committee. The committee voted to reduce the public debt limit to $275,000,000,000. Its unanimous action forecast congressional approval for the first reduction in the debt ceiling, pushed upward steadily during the war years.

More often than not, however, the debt ceiling is being raised:
  • The Lewiston Daily Sun – (June 28, 1955) Extension of National Debt Ceiling Voted; House Action Leaves Limit at 281 Billion for Year
    The House voted 226-56 today to continue for another year the “temporary” 281 billion dollar limit on the national debt. The Senate is expected to act by Thursday: without congressional action, the limit would fall back then to 275 billion. Democrats got in some additional cracks at the administration on its handling of government finances before the extension sailed through on the 170 vote margin in the House.
  • The New York Times – (July 26, 1958) The Federal Debt Ceiling
    “A specter that has been putting in an appearance more or less regularly every year now since 1953 is again back to haunt the Administration. That is the problem of keeping the public dept within the dept ceiling – a problem that will be additionally complicated in the present fiscal year at least by the prospect of a very substantial budget deficit. The dept ceiling is a comparatively new instrument of fiscal control in this country. In 1938, with the dept then standing at what many regarded as the dangerously high level of $37 billion, Congress acted to discourage future reckless spending by setting a limit on the debt of $45 billion. During the ensuing eight years, most of which were marked by war or preparation for war, Congress had little choice but to revise this limited ceiling upward when such action was requested by the President. The ceiling was lifted five times in that period, until it reached $300 billion in 1945. A year later it was revised downward for the first time to its present level of $275 billion.”
  • The Pittsburgh Press – (June 15, 1962) $308 Billion Debt Ceiling is Approved
    The House has approved President Kennedy’s request to raise the national debt ceiling to a record 308 billion dollars after rejecting a Republican effort to trim the hike. The vote on final approval late yesterday was 210 to 192, an 18-vote margin. Asked whether Republicans were justified in charging the Pentagon had tried to “black mail” them into supporting the bill, President Kennedy said he hoped everyone understood the possible effects of failing to raise the limit.
  • The Eugene Register–Guard – (June 10, 1966) Another June Rite: Raising Debt Limit
    Raising the national debt limit has become a June rite in Congress. This year the only doubt about it is whether the ceiling will be boosted by $2 billion or $4 billion. Congress already has approved the projects and voted the appropriation that will call for today’s federal debt to rise – as it has been doing year after year. The United States Treasury says it needs a $332 billion limit to give it elbow room to maneuver and be sure of paying its bills. The House says $330 billion is enough. The Senate will discuss the question next week.
  • The Pittsburgh Post- Gazette – (January 31, 1967) US Seeks loans to pay its Bills
    Secretary of the Treasury Henry H. Fowler told Congress today that the government would be unable to pay all its bill if the ceiling on the national debt was not lifted within 30 days. Fowler ran into Republican hostility in day-long testimony before the House Ways and Means Committee — not on the need to raise the limit but on the government’s debt and budget accounting methods as well as related matters. Fowler asked that the ceiling be raised by $7 billion to $337 billion to cover the period until June 30. Further legislation covering the period after June 30 will be needed later he said.
  • The Palm Beach Post – (May 26, 1970) Congress Asked to Hike Debt Ceiling
    The Nixon administration asked Congress yesterday for an $18 billion increase in the national debt ceiling primarily because the slumping economy is producing lower than expected federal income. The administration asked Congress for an $418 billion increase in both the permanent ceiling no at $365 billion and in the temporary ceiling of $377 billion the government is operation under this fiscal year. Treasury Secretary David M Kennedy and Budget Director Robert P Mayo told the Ilouse Ways and Means committee the increase was needed to cover a $1.8 billion deficit this fiscal year and $1.3 billion deficit in fiscal 1971.
  • The Miami News – (December 1, 1973) Senate may meet tomorrow on debt limit, election reform
    The federal government’s debt is $63 billion over the legal limit and the Senate is preparing for its first Sunday session in 112 years – all because of a tangle created by an election reform measure. Despite the government’s technical violation, officials said bonds and other government debts could be paid off over the next few days out of about $4.5 billion in cash on hand.
  • The New York Times – (November 14, 1975) CONGRESS ADOPTS NEW DEBT CEILING
    After a partisan dispute and a last-minute appeal by Speaker Carl Albert, the House of Representatives narrowly approved today a bill increasing the Government’s debt limit.
  • The Youngstown Vindicator – (October 5, 1977) Rise in Debt Limit Approved in House
    Concerns about the government being unable to borrow more money can be set aside. The ceiling on the national debt will be raised. But a congressional stalemate over raising the debt caused some uneasy moments at the Treasury Department. The government also had to do some juggling of the books to hold its auction of short term treasury bills to investors on Monday. The loan from the Federal Reserve pushed the national debt almost to its limit, teaching $ 699.96 billions dollars.
  • The Montreal Gazette – (April 3, 1979) U.S. Raises Ceiling on National Debt
    The U.S. House of Representatives passed legislation yesterday extending the government’s borrowing authority and preventing the U.S. from defaulting on its debts for the first in its history. The vote to accept Senate amendments and to send the legislation to the White House was 209-165. It came after the House rejected, 216-160, a Republican-led attempt to tack on a strong amendment calling for a balanced federal budget. The House vote came after U.S. Treasury Secretary Michael Blumenthal claimed in a letter that the treasury was on the verge of a default and that retired persons would be hit first. About $8 billion in Social Security cheques already had been mailed to 35 million Americans, Blumenthal said, and there would be no funds to cover them if the House failed to act. In addition, he said, the treasury would not be able to pay civil service retirement benefits, veterans benefits and railroad retirement benefits due for collection today.
  • The New York Times – (November 1, 1983) SENATE DEFEATS BILL TO INCREASE DEBT CEILING
    The Senate, in an extraordinary and unexpected move, defeated a bill late tonight to raise the nation’s debt limit, leaving the Treasury without the authority to borrow. The defeat, with both Republicans and Democrats voting against the bill, came on a vote of 56 to 39 just after 11:30 P.M. Although there is no immediate threat of shutting down the Government, the Senate defeat left unclear whether the Senate would be able to approve an increase in the ceiling in time to prevent a serious disruption. Twenty-five Republicans joined 31 Democrats in voting against the bill. Twenty-eight Republicans and 11 Democrats voted for it. The defeat was seen by some Republicans and Democrats as a way to put enough pressure on the White House and the Congress to get both to agree on some major measures to reduce the projected Federal budget deficits through spending reductions, tax increases or both.
  • The New York Times – (May 04, 1987) Time Bomb in the Debt Ceiling
    There is a time bomb in the national debt ceiling, set to go off at midnight May 15. If a new and higher ceiling has not been set, or the current ceiling extended, Government borrowing must stop and the United States will slide quickly into default. Unthinkable, but that’s how Congress wired the debt limit law last October. Each year Congress goes down to the deadline, then lifts the ceiling. But the game is trickier this year, and could have more serious consequences. Congress threatens yet another crisis to rattle already-worried financial markets. What’s needed instead is a simple bill to raise the ceiling, with dispatch and no strings. The ceiling is a sham. It has no effect on the debt. Deficits create debt; the Reagan deficits have more than doubled the national debt, to $2.25 trillion, ceilings notwithstanding. Each time Government borrowing gets close, the ceiling is raised – but not without costly eleventh-hour shenanigans that force the Treasury into devious financing.
  • The New York Times – (May 12, 1987) REAGAN URGES A RISE IN DEBT CEILING
    Warning of dire financial consequences, the White House urged Congress today to raise the national debt ceiling before the Government runs out of authority to borrow money this Friday. ”We cannot overestimate the effect of such a dereliction of duty,” Marlin Fitzwater, the President’s spokesman, said. But a number of conservative Republicans refuse to heed the Administration, and White House legislative strategists say they do not have the votes to assure passage of such a measure. Periodic Ritual: The fight to raise the debt ceiling is a periodic ritual on Capitol Hill, and every battle is surrounded by predictions of fiscal ruin. Accordingly, there is deep skepticism that the Government will ever be allowed to run out of money and stop paying its bills.
  • The New York Times – (October 19, 1989) Debt Limit Increase Is Sought
    “The Treasury Department has formally notified Congress that it would like to have an increase in the national debt ceiling in place by Oct. 24 to permit planning for Treasury bond auctions and avoid a default on Government obligations when the current ceiling expires on Oct. 31. Some House Democrats fear that the Administration is trying to create an artificial need for a short-term increase of the debt ceiling, to which Senate supporters of a capital gains tax cut could attach their proposal.”
  • The New York Times – (October 8, 1990) U.S. Sales Contingent on New Debt Ceiling
    Treasury financings this holiday-shortened week are confined to tomorrow’s auction of three- and six-month bills and Wednesday’s auction of seven-year notes. On Thursday, the Resolution Funding Corporation, the agency established to raise money to finance the savings and loan bailout, will auction 30-year bonds. These auctions, however, are contingent on a new debt-ceiling increase being enacted. The rate for a three-month bill on Friday was 7.04 percent and for a six-month bill it was 7.08 percent. By late in the day the outstanding seven-year note was trading at a price to yield 8.50 percent.
  • The New York Times – (November 11, 1995) Debt Ceiling Impasse Dampens Bond Prices
    Discussing the possibility of a Government default, Mr. Gamba said, “I believe that the repercussions would far exceed anyone’s estimation.” But, he added: “I don’t believe the Government would allow that to take place. It’s really hard to say how the market would react, because it’s never happened.” Carroll J. Delaney, director of research at Stires, O’Donnell & Company, called the impasse between Congress and the Administration macho theatrics that were being played to the hilt. Still, he saw a potential for both a “loss of credibility and a significant decline in prices.” Mr. Delaney said that the “procrastination and posturing is negative for both the markets and national image in the long run.” He added that if “the Treasury pulls out all stops to insure timely payment on principal and interest,” there will be a short-term, temporary effect of uninvested cash looking for a home.
  • The New York Times – (January 13, 1996) Gingrich Promises Solution on Debt Ceiling
    Speaker Newt Gingrich promised today to avoid more uncertainty about the nation’s borrowing during the impasse on the Federal budget, saying, “We will find a way to take care of the debt ceiling.” Mr. Gingrich, a Georgia Republican, made the comment at a news conference here and left immediately for the next stop on a 10-day fund-raising tour for Republicans. The nation’s debt reached the statutory limit of $4.9 trillion on Nov. 15, and since then Treasury Secretary Robert E. Rubin has avoided defaulting on bonds by borrowing from Government pension funds, a practice that does not count against the debt ceiling.
  • The New York Times – (March 1, 2002) G.O.P. Strategy On Debt Ceiling
    Republican leaders in the House told the Bush administration that they did not have enough votes to increase the legal limit on the national debt and urged the White House to attach the measure to another piece of popular legislation, possibly a supplemental military appropriations bill. The administration has asked Congress to raise the debt limit by $750 billion, to $6.7 trillion, by the end of March, when the government is likely to breach the limit.
  • The New York Times – (December 25, 2002) Bush Seeks Increase in National Debt Limit
    The Bush administration asked Congress today to approve another increase in the limit on national debt, saying it will run out of the authority to borrow money by late February. The deputy Treasury secretary, Kenneth W. Dam, in a letter to the House speaker, J. Dennis Hastert, cited the cost of combating terrorism and the economic slowdown for the government’s growing indebtedness. The federal government, which enjoyed a budget surplus as recently as two years ago, had a shortfall of $157 billion this year and is expected to have a larger one in 2003. Congress raised the government’s debt limit in July by $450 billion, to a total of $6.4 trillion, but administration officials predicted even then that they would need to raise the limit again by some time next year.
  • The New York Times – (October 15, 2004) As U.S. Debt Ceiling Is Reached, Bush Administration Seeks to Raise It Once Again
    Less than a day after President Bush implied that Senator John Kerry lacked ”fiscal sanity,” the Bush administration said on Thursday that the federal government had hit the debt ceiling set by Congress and would have to borrow from the civil service retirement system until after the elections. Federal operations are unlikely to be affected because Congress is certain to raise the debt limit in a lame-duck session in November. Congressional Republicans had wanted to avoid an embarrassing vote to raise the debt ceiling just a few weeks before Election Day. Since Mr. Bush took office in January 2001, the federal debt has increased about 40 percent, or $2.1 trillion, to $7.4 trillion. Congress has raised the debt ceiling three times in three years, raising it most recently by $984 billion in May 2003.
  • The New York Times – (March 16, 2006) Senate Approves Budget, Breaking Spending Limits
    The Senate narrowly approved a $2.8 trillion election-year budget Thursday that broke spending limits only hours after it increased federal borrowing power to avert a government default.  The budget decision at the end of a marathon day of voting followed a separate 52-to-48 Senate vote to increase the federal debt limit by $781 billion, bringing the debt ceiling to nearly $9 trillion. The move left Democrats attacking President Bush and Congressional Republicans for piling up record debt in their years in power.
  • The New York Times – (July 30, 2008) Bush signs sweeping housing bill
    President George W. Bush signed into law on Wednesday a huge package of housing legislation that included broad authority for the Treasury Department to safeguard the nation’s two largest mortgage finance companies and a plan to help hundreds of thousands of troubled borrowers avoid losing their homes. The law authorizes the Treasury to rescue the mortgage finance giants, Fannie Mae and Freddie Mac, should they verge on collapse, potentially by spending tens of billions in federal monies. Together, the companies own or guarantee nearly half of the nation’s $12 trillion in mortgages. To accommodate the rescue plan for the mortgage companies, the bill raises the national debt ceiling to $10.6 trillion, an increase of $800 billion. The bill also creates significant liabilities and risks for taxpayers, that are virtually impossible to calculate.


History of Government Shutdowns – 18 Times Since 1976!

The laundry list above highlights how common these political battles have become over the debt ceiling. The same hyperbolic language used today has been used for the last 80 years. The same warnings used for the last 80 years are being used today. The same metaphors used for the last 80 years are being used today.

Given the recurrent nature of debt ceiling battles, it should come as little surprise that government shutdowns are also quite common. While we all remember the 1995 government shutdown, the list below tallies the 18 shutdowns since 1976:

  • September 30 to October 11, 1976 (10 days)
  • September 30 to October 13, 1977 (12 days)
  • October 31 to November 9, 1977 (8 days)
  • November 30 to December 9, 1977 (8 days)
  • September 30 to October 18, 1978 (18 days
  • September 30 to October 12, 1979 (11 days)
  • November 20 to November 23, 1981 (2 days)
  • September 30 to October 2, 1982 (1 day)
  • December 17 to December 21, 1982 (3 days)
  • November 10 to November 14, 1983 (3 days)
  • September 30 to October 3, 1984 (2 days)
  • October 3 to October 5, 1984 (1 day)
  • October 16 to October 18, 1986 (1 day)
  • December 18 to December 20, 1987 (1 day)
  • October 5 to October 9, 1990 (3 days)
  • November 13 to November 19, 1995 (5 days)
  • December 5, 1995 to January 6, 1996 (21 days)

To be clear, most of these government shutdowns were due to a lack of a budget or Continuing Resolutions to fund and run the government. They did not necessarily occur because of the debt ceiling. We see this as a distinction without a difference.

Some of the more notable government shutdowns are highlighted below:

In December 1981 the government shut down and President Reagan sent home 20% of the non-military federal workforce (400,000 of 2.1 million people). During the episode there was no talk of default and the markets largely ignored it. (When the government was re-opened, all Federal employees were paid for the furloughed period.)

  • November 20 to 23, 1981
    The spending feud between the Republican President Reagan and the Democratic Congress led to a shutdown. The November 20 deadline for a stop gap spending bill was on a Friday, however the House-Senate Conference delayed it to the following Monday to finalize a bill. The compromise bill consisted of 4 billion in spending savings/cuts, by reducing 2 percent of government spending. The White House in reviewing the numbers claimed there would only be 2 billion in savings from the proposed cuts. When presented with the bill in the morning, Reagan refused to sign Congress’s continuing resolution. Reporting in the New York Times stated “President Reagan vetoed the measure as “budget-busting.” Faced with the “difficult choice” of either signing the bill or disrupting Government services, the President said, “I have chosen the latter.” Reagan’s veto led to a shutdown in the government for the afternoon, forcing 400,000 of the 2.1 million federal employees home. Congress approved a stop gap spending bill which later the same day Reagan signed, ending the shutdown with work resuming the next morning. Only on December 12, 1981, did the Congress and and President Reagan approve an Omnibus spending bill, “setting the spending ceilings for the entire year, except in foreign aid. Thus, although the continuing resolution will be superseded by enactment of individual appropriation bills.”
In October 1984, 500,000 federal employees were sent home, one-sixth of the non-military federal workforce. During the episode there was no talk of default and the markets largely ignored it.  (When the government was re-opened, all Federal employees were paid for the furloughed period.)
  • October 3 to 5, 1984
    Congress failed to pass a stopgap money bill, when a new budget was not passed for the new fiscal year. On October 4th 500,000 civil servants out of the 2.9 million civil servants where sent home from their jobs; leading to a partial shutdown. An emergency spending bill passed, which Reagan signed, and normal government operations continued the next morning. Both times the shutdowns were limited in their implications and impacts.
  • November 10 – 14, 1985
    In Reagan’s second term the government again faced a shutdown. Congress could not agree over a budget agreement, and the need to extend the federal borrowing limit, beyond the limit which was 1,823 trillion, which contradicted plans to balance the budget by 1991.
In 1986, 500,000 federal employees were again sent home.  There was no talk of default and the markets largely shrugged it off.  (When the government was re-opened, all Federal employees were paid for the furloughed period.)
  • October 16 – 18, 1986
    The Democratic Congress and the Presidency’s inability to agree on a new fiscal budget led to another half day furlough. Congress had also failed to come to an agreement and pass a spending bill. At Midday 500,000 non-essential federal employees were forced home. An emergency spending bill passed, returning employees the next day to work.

A shutdown in 1990 forced President H.W. Bush to go back on his “read my lips” tax pledge by raising taxes.  This was a seminal moment for the Republican party, which has not favored any kind of tax increase until this day (the fiscal cliff fight and subsequent tax deal is not considered a tax hike).

Again during this period there was no talk of default or market crashes because of the government shutdown. (To be fair, markets were under tremendous stress during this period, but it was more about Iraq’s invasion of Kuwait, the specter of the first war since Vietnam and an ongoing recession.)

  • October 5 – 9, 1990
    All previous government shutdowns lasted only short periods of time, in 1990 that changed under Reagan’s successor and former Vice President, and then President George H.W. Bush when the government experienced its longest shutdown. In October 1990 the government was shut down a total of three days, because of Democratic Congress and the Republican President could not agree on a budget for 1991. As signs of economic problems were visible on the horizon, the battle was centered on the Gramm-Rudman-Hollings Act to balance the budget. Democrats wanted to increase taxes on the nation’s richest to reduce the ballooning deficit, but in the 1988 campaign Bush had promise he would not increase any taxes across the board. Bush threatened to veto any budget that Congress presented to him that included a tax increase.  Oct. 6, 1990: President Bush made good on his veto threat; with the budget vetoed and without a continuing resolution agreed upon, the government was shut down throughout the three day Columbus Day weekend. Both the President and Congress wanted to limit the negative impact of a shutdown, and they agreed the new budget would not include any surtax or tax increases. Over the weekend President Bush then signed a continuance, and government opened on Tuesday morning. The closure during the holiday weekend, limited the impact a three day closure would had on running the government, had it been closed for three days during the week. Bush was however, was forced to agree to tax increases, going against his main campaign pledge. The President signed the Omnibus Budget Reconciliation Act of 1990 on November 5, 1990 securing a budget for the fiscal year.
In 1995 a Democratic president shut down the federal government and sent nearly half the federal workforce home!  There was no talk of default and the markets largely ignored this episode.  During the few days of this shutdown the S&P500 rallied over 1.5% and the 10-year yield fell 5 basis points.
  • November 13 – 19, 1995
    he first shutdown commenced at midnight on November 13, 2005, after a last minute attempt to avert the shut down; Clinton, Gingrich, House Majority Leader Dick Armey, and Senator Bob Dole met, but failed to reach a compromise. Clinton described the negotiations in his memoirs, My Life; “Armey replied gruffly that if I didn’t give in to them, they would shut the government down and my presidency would be over. I shot back, saying I would never allow their budget to become law, “even if I drop to 5 percent in the polls. If you want your budget, you’ll have to get someone else to sit in this chair!” Not surprisingly, we didn’t make a deal.” At the midnight, a partial shutdown led to 800,000 “nonessential employees” being sent home or told not to come into to work, with only emergency government services remained open. This represented 42 percent of the civil servants employed. The shutdown only ceased with an agreement on a temporary spending bill.
  • December 5, 1995 to January 6, 1996
    When the temporary funding measures expired, and no continuance was yet again signed, the government shut down this time for 14 days from December 16, 1995 and finally ending on January 5, 1996; the longest shutdown period in US history. Although Congress enacted resolutions to end the shutdown and another temporary spending bill was signed ending the 21 day partial government shut down, the government did not go back to fully functioning until April. Clinton agreed to submit a seven year balanced budget plan approved by the Congressional Budget Office to ensure the government would keep running after the January 26, 1996 spending extension end date. With the agreement, Clinton declared ‘The era of big government is over.’


Conclusion – It Only Matters Because We Want It To Matter

The United States has a nearly 100-year history of debt ceiling and budget fights which include 18 federal government shutdowns between 1976 and 1995.

However, none of these prior episodes produced chaos in the financial markets or any speculation of default.  Why might the current stalemate prove different?

When the government is forced to shut down, the President has wide latitude in how this occurs.  So, the President can dictate how this will happen and presumably will do it in a way that helps him politically.

In the 1980s President Reagan was trying to shrink the government and had no problem demonstrating how unnecessary many government functions are.  So he closed the government several times and often sent home up to one quarter of the federal workforce (400,000 to 500,000) and justified it by calling them “non-essential.”   It was the Democrats who feared people asking, “What do these federal workers do and why do we pay them?” who rushed to agree with Reagan to re-open the government.

In 1995 President Clinton proclaimed the era of big government over, so he could not argue that the world economy hinged on the operation of the federal government.  Instead, he wanted the public to view a government shutdown as an unnecessary inconvenience.  He accomplished this by sending home almost half the federal workforce (800,000) and closing high profile programs/monuments like the National Zoo and the Washington Monument.  It worked.  News reports of saddened Boy Scouts that could not walk the steps of the Washington Monument and the sheer number of disrupted federal workers weakened the Republicans resolve and they quickly compromised with Clinton to reopen the government.

Now President Obama wants the government to be viewed as the single most important driving force in the world economy.  So, a shutdown brings talk of default, depression and crashing markets.  This fear of armageddon is the leverage he hopes to use over the House Republicans.  And to be fair, he needs this kind of leverage.  As we detailed last month, the Republicans and Democrats are more divided now than anytime since the end of the Civil War.  Both sides are dug in and will to take it to the brink.  If one side or the other was not prepared to go to the brink, they would have no leverage over the other side.  Unfortunately, this means what used to be a non-economic event or merely an unnecessary inconvenience is now a critically important event to the world economy.

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