The Guest Blog

How will the shutdown finally end? Let's talk 1995

Daniel Yergin, vice chairman of IHS
Newt Gingrich and Bill Clinton in 1995
David Ake | AFP | Getty Images

There have been 17 government shutdowns since 1976 and they've lasted an average of 5 days. But one truly stands out — December 1995. That was the superstorm, the one people remember like the giant hurricane. It lasted three weeks. It is also the benchmark against which the current shutdown and its economic effects are being evaluated. The similarities to today's battle are eerie. Here's what actually happened — and how it finally ended.

Outlawing the deficit

Bill Clinton had come to Washington in 1993 with "New Democratic" politics that emphasized restraint by government in contrast to the more traditional liberalism that critics had taken to calling "tax and spend." In 1993, the president pushed through a deficit-reduction program in the face of tough opposition. The administration also launched an ambitious plan for the federal government to assume responsibility for the largest sector of the economy — medical care — but that program had foundered on its very complexity.

The Republicans came back with a vengeance in 1994, winning control of both the House and the Senate. Their manifesto, championed by House Speaker Newt Gingrich, was the "Contract with America," a list of undertakings aimed to assuage the anxieties of middle America, along with the promise to cut back on regulation and government intervention in the economy, shrink the size of the American government — specifically, to contain government spending and balance the budget. They also wanted to pass a constitutional amendment to require a balanced budget — in other words, outlawing the deficit.

(Read more: Kenny Polcari: Bribing the children of DC with cookies and milk)

Certainly, the ensuing battle was part of the run-up to the 1996 presidential election, but it was also a struggle over the role of government — whether to expand it, keep it as it was, or indeed shrink it. The Republicans' goal was to enact a budget that would end the federal deficits within seven years. They wanted to curb the growth in entitlements and to enact big tax cuts. Clinton vetoed their budget, and the Republicans in turn refused to pass the continuing resolution that would have provided the temporary funding to keep the government going. This had happened first in November 1995, leading to a six-day shutdown. And then, with no agreement, the government shut down again on December 16, 1995. The world's last superpower was closed for business. The shutdown continued through Christmas and then into the new year. Each side blamed the other.

But to their surprise, and then their dismay, the House Republicans discovered that they were losing the public; they had underestimated the depth of national sympathy for federal workers and the anger and hardships created by the shutdown. Still, they thought they had the leverage to force Clinton to capitulate by driving the federal government to the edge of default — and catastrophe.

Here, however, they miscalculated. For months, they had been telegraphing their intention; and that had given Treasury Secretary Robert Rubin, an expert poker player from his days on Wall Street, plenty of time to get prepared. Treasury had the authority from 1990 legislation to borrow from various government employee retirement trust funds, and by the time of the December 1995 shutdown, it was more than ready. It turned to the trust funds, thus pushing any potential default off for months. When they realized how Rubin had outwitted them, some of the Republicans were so furious that they talked of impeaching him.

'History turns on small things'

The Republicans made one other critical error. Between Christmas and New Year's, Clinton, going against some of his advisers, accepted one of the proffered Republican proposals. But the House Republicans, whom Gingrich was having trouble holding together, rejected Clinton's acceptance. "The Republicans wouldn't take yes for an answer," one of Clinton's senior advisers later said. "History turns on small things. If the Republicans had accepted the president's offer, it would have been a great victory for Gingrich, the Republicans would have been able to say that they had achieved what they set out to achieve with their Contract with America in less than a year, the federal government would have shrunk more, and Clinton might have lost the 1996 election. But they didn't."

(Read more: Relax! Government won't run out of money Thursday)

Finally, early in the new year, a compromise of sorts was reached. The budget cuts were reduced, as were the tax cuts. Still, the administration accepted in principle, more or less, a budget that — as scored by the Congressional Budget Office — would end deficits in seven years. At the end of the first week of January 1996, an extraordinary blizzard blanketed Washington. Hardly any vehicles could venture out, and senior officials on both sides could not even meet to continue their negotiations. But, snow notwithstanding, the great shutdown of 1995-96 was over.

'The era of big government is over'

In retrospect, the shutdown and the budget debacle were counted as a Democratic victory and Bill Clinton went on to handily win reelection in 1996. Yet the struggle was also a turning point for both the country and the Democratic Party. That became clear when, in his State of the Union address, Clinton said, "The era of big government is over." In fact, he said it twice in that speech. As in so many other countries, America's economic policies were now affected not only by public opinion but also by the judgment that the financial markets, including the trillions of dollars in pension assets, made on the probity of those policies. And the market's view could not have been clearer: large deficits were unacceptable. The mainstream of American politics had changed course.

(Read more: How safe is your money if the US defaults?)

The deficit in 1995, the year of the shutdown, was $226 billion. The target was to end deficits in seven years. Aided by a very buoyant economy, it was achieved much more quickly — in just three years. By 1999, the federal budget was in balance — and the next year, actually in surplus.

But it didn't last. In 2001, the year of the Sept. 11 attacks, the deficits began again. Over the next several years they rose substantially, and then really soared into the stratosphere with the recession and stimulus spending. In 2012, the deficit was about $1.1 trillion — five times what it had been the last time the government shut down. The estimate for 2013 was expected to be down to around $750 billion, owing mainly to a surge in tax revenues with economic recovery. But that is still three times what it had been the last time the government was shut down.

— By Daniel Yergin.

Daniel Yergin, vice chairman of IHS, is author of "The Quest: Energy, Security and the Remaking of the Modern World." This article is partly adapted from his book "The Commanding Heights: the Battle for the World Economy." He received the Pulitzer Prize for his book "The Prize." Follow him on Twitter @danielyergin.